Valuation in materials management

7/29/2019 Valuation in materials management

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PRESENTED BY:-

SHASHANK PANCHAL (CP1009)

KASHYAP PATEL(CP1109)MANISH PATEL(CP1209)

SUBMITTED TO:- Mrs.Jyoti Trivedi


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Definition

Value analysis in materials management is costreduction tools.

Value analysis is more effective than the basicdesign of the product, value analysis is more

effective than other cost control techniques. It isconcerned with ascertaining whether thematerial purchased is good value for the money,for the required purpose.

Value analysis is an organized creativeapproach aimed at identifying unnecessarycosts and eliminating the same from the systemwithout affecting the functionalutility/guarantee/safety performance.


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The essence of value analysis is to identify thefunction of the product, to examine alternativeways by which the function can be accomplishedand finally choosing that, which involves the least

cost Value analysis correlates the cost of purchasing a

product or services with its end use.

It attempts to examine critically the make-up ofevery item, which contributes towards the cost ofthe product and whether this cost contributestowards the cost of the product and whether this

cost contributes to the function appropriately.


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Related Techniques

PROFIT --- Product return opportunities byfunction investigation techniques;

FIRST --- functional idea system techniques;

FAST --- functional analysis system techniques; FACTS --- functional analysis of components of

total system;

VM/VI --- value management and valueimprovement.


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Historic Background On the industrial scene, immediately after World War II, the cost of

production was going up in General Electric, as in most othercompanies, due to inflation. For different civilian consumer products, adesperate situation arose.

Lawrence D. Miles was forced to turn to basics and asked thesuppliers to provide the desired function. It was found that many war-time substitutes and methods were performing at least as well as the

original in many situations and at less cost. He established a research facility in the central purchase department

to study the new approach. He refined and developed this costreduction techniques and called it Value Analysis.

Leaders like Robert McNamara used this tool in Department ofDefense in the USA and saved a reported $14 billion in five years. Asa result, the Defense Department wrote an incentive clause making

Value Engineering an integral part of government contracts on projectsabove a particular value.

The Society of American Value Engineers ---SAVE--- was formed in1959 to give the new methodology confounded in 1978, conductsannual conferences and brings out a quarterly journal Invest, whereinsuccessful Indian experiences have been shared.


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CONCEPT OF VALUE

In the field of purchasing, value can be defined as the lowest cost forreliably performing an essential function and should be considered asthe ratio of worth to cost.

The determination of value requires a combination of the followingconsideration:(a) Functional or use value --- which helps in accomplishing a task;

this may be divided into primary secondary and tertiary.(b) Esteem value --- associated with pride of possession andsentiment.(c) Exchange value --- exchange value is the barter value expressedas the sum of use and esteem value.(d) Cost value --- depends upon the commercial value of the cost of

production.(e) Scrap value --- the money that can be recovered when the item isno longer needed.The concept of value is dynamic and it changes with time. An itemwhich has functional value today will have esteem value after sometime and finally as time and finally as time passes, the item will have

only scrap value.


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ITEMS FOR VALUEANALYSIS The product life-cycle concept comes in handy foridentifying the product for value analysis. It is well known

that any product like the human race, goes through the fivephases of the life-cycle, namely--- conception,development, growth, maturity and decay.

The return on investment also varies with the five phases.The life-cycle time for each phase varies from one type ofproduct to another.

Many organizations have reduced packaging cost byadopting value analysis method on packing materials. But,usually firms identify the product for value analysis by ABC

analysis, which ranks the components in relation to theannual turnover, production or revenue generated. Thisensures that any increase in value relative to costs wouldyield maximum possible benefits.


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ORGANIZATION FOR VALUEANALYSIS A common question arises as to who should carry outvalue analysis in a company. Ideally, value analysis is

basically, a team effect and requires interdisciplinaryapproach.

Interdisciplinary teams of four or five individuals are

selected from all key departments such as marketing,design, purchasing, cost accounting, research, quality,packaging, safety, maintenance, and manufacturing.

The methodology of value analysis is exposed to themembers by an expert in a workshop for a period of threeor four days. Each team, later, selects and works on a

specific project and finally prepares a report. The value engineering study also may require the aid and

advice of specialists in various areas as consultants.


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In case of large industries, a separate department headedby a senior executive is formed to devote their time forvalue analysis studies.

These studies involve people at two levels. The first levelconsist of senior managers to decide broad policies, such

as accepting proposals, procedures, budgets acceptingteam recommendations. The second level consists of operative executives to carry

out value analysis studies. The people working in value engineering department

should have self-confidence, patience, loyalty, curiosity,creativity and good human relations. It is necessary thatthe members of the specific purpose of cost reduction.

Some organization feel, the inclusion of representatives ofconsumers and suppliers in the team would add a furtherdimension to value improvement.


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VALUE ANALYSISAPPLICATIONS Several organizations in public, private, industrial service, large

and small sectors have used value analysis and are makingsizeable savings every year. It brings the much needed technique of plain common sense into

the operations, by bringing out on a voluntary basis, the besttalent in people.

It uses a confidence building and creative process, that results in

the generation of valuable ideas by tapping the creative humanpower. It makes employees cost conscious and promotes teamwork.

Value analysis studies emphasize on total system concepts andthe studies should be carried out keeping the interests ofproducers, consumers, employees, traders and industries have

been reported in a large number of articles in different stagesand some are mentioned below: The value analysis team in one steel plant in India found that

many of the rigid material and process specifications in some ofthe intermediate stages were not required, for the tasks forwhich the steel products are ultimately expected to perform.


