VALUE ANALYSIS

THE CONCEPT OF VALUE

The value of a product will be interpreted in different ways by different customers. Value is subjective. Just as beauty lies in the eyes of the beholder, value is highly dependent upon perspective. Frequently, the analyst will discover that the different perspectives will lead to conflicting definitions of value. But usually its common characteristic is a high level of performance, capability, emotional appeal, style, etc. relative to its cost. This can also be expressed as maximizing the function of a product relative to its cost:

Value = (Performance + Capability)/Cost = Function/Cost

Value is not a matter of minimizing cost. In some cases the value of a product can be increased by increasing its function (performance or capability) and cost as long as the added function increases more than its added cost. The concept of functional worth can be important. Functional worth is the lowest cost to provide a given function. However, there are less tangible "selling" functions involved in a product to make it of value to a customer.

INTRODUCTION TO VALUE ANALYSIS

Lawrence Miles conceived of Value Analysis (VA) in the 1945 based on the application of function analysis to the component parts of a product. The technique simultaneously pursues two complimentary objectives:

Maximizing the utility provided by the product or service Minimizing or eliminating waste.

The analyst's goal is to eliminate as much of the non-value-added elements as possible by reengineering the design of the product or process. Equally important, the analyst also considers the possibility of substituting functionally equivalent elements for the value-added elements of the product or process design. In the latter case, a

substitution is justified when the functionality of the element is maintained or enhanced at a reduced cost to the producer. Value analysis may be applied to the design and redesign of products, services, and processes

Component cost reduction was an effective and popular way to improve "value" when direct labor and material cost determined the success of a product. The value analysis technique supported cost reduction activities by relating the cost of components to their function contributions.

Value analysis defines a "basic function" as anything that makes the product work or sell. A function that is defined as "basic" cannot change. Secondary functions, also called "supporting functions", described the manner in which the basic function(s) were implemented. Secondary functions could be modified or eliminated to reduce product cost.

Finally, design changes may be proposed to eliminate, reduce, or replace elements that fail to add sufficient value to the overall product or process.

As VA progressed to larger and more complex products and systems, emphasis shifted to "upstream" product development activities where VA can be more effectively applied to a product before it reaches the production phase. However, as products have become more complex and sophisticated, the technique needed to be adapted to the "systems" approach that is involved in many products today. As a result, value analysis evolved into the "Function Analysis System Technique" (FAST)

VALUE ANALYSIS METHOD:

Identifying the function in the broadest possible terms provides the greatest potential for divergent thinking because it gives the greatest freedom for creatively developing alternatives. A function should be identified as to what is to be accomplished by a solution and not how it is to be accomplished. How the function is identified determines the scope, or range of solutions that can be considered.

That functions designated as "basic" represent the operative function of the item or product and must be maintained and protected. Determining

the basic function of single components can be relatively simple. By definition then, functions designated as "basic" will not change, but the way those functions are implemented is open to innovative speculation.

As important as the basic function is to the success of any product, the cost to perform that function is inversely proportional to its importance. This is not an absolute rule, but rather an observation of the consumer products market. Few people purchase consumer products based on performance or the lowest cost of basic functions alone. When purchasing a product it is assumed that the basic function is operative. The customer's attention is then directed to those visible secondary support functions, or product features, which determine the worth of the product. From a product design point of view, products that are perceived to have high value first address the basic function's performance and stress the achievement of all of the performance attributes. Once the basic functions are satisfied, the designer's then address the secondary functions necessary to attract customers. Secondary functions are incorporated in the product as features to support and enhance the basic function and help sell the product. The elimination of secondary functions that are not very important to the customer will reduce product cost and increase value without detracting from the worth of the product.

The cost contribution of the basic function does not, by itself, establish the value of the product. Few products are sold on the basis of their basic function alone. If this were so, the market for "no name" brands would be more popular than it is today. Although the cost contribution of the basic function is relatively small, its loss will cause the loss of the market value of the product.

