Value Analysis in Supply Chain

o Definition of term used in value analysis

o The need for value analysis in supply chain
o Types of value analysis in supply chain
o Value analysis tools and techniques in supply chain
o Methods of improving supply chain in operations Management

Introduction

All organizations strive to create value for their customers. This value creates mind space for product and
services. Value analysis, therefore, is a scientific method to increase this value.

Value is a perception hence every customer will have their own perceptions on how they define value.
However, overall at the highest level, value is quality, performance, style, design relative to product cost.
Increasing value necessarily does not mean decrease in all-inclusive cost of production but providing
something extra for which a premium can be charged.

The objective and benefits of value analysis can be summarized as below:

 Value analysis aims to simplify products and process. There by increasing efficiency in managing
projects, resolve problems, encourage innovation and improve communication across
organization.
 Value analysis enables people to contribute in the value addition process by continuous focus on
product design and services.
 Value analysis provides a structure through cost saving initiatives, risk reduction and continuous
improvement.

Activities for Value Analysis

Activities for value analysis are separated into following activities:

Product/Service - The 1st step is to identify the product or service which is based on usage/demand,
complexity in development and future potential.

Cost Analysis: The next step understands in detail cost structure in developing and manufacturing the
product.

Define product and function: The next step is to define all the primary function of the product and
service through satisfying the basic need and then taking next step in delighting the customer. For this
better understanding of product components and characteristics is required.

Evaluation of alternatives: Through brainstorming possible alternatives can short listed which can
provide value to the primary function of the product. Cost evaluation at high level needs to be done for all
the alternatives, and the cheapest alternative is short listed.

Secondary Function evaluation: Secondary functions of the product and services are studied and
evaluated.
Recommendation: Value Analysis done has to communicate to the various level of the management
team as to get acceptance.

Value Analysis Team

The process of value analysis is carried out by value analysis team. So it becomes paramount that team
selection for value analysis also follows a structured process. Value analysis team consists of trained and
qualified team members who have background and knowledge about the project. Team leader is selected
by the project manager. Team size for value analysis is 5 to 8.

Value Analysis Process

Value analysis process can be divided into three phases of mainly pre-analysis, analysis and post analysis.
Pre-analysis contains activities of project selection and team selection. Analysis phase as the name
suggests consists of activities like investigation, speculation, evaluation, development and presentation of
the report. Post analysis consists of activities’ implementation of the report and regular audit.

Functional Analysis part of Value Analysis

Function analysis is required to transform the project elements from design of product towards function of
product. The main categories are Basic, Secondary, Required Secondary Aesthetic, Unwanted, Higher
Order and Assumed.

Definition of term used in value analysis

Value analysis is an approach to improving the value of a product or process by understanding its
constituent components and their associated costs. It then seeks to find improvements to the components
by either reducing their cost or increasing the value of the functions.

It is an orderly and creative method to increase the value of an item. This ” item” can be a product, a
system, a process, a procedure, a plan, a machine, equipment, tool , a service or a method of working.
Value Analysis, is also called Functional Analysis . Value of an item = performance of its function / cost

 An item that does its function better than another, has more value. Between two items that
perform their function equally well, the one that costs less is more valuable.
 The “performance of its function” could include that it is beautiful (where needed)

value refers to economic value, which itself can be sub-divided into four types as cost value, exchange
value, use value and esteem value.
Cost Value” is the measure of sum of all costs incurred in producing the product. The ‘cost value’,
therefore is the sum of raw-material cost, labour cost, tool cost and overheads expended to produce the
product.
Exchange Value” is the measure of all the properties, qualities and features of the product which make
the product possible of being traded for another product or for money. ‘exchange value’ refers to the price
that a purchaser will offer for the product, the price being dependent upon the satisfaction value which
derives from the product.

Value derived from the product consists of two components namely (a) value due to reliability of
performance of the product and the value which the possession bestows upon the buyer. These are often
referred to as “value in value” and “esteem in value”.

“Use Value” is the measure of properties, qualities and features which make the product accomplish a
use, work or service. Use value, therefore, is the price paid by the buyer or the cost incurred by the
manufacturer in order to ensure that the product performs its intended function efficiently. Use value in
the fundamental form of economic value.