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This has allowed the organization to reduce some were notrequired, for the tasks for which the steel products areultimately expected to perform. This has allowed theorganization to reduce some of the required processing ofvarious steel items to offset the physical overdesign.

The electrical engineering industry has substituted theindigenously available aluminium instead of importedcopper, a major breakthrough resulting in substantial

savings. This resulted in considerable reduction in maintenance

cost. Value analysis has been practiced by many firms as a

policy for import substitution. In the packaging of consumer

goods like tooth paste, instant coffee, soap, cigarettes,biscuits, etc, value analysis techniqueshave beenprofitably used to bring about economy in packing. Thusvalue analysis helps to maximize the conservation ofscarce material resources in the country and helps toachieve cost reduction


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TECHNIQUES FOR VALUEANALYSIS The sequential steps involved in carrying

out a value analysis include the following:(1) product selection,(2) information gathering,(3) definition of function of the product,(4) identification of function,(5) speculation of alternatives,

(6) evaluation of alternatives,(7) reporting about recommendations and(8) implementation and followup.


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BRAIN STORMING: A TO ZWAYS Brain storming helps in creativity and speculation of

alternatives. The philosophy of brain storming sessions is no to judge the

ideas as they come, as this inhibits the people in coming outwith creative ideas.

Here the emphasis is on creation of as many ideas as possible.

The brain storming groups normally consist of five to sevenpeople with different backgrounds drawn from differentdepartments of the organization.

They meet in a group to speculate the alternatives. Thealternatives suggested by different members of the group arelisted on this step for evaluation in the subsequent step.

The following illustrative questions aid in creative thinking andin the speculation of alternatives and finding answers to somequestions in the committee to help reduce the cost:

( ) Wh t i th it d d ith t th it ?


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(a) What is the item and can we do without the item?

(b) Why is it this shape? How does it contribute to the value ?

(c) If it is flat, can it be round (vice versa)?

(d) Can two components be made into one (vice versa)?

(e) Why does it need to be so thick? Does it need all the features?

(f) Why does it need to be so thin?

(g) (If we make ) can we buy it cheaper (vice versa)?

(h) What new processes can we use? Can we use more of a less expensive material?

(i) Is the cost reasonable in terms of its contribution to the end products?

(j) Is the quantity purchased most economical on the ultimate cost?

(k) Does the item need all the features?

(l) Is the item made on proper tooling?

(m) Is any other organization buying less and if so from whom? (n) Is it necessary to have such a finish?

(O) Is a material available which will eliminate finishing?

(p) Is any one buying for less cost?

(q) Have all basic processes been considered?

(r) What are the competitors doing?

(s) Can we get ideas from suppliers/ consumers on cost reduction? (t) What are the alternatives possible?

(u) Is this item standard as regards specification, size, shape, type, etc.?

(v) If the item is imported, can it be indigenously made?

(w) Does the analysis of the reasonable cost of material production, and profits,roughly equal to the pricequoted, or is exorbitant according to the analysis?

(x) Is it possible to put a rupee sign on all tolerances and would you use your own money in this way?

(y) Is the cost proportional to the utility?

z How do ou increase the worth to ou and decrease the rice of the item?


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STEPS FOR VALUEANALYSIS

The first and crucial question in value analysis is what is the function of theproduct, process or service? The next question is, how to enhance the qualityor value with lowest cost? In this process, the following eight phases orsequential steps are considered:

(a) Information phase --- In this phase all relevant facts/data about a particulartroublesome product/part/process/are gathered, organized and analyzed.

(b) Functional phase --- Here, a few items of poorest value (they cost far morethan they should) are identified, and the functions that must be performed bythe product are inspected, analyzed and classified.

(c) Creative phase --- A probing, far reaching collection of solutions, probableand improbable, is gathered in an effort to generate ideas to perform thefunctions identified for the poor value items.

(d) Judicial analysis phase --- The ideas generated in the creative phase arenow evaluated in a practical, pragmatic and analytical mode. Several ideas areselected and ranked in order of importance.

(e) Development phase --- The best creative and practical ideas are nowrefined by the team and brought into shape. The cost factor is added here andapplied to reality. This is a consolidation of what the team thinks.


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CASE STUDY


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Project Details

Builder Name: Himalaya Construction

Location: Opp. Galaxy Mall, Naroda

4 nos. of Apartments and 1 shoppingMall

A item B item C item


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A item

High Consumption value

B item

Moderate value

C item

Low consumption value

Very strict control Moderate control Loose control

No safety stocks

(or very low)

Low safety stocks High safety stocks

Frequent ordering or weekly

deliveries

Once in a 1.5 months Bulk ordering once in a 3 months

Weekly control statements Every 15 to 20 days control reports Quarterly control report

Maximum follow up and

expending

Periodically follow up Follow up & expending in

exceptional cases

Rigorous value analysis Moderate value analysis Minimum value analysis

As many sources as possible for

each item

2 or more reliable sources 2 reliable sources for each item

Accurate forecasts in material

planning

Estimate based on past data on

present plans

Rough estimates for planning

Minimization of waste, obsolete &

surplus

(revive every week )

Quarterly control over surplus and

obsolete items

Annual review over surplus and

obsolete material

Individual postings Small group postings Group postings

Central purchasing and storage Combination purchasing Decentralized purchasing

Maximum efforts to reduce lead

time

Moderate Minimum clerical efforts

Must be handled by senior officers Can be handled by middlemanagement

Can be fully delegated


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THANK YOU

Documents

Valuation in materials management