One objective of value analysis or function analysis, to improve value by reducing the cost-function relationship of a product, is achieved by eliminating or combining as many secondary functions as possible.

VALUE ANALYSIS PROCESS

The first step in the value analysis process is to define the problem and its scope. Once this is done, the functions of the product and its items are derived. These functions are classified into "basic" and "secondary" functions. A Cost Function Matrix or Value Analysis Matrix is prepared to identify the cost of providing each function by associating the function with a mechanism or component part of a product. Product functions with

a high cost-function ratio are identified as opportunities for further investigation and improvement. Improvement opportunities are then brainstormed, analyzed, and selected.

FUCTION COST MATRIX APPROACH :

The objective of the Function Cost Matrix approach is to draw the attention of the analysts away from the cost of components and focus their attention on the cost contribution of the functions. The Function Cost Matrix displays the components of the product, and the cost of those components, along the left vertical side of the graph. The top horizontal legend contains the functions performed by those components. Each component is then examined to determine how many functions that component performs, and the cost contributions of those functions.

Detailed cost estimates become more important following function analysis, when evaluating value improvement proposals. The total cost and percent contribution of the functions of the item under study will guide the team, or analyst, in selecting which functions to select for value improvement analysis.

VALUE ANALYSIS MATRIX :

A variation of the Function-Cost Matrix is the Value Analysis Matrix. This matrix was derived from the Quality Function Deployment (QFD) methodology. It is more powerful in two ways. First, it associates functions back to customer needs or requirements. In doing this, it carries forward an importance rating to associate with these functions based on the original customer needs or requirements. Functions are then related to mechanisms, the same as with the Function-Cost Matrix. Mechanisms are related to functions as either strongly, moderately or weakly supporting the given function. This relationship is noted with the standard QFD relationship symbols. The associated weighting factor is multiplied by customer or function importance and each columns value is added.

These totals are normalized to calculate each mechanism's relative weight in satisfying the designated functions. This is where the second difference with the Function-Cost Matrix arises. This mechanism weight can then be used as the basis to allocate the overall item or product cost. The mechanism target costs can be compared with the actual or

estimated costs to see where costs are out of line with the value of that mechanism as derived from customer requirements and function analysis

FUNCTION ANALYSIS SYSTEM TECHNIQUE

Function Analysis System Technique is an evolution of the value analysis process created by Charles Bytheway. FAST permits people with different technical backgrounds to effectively communicate and resolve issues that require multi-disciplined considerations. FAST builds upon VA by linking the simply expressed, verb-noun functions to describe complex systems.

FAST is not an end product or result, but rather a beginning. It describes the item or system under study and causes the team to think through the functions that the item or system performs, forming the basis for a wide variety of subsequent approaches and analysis techniques. FAST contributes significantly to perhaps the most important phase of value engineering: function analysis. FAST is a creative stimulus to explore innovative avenues for performing functions.

Bytheway's set of original questions for FAST includes the following:

1. What subject or problem would you like to address? 2. What are you really trying to do when you? 3. What higher level function has caused to come into being? 4. Why is it necessary to? 5. How is actually accomplished or how is it proposed to be

accomplished? 6. Does the method selected to cause any supporting functions to

come into being? 7. If you did not have to perform, would you still have to perform the

other supporting functions? 8. When you, do apparent dependent functions come into existence as

a result of the current design? 9. What or who actually?

The FAST diagram or model is an excellent communications vehicle. Using the verb-noun rules in function analysis creates a common language, crossing all disciplines and technologies. It allows multi-disciplined team members to contribute equally and communicate with

one another while addressing the problem objectively without bias or preconceived conclusions. With FAST, there is no right or wrong model or result. The problem should be structured until the product development team members are satisfied that the real problem is identified. After agreeing on the problem statement, the single most important output of the multi-disciplined team engaged in developing a FAST model is consensus. Since the team has been charged with the responsibility of resolving the assigned problem, it is their interpretation of the FAST model that reflects the problem statement that's important. The team members must discuss and reconfigure the FAST model until consensus is reached and all participating team members are satisfied that their concerns are expressed in the model. Once consensus has been achieved, the FAST model is complete and the team can move on to the next creative phase.

