Value Management : Weapon of Cost Reduction

Value Management 

Why Value Management ? What is different ? What to expect ?


Value Management initially developped in the US is increasingly popular in a lot of industrialized countries such as US, Canada, Japan, India, Korea, South Africa, etc..starting in Europe. VM is considered  as THE industry best practice for cost reduction delivering 15 to 55% CR on complex products. VM is contractually included since decades in any US government programme;  DoD, Air Force, Navy, Missiles, Civil construction, etc.. and used by a large number of companies around the World in the private sector such as Chrysler, Ford, GE, United Technologies, SAP , Xerox, Hewlett Packard, Honda, Toyota, Mitsubishi, Canon, Sony, Ricoh, Isuzu, Hitachi, Toshiba, Sharp, Nissan, BMW, Tata, Whirpool, Panasonic,  etc..


The fundamental difference in the Value Management approach to cost reduction is that it is function focused.


VM is an organised and systematic approach to understand the functions of a product, system or process in order to achieve these functions at the lowest possible cost. The team as part of the VM methodology is able to evaluate a range of cost effective options for achieving these specific functions, and then choose the best solution while still maintaining those crucial elements that comprise value, such as performance, quality, reliability and safety.


Value Management is the industry most powerful, result-oriented and holistic approach to cost reduction.


It is an organised methodology to analyse the functions of a product, system or process in order to achieve these functions at the lowest possible cost. 

Value Management benefits compared to traditional cost reduction approaches

Traditional Cost reductions approaches

  • Cost reduction average outcome (0-7%)
  • Focus on part / technology
  • Focus on parts in isolation
  • Often « cheapening » design solution
  • Same number of parts as outcome
  • Limited multifunctional approach
  • Focus on cost of design, limited approach to overall cost (Design, Manufacturing, Quality, etc..)
  • Limited creativity (most of the cases possible alternatives solutions have already been analysed by design teams..)
  • Limited aggregation of alternatives solutions into design scenario or design solutions
  • No standard (across plants, teams, suppliers..) methodology for Cost reduction.
  • No pre-established criteria for proposals acceptance / rejection

Value Management

  • Cost reduction on complex products (15-55% typ.)
  • Focus on Components Assemblies / Major Components Assemblies / Systems
  • Focus on system (and components interactions)
  • VM increase or maintain Value at lowest possible cost
  • Count Part Reduction is an outcome of VM – (Often same functions can be accomplished with fewer parts)
  • VM is based on multifunctional approach
  • VM looks at lifecycle and all industrial costs
  • Creativity techniques are part of VM methodology - Also focusing on functions enlarge the creativity number of  alternative solutions.
  • As part of VM methodology, multiple improvement solutions are regrouped as design scenarios evaluated against pre-set criteria (weight, performance, NRCs, etc..)
  • VM in itself is a standard methodology that can be applied to design, processes, tooling, internally and at suppliers
  • Pre-established criteria for validation / rejection of alternative solutions to be established upfront

Key Principles

Value Management means change. Change in methods of working, in thinking and in the procedures used. 


VM is a style of management, particularly dedicated to motivate people, develop skills and promote synergies and innovation.


At the very heart of the VM process is  the value analysis (VA) activity to understand the cost hierarchy of the product sub-components including labour, raw material, buy items, quality costs, etc..  compared to the cost hierarchy of the product / customer requirements (expressed in terms of functions) that the product must accomplish. 


As such, the VM process, focusing on too costly and/or not necessary functions, is used to offer a same or higher performing product  to the customer at a minimal cost as opposed to substituting an existing product with an “inferior” or “cheapest” solution.


This basic principle, of offering value at the lowest optimal cost , is never compromised. It is the principle that guides all actions within the VM methodology and allows any improvement ideas to be translated into commercial gains for the company and its customers. The VM process is therefore one of the key features of a business that understands and seeks to achieve in all that it does to satisfy customers.


For many of the world's leading companies, including names like Hewlett Packard, Sony, Panasonic, Toyota, Nissan, Mitsubishi, Ford, United Technologies, Canon, Tata, Whirlpool, SAP,  Xerox, etc.. the VM process of design or re-design of products has provided major business returns. The key to realizing these returns is the understanding of the customer’s requirements and the associated internal costs to satisfy these needs. Products and processes re-design are then to yield lower costs and enhanced customer value.


What controls costs ?