Thus, value analysis is a systematic application of established techniques to identify the functions of a
product or component and to provide the desired functions at the lowest total cost. It is a creative
approach to eliminate unnecessary costs which add neither to quality no to the appearance of the product.

A value chain is used to describe all the business activities it takes to create a product from start to finish
(e.g., design, production, distribution, etc.). And a value chain analysis gives businesses a visual model of
these activities.

Value chain analysis is a way for businesses to analyze the activities they perform to create a product.
Once the activities are analyzed a business can use the results to evaluate ways to improve its competitive
advantage.

Competitive advantage is what sets your business apart from competitors. And to develop an advantage,
you'll need a clear idea of your target market, the benefit your product provides to the target market, and a
solid understanding of your competitors and their offerings.

It is a rational and structured process consisting of:

(a) Functional analysis to define the reason for the existence of a product or its components,

(b) Creatively analysis for generating new and better alternatives and

(c) Measurement for evaluating the value of present and future concepts.
The phrase value analysis can be defined as a technique which examines the facts of a function and cost
of a product in order to determine whether the cost can be reduced or altogether eliminated, while
retaining all the features of performance and quality of a product or both.

Therefore, logically, VA is an organized approach of exposing and eliminating unnecessary costs. The
method has logical foundation in its fundamental approach to cost reduction and profit improvement and
in this objective approach, the VA techniques has to analyse the functional cost of an item and
recommend a change.

Put alternatively, VA is a team approach to think functionally about a component as to “what it does”
rather than “what it is”. This approach is the real test of understanding problems under study.

Value Analysis and Value Engineering:

‘VA’ and ‘VE’ are closely related terms so much so that many people use them interchangeably. Though
the philosophy understanding the two is the same the identification of unnecessary costs yet they are
different. The difference lies in the time and stage at which the technique is applied.

“Value Analysis” is the application of a set of techniques to an existing product with a view to improve its
value. Thus, it is remedial process. “Value Engineering” is the application of exactly the same set of
techniques to a new product at the design stage project concept or preliminary design when no hardware
exists to ensure that bad features not added. Thus, it is a ‘preventive’ measure. In that sense, ‘VE’ is
fundamental and VA is collateral because ‘prevention is better than cure.”

Value Analysis versus Other Conventional Approaches:

Speaking in terms of “cost reduction” value analysis is an effective tool of cost reduction which differs
from established conventional approaches such as industrial engineering, production engineering,
methods engineering and the like.

Merits of Value Analysis:

Value analysis is really a very valuable technique of cost reduction and quality improvement. The
specific merits of its are:

1. Improvement in Product Design:

It leads to improvements in the product design so that more useful products are given shape. Now in case
of ball points, we do not have clogging, there is easy and even flow of ink and rubber pad is surrounding
that reduces figures fatigue.

2. High Quality is maintained:

High quality implies higher value. Thus, dry cells were leaking; now they are leak proof; they are pen size
with same power. Latest is that they are rechargeable.

3. Elimination of Wastage:
Value analysis improves the overall efficiency by eliminating the wastages of various types. It was a
problem to correct the mistakes. It was done by pasting a paper. Now, pens are there and liquid paper is
developed which dries fast and can write back.

4. Savings in Costs:

The main aim of value analysis is to cut the unwanted costs by retaining all the features of performance or
even bettering the performance. Good deal of research and development has taken place. Now milk, oils,
purees pulp can be packed in tetra packing presuming the qualities and the tetra pack is degradable unlike
plastic packs.

5. Generation of New Ideas and Products:

In case of took brushes, those in 1930’s were flat and hard, over 60 to 70 years brushes have come
making brushing teeth easy, cosy and dosy as it glides and massages gums.

6. Encourages Team-Spirit and Morale:

Value analysis is a tool which is not handled by one, but groups or teams and an organization itself is a
team of personnel having specification. A product is the product of all team efforts. Therefore, it fosters
team spirit and manures employee morale as they are pulling together for greater success.

7. Neglected Areas are brought under Focus:

The organizational areas which need attention and improvement are brought under the spot-light and even
the weakest gets a chance of getting stronger and more useful finally join’s the main strain.