DIFFERENCE BETWEEN FAST AND VALUE ANALYSIS:

FAST differs from value analysis in the use of intuitive logic to determine and test function dependencies and the graphical display of the system in a function dependency diagram or model. Another major difference is in analyzing a system as a complete unit, rather than analyzing the components of a system. When studying systems it becomes apparent that functions do not operate in a random or independent fashion. A system exists because functions form dependency links with other functions, just as components form a dependency link with other components to make the system work. The importance of the FAST approach is that it graphically displays function dependencies and creates a process to study function links while exploring options to develop improved systems.

There are normally two types of FAST diagrams, the technical FAST diagram and the customer FAST diagram. A technical FAST diagram is used to understand the technical aspects of a specific portion of a total product. A customer FAST diagram focuses on the aspects of a product that the customer cares about and does not delve into the technicalities, mechanics or physics of the product. A customer FAST diagram is usually applied to a total product.

VALUE ADDED ASSESSMENT:

The function of each design element is then reviewed against the operational definition of value to determine whether and how it contributes to the worth of the product or process. Although each situation is unique, several functions are commonly considered to be non-value-added. The following list is a small sample of highly suspect verbs:

Administration: allocates, assigns, records, requests, or selects. Waiting or delay: files, sets up, stages, updates, or awaits. Motion or transportation: collates, collects, copies, delivers, distributes, issues, loads, moves, or receives. Oversight or control: approves, expedites, identifies, inspects labels, maintains, measures, monitors, reviews, or verifies. Rework or repair: adjusts, changes, reconciles, repairs, returns, revises, or cancels

However, identifying non-value-added design elements is only one aspect of the value assessment. The value-added elements should also be appraised. For example, assume that our evaluation has determined that the function of a bolt is to "attach-component." Our initial analysis reveals that this is a secondary function that supports the overall operation of our product and is therefore value-added. However, during the information-gathering phase of our analysis we discovered that several warranty claims can be traced to the failure of this bolt. Based upon this information we should then consider whether a substitute component might provide a higher level of value. In this situation we might consider a bigger, stronger bolt. If the revised design leads to fewer failures, our customers might experience fewer field failures. In addition, even though the new component presumably costs more than the original, we may find the overall product profitability improved if the reduced warranty claims offset the higher production costs. We might also choose to extend our analysis to consider other functionally equivalent components to the

original bolt. Returning to our example, the function of the bolt was to "attach-component." Several other design elements might perform the same fastening function at either a reduced cost or improved performance level. A more complete analysis might consider substituting a screw, a rivet, adhesive, or even a weld for the troublesome bolt. Each potential substitution has its own implications for production costs and stakeholder satisfaction.

VALUE ANALYSIS AND DESIGN PROCESS

The analysis of value is intrinsic to the design process. Design professionals evaluate materials and systems as part of the process of responding to the client's needs. The resultant design is really a series of recommendations to the client that address constructability, program requirements, and life-cycle costs including operational and maintenance expenses.

Generating alternatives to produce the greatest worth for the client often takes skill sets beyond those of design professionals. A team approach can best incorporate the expertise of value and constructability consultants into any analysis that the designers of record provide. Used properly, value analysis can increase the return on investment and create greater overall project value for the client.

Assessing Functional Alternatives

The basis of value analysis is an organized effort focused on achieving the lowest life-cycle costs consistent with required performance, reliability, quality, and aesthetics. This organized effort should acknowledge that the design team's participation will result in additional time and liability exposures, and the professional service fee should be increased accordingly. Usually, the best results are achieved when value analysis begins early in the design process. Beginning at the schematic design development phase, initial and long-term expenses as well as construction costs can decrease through use of more cost-efficient materials and reduction in construction time, increasing the client's profitable use of the facility.