The purpose of Value Management is to reduce complex products costs and improve profitability in spite of market conditions and competition.


Whilst there are many factors which influence the profitability of an engineering driven company, the technical excellence, availability and price of its products are all of prime importance.


The product will be of value to both the customer and the supplier if the technical or functional requirements are provided at the right time and at an acceptable price, and if the cost of manufacturing allows profit to be made.


Traditional approaches

Examination of the management techniques which are usually used in engineering driven companies for profit improvement indicates that the principal target has long been the cost of direct labour.


Whilst it is important for labour costs to be controlled, materials and overheads each represent a larger proportion of the total cost and also justify intensive study and control.


In many companies the various procedures and methods used are already carefully scrutinised (by O & M, Work Study,  Time Measurement, etc.) to ensure they operate smoothly and efficiently. In addition, the specified materials and components are probably purchased at the most competitive prices.


However, it will be recognised  that in the engineering industry, as in many manufacturing industries, costs are controlled not only by the efficiency with which the methods are executed and the materials purchased, but by the decisions taken during marketing, research, development, design and detail design.


A high proportion of product cost is generated in these stages by the choice of product specification, choice of design approach and the materials, dimensions, shapes, methods and finishing specified. Once drawings are produced, a cost path as well as a design path is established which can only be partially affected by the traditional methods and techniques which are used subsequently.


The reasons for unnecessary costs

There is little doubt that engineers and designers are well aware of the need to minimise cost, and in most instances they are making a lot of efforts to receive and to use better cost information. However, there are other reasons why unnecessary cost occurs in the products they are specifying. 


For example the needs of the user(s) are not always clear and formalized. Where there is a lack of information and time, then it is inevitable that the exact requirements of the customer or user will be exceeded.

New lower cost products, processes and materials become available on an ongoing basis and quickly render existing design concepts obsolete.


Many designs evolve over a period of years, and the lack of time which persists in most engineering organisations encourages these design approaches to be perpetuated even if in modified form.


Clearly, whilst it is not practicable to question every design, if those areas of significantly high cost likely to be repeated in the future are not regularly reviewed, the amount of unnecessary cost contained in them will increase as the design approach, materials and methods used, become out of date.


Lack of time also can lead to a lack of ideas and adoption of the first solution which will satisfy technical requirements, irrespective of its ultimate cost.


Proposed solutions to problems and new ideas are frequently rejected because of erroneous but sincerely held beliefs. For example, a material can be dismissed as unsuitable or a tool cost assumed to be too high to justify a suggested change. Also,  good ideas are often discarded without proper consideration and examination of today's facts. 


Most companies are faced with emergency measures at some time when a modification, material, machine or supplier readily available is accepted as a temporary solution regardless of cost and continues in use after the emergency has been overcome.


Circumstances can also change. The fact that a feature is no longer required  is frequently not known or overlooked. Costs are incurred in providing these features which are due to historical requirements of test, development, manufacturing or procurement, but which are no longer relevant.


In all aspects of life, mental attitudes affect the speed at which change can take place. Fear of failure resulting in a loss of status or ridicule, and a subconscious reaction to change in favour of well-established practices will restrain people from thinking and from proposing or accepting new ideas. These restraints in the creative ability latent within a company control the rate of innovation, profitability and sales.


These reasons for unnecessary cost probably apply to most aspects of human activity. They will and do occur in well-organised companies having skilled management and technical staff, and do not necessarily reflect on any one individual or group of individuals.


Most industries common reasons for unnecessary costs

  • Shortage of time due to Programmes Development milestones
  • Misleading information
  • Ambiguous goals, objectives, scope, etc…
  • Hasty decisions based on false assumptions
  • Lack of ideas
  • Lack of funds
  • Resistance to change
  • Unrealistic temporary circumstances
  • Politics
  • Bad habits and attitudes, beliefs
  • Over design and over specified safety factors
  • Continues changing in the owner requirements
  • Lack of communication coordination
  • Using unsuitable standards and specification
  • No Life Cycle Cost estimate.
  • Etc..

Clearly, an approach which will meet these requirements must provide cost information and other facts, must question everything of significant cost and must encourage new ideas to be put forward and considered in a positive way by all those involved with the product and its cost.


Of course, there is nothing new in the suggestion of people of different disciplines, meeting to examine and reduce the cost of the products and systems around them, but cost reduction alone is likely to be insufficient  to attain cost objectives in a competitive environment.