8. Qualification of Intangibles:

The whole process of value analysis is an exercise of converting the intangibles to tangible for decision
making purpose. It is really difficult to make decisions on the issues where the things are (variables) not
quantifiable.

However, value analysis does it. The decision makers are provided with qualified data and on the basis of
decisions are made. Such decisions are bound to be sound.

9. Wide Spectrum of Application:

The principles and techniques of value analysis can be applied to all areas-man be purchasing, hardware,
products, systems, procedures and so on.

10. Building and Improving Company Image:

The company’s status or image or personality is built up or improved to a great extent. Improvement in
quality and reduction in cost means competitive product and good name in product market; it is a good
pay master as sales and profits higher and labour market it enjoys reputation; it capital market, nobody
hesitates to invest as it is a quality company.

Limitations:
Like any other cost reduction technique, value analysis has its own limitations. The most common
limitations are that the man made excuses are the blocks in implementing these plans of value analysis.

The most common excuses given are:

(a) Lack of motivation

(b) Resistive to change

(c) Inertia

(d) Lack of knowledge and patience

(e) Attitude of ‘It will not work in India

(f) We are very small or very big

(g) This has been tried earlier and failed

(h) The change is too big

(i) ‘Let competitors try before we try’

(j) Difficulty of teams meeting or team meeting for getting consensus.

Types of value analysis in supply chain

Value Chain Analysis Template

1. Porter's Value Chain Analysis Model

 This Porter's value chain analysis template provides a general overview of business activities.

2. Template for Cost Profit Margin

3. Template for Educational Institutions
4. Template for Products
5. Template for Financial Acquisitions
Value analysis tools and techniques in supply chain
1. Work in Specifics
2. Obtain All Available Costs
3. Seek Information from the most Authentic Source
4. Evaluate Function by Comparison
5. Discuss with Specialists and take Advantage of their Expertise Knowledge
6. Use Real Creativity
7. Consult your Suppliers for New Ideas
8. Use Standard Parts whenever Possible
9. Identify and Overcome all Road-Blocks
1. Work in Specifics:
Very often people at the top in an organisation are likely to say, “This is the only method to make, this
item. We have tried other methods but failed”. The best way of tackling such a situation is to be very
specific and not to make a vague statement.
People at the top will be influenced by the specific proposal and it is possible that the right manufacturing
process may be developed after careful examination. Hence, avoid generalities because they serve only to
prevent changes and protect the status quo.

2. Obtain All Available Costs:

Information about all available costs should be obtained. It is possible that specific method may slightly
increase cost in one department but may lead to substantial reduction in costs in other departments,
resulting in an overall reduction of cost.

Value analysis is mainly concerned with comparing costs. Therefore, relevant costs for each function as
may be required for the analysis should be obtained; and if costs are not readily available, these should be
developed as accurately as possible.

3. Seek Information from the most Authentic Source:

Information on any aspect of cost, methods of manufacture, finishing, packing etc. should be obtained
from the most reliable source. To get the correct information a questionnaire should be developed.

4. Evaluate Function by Comparison:

After identifying the function of an item, the natural questions to ask are—”How do other concerns
perform the same function? What is their cost? Will the value of the function be reduced by
eliminating unnecessary costs?” This probe will lead to a number of alternatives which can be examined
to see if any of them is likely to result in a cheaper but reliable alternative.
5. Discuss with Specialists and take Advantage of their Expertise Knowledge:
Now-a- days, technology is advancing so rapidly that it is almost not possible for engineer and others
working in an organisation to keep abreast of the latest developments. It, therefore, pays to be in touch
with a specialist suitable for the specific problem and get his specialised knowledge. Without such
expertise knowledge status quo will be continued and opportunity of improving value and reducing cost
will be lost.

6. Use Real Creativity:

Value analysis involves a creative approach for finding out unnecessary costs. The human mind is
capable of developing new ideas which lead to cost reduction and performance improvement. Creative
thinking can be helpful in cost reduction by simplifying the existing part or item to do the same function.

7. Consult your Suppliers for New Ideas:

As your suppliers are dealing with many others who are in the same line of business, their ideas and
suggestions will be of great help to you.