Avoiding the Cost-Cutting Mentality

Mere cost cutting is not true value analysis. Cost cutting that results in a loss of quality and functionality does not qualify as the systematic identification of a component's true function. And this does not provide a component's essential function at the lowest overall cost. Most value analysis ideas involve some compromise on quality, but performance, quality, and cost must be weighed against each other before agreeing on changes. If the solution is developed early enough in the design process, the overall benefit to the client will be greater. Achieving True Benefits

Reducing project construction costs, improving project schedules, and decreasing operational and maintenance costs can be a significant challenge. The first step in meeting that challenge is to make sure the client has a well-prepared budget and a clear program. Then the value analysis process, conducted early in the design phase, can have positive results. Gaps in the client's program or insufficient funding can lead to significant problems during construction if not addressed up front.

Value analysis should not be a one-time effort, however. The design team must review and evaluate each proposal on the basis of project goals, technical considerations, implementation consequences, and both initial operations and life-cycle cost savings. The design team also is responsible for defending quality to the client and explaining the downside of any value analysis ideas. A client must be able to express informed consent when deciding on design team recommendations.

All stakeholders in a construction project must understand the procedures and timing of value analysis if the process is to achieve a true benefit rather than illusory savings to the client.

SIGNIFICANCE OF VALUE ANALYSIS:

Value analysis is an important analysis tools. This methodology leads to improved product designs and lower costs by:

Providing a method of communication within a product development team and achieving team consensus Facilitating flexibility in thinking and exploring multiple concepts

Focusing on essential functions to fulfill product requirements Identifying high cost functions to explore improvements

CASE STUDY 1 Business Value Analysis of mySAP CRM on BlackBerry at SAP America

IDC OPI NION As organizations across the globe leverage mobile solutions to extend beyond their initial use for mobile email, significant opportunities for strategic differentiation begin to materialize along with tremendous quantitative and qualitative benefits. Such benefits bring exceptional value not only to the intended mobile user base but also to a larger set of workers across the organization in the form of streamlined workflow and improved business processes. SAP America created and deployed an extension of its mySAP Customer Relationship Management (mySAP CRM) application to its mobile sales force on their BlackBerry devices.

This undertaking yielded the following results: An initial deployment of a Web-based portal provided the necessary gateway between desktop and the mobile application for many users. The visibility and usage of the portal allowed for a better overall understanding of business processes and ultimately contributed to increased adoption of the subsequent mobile application. The plan to use the SAP xApp Mobile Sales composite application on BlackBerry sought to present a "My Opportunities" view and enable updating of customer and company contact information, viewing and modifying of in-process opportunities, changing status and close date, adding members to a virtual account team, viewing an opportunity's internal order number, and providing revenue modification at the line-item level.

The SAP team completed a rapid deployment and delivery cycle that brought mobile CRM to nearly 100% adoption in six months. An initial phase of deployment had yielded little adoption by the sales force due to slow performance and unwieldy security policies. Additional enhancements, such as single sign-on features and improved ease of use, significantly increased user adoption. Key hurdles to overcome included heavy reliance upon support staff, combined with inefficient communication and workflow mechanisms among account executives, managers, and virtual account teams. Qualitative benefits included operational and quality improvements, significant increases in sales productivity, numerous efficiency improvements, and cost reductions. The Solution The SAP team completed a rapid deployment and delivery cycle that brought mobile CRM to nearly 100% adoption in six months. The following timeline shows the implementation cycle for SAP America:

In 2002: Rolled out mySAP CRM application to account executives April 2005: Launched CRM portal June 2005: Rolled out online version of SAP xApp Mobile Sales on