Experience has shown that technical and product requirements (functions) must be defined and  examined at the same time as cost.


In addition, if the time of the team or group involved is not to be wasted, a systematic methodology and disciplines are necessary. They will isolate significant areas of cost or poor value and concentrate attention upon them. That way, lower cost alternatives can be generated, evaluated and put into effect quickly and without excessive risk.


Value Management is a convenient name to identify the systematic disciplines and methodology which can effectively provide this form of product cost reduction.


What has been stated implies that even in very advanced and competent companies, unnecessary costs are being generated. Further, that if we are to remedy this condition we must make a different approach in which both the functions and their costs are considered together to provide an overall improvement in value with benefits to both the user and the supplier of the product.


Elements of Value Management

For example, during the study of an aircraft engine gear box, the total cost of the elements which contributed to the function "provide lubrication“ was found on analysis to represent  23% of the total cost.


The team, comprising design, production, procurement, costing and quality, familiar with the product, considered this to be too high a proportion, even though the materials, methods and labour times were reasonable for the specified design.


This awareness of poor relative value motivated the team to re-think the problem using Value Management methodology. They developed new ideas and improvements resulting in a new design which effectively performed the function for  11% of the new total cost.


The most visible benefits arising out of the application of VM will include (EN 12973) :

  • better business decisions by providing decision makers a sound basis for their choice ;
  • increased effectiveness by using limited time and resources to best effect ;
  • improved products and services to external customers by clearly understanding, and due priority given to their real needs;
  • enhanced competitiveness by facilitating technical and organisational innovation;
  •  a common value culture, thus enhancing every member’s understanding of the organisation's goals;
  • improved internal communication and common knowledge of the main success factors for the organisation;
  • simultaneously enhancing communication and efficiency by developing multidisciplinary and multitask teamwork;
  • decisions which can be supported by all stakeholders.

Value Management is the most effective industry approach known to identify and eliminate unnecessary costs in product design or re-design, manufacturing processes, tooling facilities, etc ... Below are some guidelines which are key for  a successful implementation and application of a Value Management Programme within a typical medium or large company. 


Implementation guidelines and Key Sucess Factors

  • A firm commitment and support by Executive Management is the most important element for assuring the success of a VM programme.
  • Dedicated centralized team to initiate and manage the VM Programme (Manage VM consultant(s) to initiate implementation of VM through projects and training up to the point of autonomy, establish training programme, prioritise projects, establish benefit sharing policies with Risk Sharing Partners and Suppliers, develop contracts addendum, establish VM reports, drumbeat implementation, monitor Programme implementation) 
  • A prioritized planning as to where, when, how, and to what specific products or sub-components the VM effort will be directed.
  • All levels of management involved in a particular VM study understand and support Value Management.
  • Availability of multifunctional team involved in a particular VM study; for the preparation phase, for the VM workshop(s) and for the wrap-up phase
  • A Senior Consultant or a Senior VM leader coordinates or administers and monitors the VM programme.
  • VM is performed:
    • Early in the planning-design process or early in the production phase when VM applied in re-  design to maximize potential product improvement and cost savings as priority activities
    • On high-cost and complex projects.
    • By a multifunctional team with enough knowledge in the product or sub-component in their   discipline area.
    • A Value Management approach / policy towards suppliers & Risk Sharing Partners is developed in order to:
      • Allow performing  joint VM projects through joint cross-functional teams (Company & suppliers)
      • Suppliers and RSPs can propose VM proposals to allow the Company to benefit from supplier’s design and manufacturing ingenuity and experiences.
      •  In both cases :
        • Proposal process is simple and quick.
        • Cost Savings are shared with the supplier / RSP. 
        • Change proposals become or not the property of the Company. The concept may be used on future projects depending on commercial agreements
        • Change proposals do not compromise any essential design criteria or preliminary engineering commitments.
        • Change proposals cannot be the basis for a contract claim.
        • All VM team recommendations and supplier’s proposals are fairly reviewed and expeditiously evaluated for implementation.

Example of Kaizen framework for Value Management

Kaizen framework for Value Management atemi consulting lean management consultant
Kaizen framework for Value Management

Typical Value Management Programme / Project Leading Competencies

Value Management Competencies lean  management consultant atemi consulting
Value Management Competencies

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