Value Analysis: Meaning, Types and Procedure

In this article we will discuss about Value Analysis:- 1. Meaning of Value Analysis 2. Types of Value Analysis 3. Procedure 4. Advantages.

Meaning of Value Analysis:

Value analysis is one of the newer scientific aids to managerial decision-making. It comprises a group of techniques aimed at the systematic identification of unnecessary costs in a product or service and efficiently eliminating them without impairing its quality and efficiency.

It can also be defined as a systematic analysis and evaluation of techniques and functions in the various areas of a concern with a view to exploring channels of performance improvement so that the value attached to a particular product or service may be improved.

It endeavors to achieve the maximum possible value for a given cost by a continuous process of planned action and aims at cost reduction from the point of view of value.

Although initially the group of techniques, aimed at the systematic identification of unnecessary costs and exploring channels of performance improvement, was used mostly in the engineering field which gave it the name of value engineering, it is now used in the various areas of a concern such as marketing, purchasing, financing etc.

Keeping in view the wide applicability of this technique, value analysis is now used instead of value engineering.

Value analysis involves a creative approach for finding out unnecessary costs. Such costs are those costs which though incurred on a product or service, are unnecessary and do not improve its quality or efficiency, give it a better appearance, prolong its life, nor provide any additional satisfaction to the customer.

By eliminating these costs; the cost of the product or service can be reduced, and the sales and the resulting profit proportionately increased.

Value analysis is an effective tool for cost reduction. Cost reduction may be achieved by economizing expenditure and increasing productivity whereas value analysis probes into the economic attributes of value. In value analysis it is possible to improve performance, increase the value of a product and thus reduce costs by a continuous process of planned action.

Value analysis lays emphasis on searching out new ideas while cost reduction is usually confined to already known facts. Hence, value analysis is not a substitution for cost reduction methods but it is a completely different procedure for accomplishment of greater results leading to the elimination of unnecessary costs and value improvement of a product or service.

Value analysis is sometimes taken as value engineering. There is no doubt that value engineering is an important aspect of value analysis and is concerned with production technology, product designing, fabrication and quality control.

Broadly speaking value engineering is mainly concerned with production while value analysis goes up to the marketing stage for the systematic identification of unnecessary costs and efficiently eliminating them. The scope of value analysis thus is broad and extends to all operations of an organisation where cost is incurred.

Types of Value Analysis:

The term, value is used in a broader sense and it has different meanings for different persons. For example, for a designer, value means quality of the product designed and efficiency of the product produced; for a salesman, it would be the price of the product at which it can be sold in the market; and for the management, value would be the return on capital employed.

An industrial product may have the following types of value:

a. Use Value:

There are certain characteristics of a product which make it useful for certain purposes. For example, a book of Cost Accountancy if written for ICWA—Inter students, has a use value provided it serves the purpose of such category of students. It measures the quality of performance of a product. Use value may be primary use value, secondary use value and auxiliary use value.

Primary use value indicates the attributes of a product which are essential for its performance as engine, steering wheel and axle in a motor car without which car cannot run. Secondary use value refers to such devices as bonnet or the mudguard or the windscreen without which motor car can be driven but these are necessary for the protection of engine and other parts.

Auxiliary use value is essential for better control and operation as speed meter, electric horn etc in motor car.

b. Esteem Value:

Certain properties of a product do not increase its utility or performance but they make it esteemable which would induce customers to purchase the product. For example, a watch with gold cover has esteem value. A rich customer may prefer a watch with gold cover although a watch with a steel cover may serve the same purpose of keeping time.

Some products may have both use as well as esteem value and yet both may be important. For example, a fountain pen with a gold plated body will have both use and esteem value as it will not only look better but will also last longer.

c. Cost Value:

This value is measured in terms of cost involved. In case of a manufacturing concern it refers to the cost of production of the product produced and if some part of the product is purchased from outside, it means cost of purchase of that part.

d. Exchange Value:

Certain characteristics of a product facilitate its exchange for something else and what we get is the exchange value of that product. It is equivalent to its sale value. All these values play an important part in our personal lives, but in value analysis, we are mainly concerned with use value and to some extent to the esteem value.

All other valued should be subordinated to use value in varying degrees. Value of a product manufactured for sale is the least amount spent in manufacturing it to create appropriate use and esteem values. Thus, value analysis seeks to provide the different values required in a product or service at the least cost without impairing its quality, efficiency and attractiveness.

Procedure of Value Analysis:

Following points should be considered for putting a scheme of value analysis in operation:

a. Identification and definition of the problem, i.e. ascertaining whether the customer is being given the full use value and esteem value for the product he purchases and if not, what is required to be done. In case of raw materials and components performance, satisfaction in subsequent production or processes is to be seen.

b. The feasibility of the alternatives and exploring the best method of performing the work at the minimum cost. For this purpose all relevant facts like drawing and design, material specifications, material, labour, overhead and other costs, market competition etc. are considered before proceeding farther with the job of value analysis.

c. The investment, if any, required for the alternative.

d. Percentage of the return on new investment. This return should be equal to or more than the expected return on investment.

e. Costs resulting indirectly out of a decision to change to alternative like costs of items becoming obsolete cost of training, etc.

f. The benefits from the alternative like reduction in costs and increased revenue.

g. Recommendation of the final proposal for implementation after considering the above points which will increase use value and or esteem value.

Value analysis requires a broad organisational framework, active involvement of various departments and a combination of initiative, creative approach, knowledge and mature personality in the person heading the value analysis team which generally includes a design engineer, a production engineer, cost accountant, system expert, market analyst and experts from other functional areas.

For its success, the value analysis team should base its judgement upon complete information from all areas of the organisation when cost is incurred, cost benefit analysis, work study, standard costing, market research etc.

To get willing cooperation from everyone within the organisation, the value analyst should invite suggestions for performance improvement and elimination of unnecessary costs which should be duly considered.

Advantages of Value Analysis:

Following are the main advantages of value analysis:

a. It is a powerful tool for cost reduction because its basic objective is the identification of unnecessary costs in a product or service and efficiently eliminating them without impairing its quality and efficiency. Reduction in cost will make available more profit to a firm.

b. It is a scientific tool for increasing the productivity of a concern because it aims at exploring various alternatives for efficient use of all types of resources in employment and making available goods and services of the kind and quality most wanted by customers at lower and lower costs.

In this way, the manufacture of most suitable production is facilitated because value analysis aims at giving highest use value and esteem value to customers.

c. It helps to keep management abreast of the latest technology and other developments because value analysis aims at examining new methods and techniques of doing things with a view to reducing the cost and increasing the value of the items.

d. It ensures the fullest possible use of resources because it aims at eliminating all unnecessary costs.

e. It promotes innovation and creativity. It induces the creative ability of the staff because it involves a creative approach for finding out unnecessary costs. Creativity develops new ideas which, in turn, make available the least expensive alternative to do the same function.

f. It creates proper atmosphere for increased efficiency because it aims at a continuing search for improvement in efficiency.

g. It is helpful in any drive for import substitution because it explores new methods and techniques of manufacturing indigenous goods which may serve the same purpose which imported goods serve. Thus, it is helpful in saving precious foreign exchange.

h. It can be applied at all stages from the initial design stage of an item right up to the final stage of its packing and despatch because it aims at identifying unnecessary costs at all levels with a view to eliminating them systematically.

i. Customers’ needs are best served with the help of value analysis because it aims at production of the most suitable products.

j. Value analysis helps in the implementation of the marketing concept because it lays emphasis on the constant linking of production function with the marketing function.

k. Management effectiveness can be measured with the help of value analysis because any saving in cost is treated as increased efficiency.