BlackBerry (read-only capabilities) August 2005: Added single sign-on capabilities (eliminated

significant adoption barrier) November 2005: Integrated opportunity and sales-cycle

management capabilities (update capabilities added)

A key component of the mobile solution was the initial deployment of the CRM portal. The portal acted as an important bridge to move users from the desktop-based mySAP CRM solution to SAP xApp Mobile Sales. Portal usage, understanding, and functionality actually led to a broader adoption of the sales application on the BlackBerry devices. The BlackBerry device and SAP xApp Mobile Sales enable account and opportunity management processes including:

Update customer and company contact information View and modify in-process opportunities Change status and close date See a "My Opportunities" view 6 #205182 ©2007 IDC View and add members to virtual account team View an opportunity's internal order number Modify revenue by separate line item

Use mobile email and voice communication "Improving the accuracy and frequency of our customer information has been a constant goal. BlackBerry is one of the tools that help us."

Implementation Challenges Adoption was a challenge to the account executives for several reasons: Since existing processes still worked well, account executives needed training before they recognized the value of the solution. Because account executives focus on sales, any disruption to their existing processes can meet with resistance. Demonstrating how such a mobile solution could improve efficiencies and enhance productivity had to resonate for an account executive to consider adoption, and it was critical to a successful deployment. Since account executives already used BlackBerry devices for mobile email that certainly went a long way toward influencing adoption of the new sales application. However, old habits were not easy to break, such as calling super users and administrators for CRM information.

SAP focused on simple yet vital features, So the company succeeded in nearly 100% adoption of the application.

Cost Reduction and Improved Efficiencies

Mobile access to mySAP CRM allows account executives to be more self-reliant and reduces interactions with the following office-based workers.

Super users Reduces calls for opportunity status checks, as this is a core feature

of the application on BlackBerry devices Eliminates "thank you letter" responsibility, since the mobile

application automatically generates an "e-letter" from the BlackBerry device

Marketing Promotes faster handoff to sales through mobile lead acceptance

Results in fewer demos scheduled for mobile CRM, as this can be performed by the account executive leveraging his or her own device

Keeps marketing resources focused on activities that add value Sales executives Makes informed resource allocation decisions based on the most up-

to-date Information Leverages workflow capabilities to ensure follow-through on all

account activity

Benefits with use of SAP

Qualitative Benefits With the implementation of SAP xApp Mobile Sales on BlackBerry, SAP America recognized a number of qualitative benefits, including increased user productivity and improvements to sales efficiency and effectiveness, along with significant cost reductions. Overall workflow and quality improvements were beneficial to account executives, their teams, and their executive management. Account information can be updated immediately and at the point of doing business, improving its accuracy and potential for making it into the system.Management reports are more likely to contain the most up-to-date account and opportunity information, providing more actionable data

Quantitative BenefitsThe number of cross-sell and up-sell opportunities increased by 9.3%. In addition, calls required for closing a sale decreased by 4.5%.Sales executive efficiency increase by 2.7%. There were 36.6% fewer calls to administrators per month and productivity loss decreased by $13.15 per user per month. Use of the mobile sales application on BlackBerry by SAP account executives also generated tangible cost savings in the form of reduced administrative support and lower telecom costs. SAP America's implementation of SAP xApp Mobile Sales on BlackBerry delivered a number of measurable benefits"The goal was not to save money, but to improve the accuracy and timeliness of data regarding opportunities."

CASE STUDY 2

VALUE ANALYSIS FOR SHARE HOLDERS

Shareholder Value Analysis (SVA) is one of a number of methods being used as substitutes for traditional business measurements.SVA calculates the value of a company by looking at the returns it gives to shareholders, and is based on the view that the objective of company directors is to maximise the wealth of the company's shareholders. This checklist introduces the financial calculations involved in carrying out SVA and advises on its implementation.SVA is a method of financial analysis which measures. Advantages of Shareholder Value Analysis:

It provides a long-term financial view on which to base strategic decisions.