8. Use Standard Parts whenever Possible:

Standard parts are interchangeable and cheaper than specially made parts because standard parts are
generally made by mass production methods leading to reduced costs. Specially made (non-standard)
parts should be used only when is is unavoidable to do so.

9. Identify and Overcome all Road-Blocks:

Road blocks are the difficulties created by one’s colleagues and others who resist change and feel secure
in the existing ways. The resistance to change to new methods and techniques is principally from
ignorance and it can be overcome with patience, tact and carefully explaining the proposed method or
technique to the individual concerned who is opposed to change.

10. Get the maximum cooperation from your colleagues in other departments with whom you have to
deal. The value analyst should be polite and friendly with every one so that he may get the fullest
cooperation.

11. The value analyst should always ask him this question, “Would he spend his money in this
way?” Such an approach will be helpful in thinking of alternatives that are less costly.

Methods of improving supply chain in operations Management

1. Improve your distribution network.

Your company’s distribution network is the operational hinge you should build around. Distribution
affects everything from delivery tracking to sales strategy. The main goal is to improve your distribution
network, which you can do through a holistic approach or a cluster view. In a holistic approach, you
review essential parts in your distribution network and try to figure out how the parts work in sync. For
example, look at your purchasing software and see how it works with your delivery system. Does it
communicate well with production foreman or warehouse managers? If it’s not as efficient as you’d like
it to be, you can identify where changes need to be made. Unlike a holistic approach, a cluster view
groups charts, graphs, and other details together to help you keep an eye on the process for a specific
function in the company.

2. Devise a distribution strategy.

A distribution strategy is integral to an effective framework for supplier management. It allows a business
to have a better idea of what it takes to shorten delivery times, reduce goods decay, and improve customer
service. Supplier management and the broader field of supplier chain management help a company plant
the seeds of long-term financial stability. Supply chain management experts David L. Anderson, Frank F.
Britt, and Donavon J. Favre indicate that formulating an effective distribution blueprint helps a business
achieve profitable growth, especially when corporate managers think strategically about revenue, cost,
and asset utilization.

When formulating your distribution strategy, keep an eye on things like warehouses, cross-docks,
production facilities, and customers, along with the location, number, and network missions of suppliers.
Set an overall goal for your distribution and implement tactics that are in sync with your overall strategy.
For example, if you want your company to receive an industry award for timely delivery, figure out all
key stakeholders (delivery teams, production supervisors, etc.) to partner with and essential processes to
improve.

3. Monitor cash flows.

Cash flow monitoring is a fundamental tool that various organizations use to improve supplier
management. It is important to track payment terms and conditions with several groups within the supply
chain, forging an efficient plan to understand the technology used for monetary transfers. Said simply,
companies must clearly understand how to pay suppliers and logistics companies, how often to pay them,
payment tools, and any expenses that get passed to customers. Payment technology, in the context of
supplier management, refers to equipment used to pay vendor bills, like point-of-sale machinery, the
electronic pad the warehouse staff signs when receiving goods and shipment tracking software.

4. Establish information conduits.

Information conduits are channels businesses use to share important data, like tracking information, with
key partners. To establish proper information conduits, make sure data is distributed promptly and
properly to pertinent recipients. For example, if your factory foreman needs more materials, this
information should be conveyed to purchasing managers as well as store room supervisors and delivery
personnel.
5. Track your inventory.

By utilizing tracking software or internal spreadsheets you design, you can monitor the whereabouts of
your inventory. This will help you know how much of your product you have, how much you need, as
well as if anything happens to it (damage, decay, theft, etc). It is important your staff knows how this
system works so they can effectively log information, as well as participate in routine inventory
assessments. Other things to consider are the location and quantity of inventory, including finished goods,
work-in-progress items, and raw materials.

Five Ways to Optimize Supply Chain Management

1. Think Globally but Act Locally. ...

2. Focus on Core Strengths and outsource all other Activities. ...
3. Improve Collaboration Between Manufacturer/Supplier and Retailer for Demand Data Driven
Forecasting and Inventory Management. ...
4. Utilize Mobile-Based Technology. ...
5. Build a Responsive Supply Chain.