It provides a universal approach that is not subject to the particular accounting policies that are adopted. It is therefore internationally applicable and can be used across sectors.

It forces the organisation to focus on the future and its customers, in particular the value of future cash flows. Traditional measures are cost-based, bearing little relation to the economic income generated during a period.

STEPS TAKEN TO CHECK THE VALUE

1. Understand and calculate the organisation's shareholder value

It is important when planning to adopt shareholder value as a significant financial objective that you understand the implications and best

approach for your business. This can be achieved by planning the approach first with professional advisers, such as accountants or consultants who specialise in this area.

A company's shareholder value can be calculated as follows:

Shareholder value = Total business value—Debt

Total business value =Present value of future cash flows + Residual value of future cash flows

If the result of this equation is greater than one, then the company is worth more than the invested capital and value is being created.

* Future Cash Flows Future cash flows are affected by growth, returns and risk,

* Residual Value The residual value is an important figure, which represents cash flows arising after the normal planning period. * Weighted Average Cost of Capital (WACC) WACC consists of the cost of equity added to the cost of debt, and its purpose is to express the return that a company must earn if it is to justify the financial resources that it uses.

2. Gain top management commitment

SVA is based on the belief that creation and maximisation of shareholder value is the most important measure by which to assess business performance. This overriding objective must be accepted by top managers for it to be achieved and take root in the organisation. There should also be an acceptance that traditional measures and approaches may fall short of achieving this objective.

3. Identify the key value drivers of the organisation and set targets.

This analysis of value drivers links financial and operational objectives, and provides a framework for:

* setting targets for performance

* assigning responsibility to individual managers

* reviewing the financial performance of the business (and benchmarking against competitors)

* developing strategic plans--in using SVA, it is possible to measure the incremental change in shareholder value arising from each strategy, by calculating the difference between the present value of future cash flows before and after implementation of the strategy.

Identifying the key factors influencing each value driver is invariably a process of trial and error. However, this process is fundamental to managing, controlling and making improvements in the business which will lead to improved cash flows.

4. Communicate the approach and train staff:Managers need to understand the broad nature of creating shareholder value, particularly when appraising potential projects, but the technical aspects of SVA are unlikely to be of concern. Managers need to understand the importance of identifying, controlling and improving the performance of the value drivers, and the key factors influencing them.

5. Change the organisation's information systems to monitor and measure progress:The organisation's financial reporting systems and information systems in general, will probably need to be revised when SVA is implemented. Conventional reporting systems are unlikely to provide all of the information required, or to provide it in the most effective format. In order to implement SVA and unlock shareholder value, managers must be able to regularly measure and monitor information concerning the key value drivers and targets that have been set.

6. Change the financial incentive schemes employed for managers:One key area to address is that of incentive schemes. For senior managers incentives should reflect the need to increase shareholder value over realistic time periods, rather than focusing simply on short-term profit growth or earnings per share. Incentives and bonuses for line

managers should reflect their success in exerting a positive influence over the value drivers that they control.

7. Monitor and review progress, and refine targets:Creation of sustained value will require permanent monitoring. Appraisals, performance reviews, management meetings and key decisions will all need to focus on the progress that has been achieved, and the action that is required to continue building shareholder value. Failure to emphasise value creation can result in managers focusing on targets which are no longer relevant, or which are actually harmful to the long-term value of the business.

Acknowledgement

On the successful completion of this project, we feel worthwhile to convey our acknowledgement to all those associated with it.

We are also extremely grateful to our management institute NARSEE MONJEE COLLEGE OF COMMERCE AND ECONOMICS for providing us the

opportunity to carry out such an informative project report.

We would like to express our gratitude to our project guide, Prof. Reema for her valuable advice, suggestions and the help given to us in

completion of this project.

We also take this opportunity to express our gratitude to all those who directly or indirectly helped us to successfully complete this project.