Value engineering refers to the systematic method of improving the value of a product that a project produces. It is used to analyze a service, system, or product to determine the best way to manage the important functions while reducing the cost.
Value engineering encourages using alternative methods and materials that are less expensive and do not lower the functionality of the system, service, or product.
Most often, value engineering takes place after the completion of the design process, but it is best performed before the design is conducted to allow the experts to incorporate the option of using alternative materials and methods.
Most value engineering projects opt for a team approach, where subject matter experts work together to execute the value methodology.
Value engineering refers to a systematic approach to improve the value of a project at the lowest cost.
Valuation engineering involves using substitute materials and methods that are less expensive while preserving the functionality of the product.
The concept of value engineering began in the 1940s at General Electric.
Understanding Value Engineering
Value is calculated as a ratio of function to cost. A business can add value to a product by either cutting down on cost or improving the function. Most companies use value engineering as a cost-cutting strategy, where the basic function of a product is preserved – not sacrificed – in the process of pursuing value improvement.
From a marketing perspective, value engineering is used to design a product so that it lasts for a specific duration before it becomes obsolete. Usually, when a product is expected to be stylistically or practically obsolete within a specific duration of time, the manufacturer uses value engineering to save on costs without taking away the intended purpose.
While the product can be designed using high-quality components, value engineering allows manufacturers to use alternative low-cost components to avoid imposing unnecessary costs to the production process, which will ultimately be passed on to the consumer.
The manufacturer uses cheaper components that meet the product lifetime duration while preserving the basic purpose of the product.
History of Value Engineering
The concept of value engineering started in the 1940s at General Electric Co. This was during the Second World War when there was a shortage of raw materials, component parts, and skilled labor. The engineers at General Electric had to find alternative components and raw materials to ensure the continuity of the production process.
Therefore, Lawrence Miles, Harry Erlicher, Jerry Leftow, and other engineers sourced for acceptable substitutes that would reduce the production costs without compromising the functionality of the products.
What started as an accident turned into a systematic process that not only reduced the cost of production but also provided better final products or better performance. The engineers named this technique “value analysis.”
Steps in Value Engineering
Value engineering can be broken down into the following phases:
The information phase involves gathering project information and refining the goals of the project. Data is collected and analyzed, and the information obtained is used to finalize the priorities of the project and areas of improvement.
The potential issues are broken down into constituent components, which are elements to be addressed. This phase also involves identifying the methods that the team will use to evaluate the progress of the project.
2. Function Analysis
The function analysis phase involves determining the functions of the project and identifying them with a verb/noun combination for every element under evaluation. The function is defined as the set targets to be attained through the execution of an element or a set of elements.
Each of the identified functions is analyzed to determine if there are improvements to be made and if a new function is required. An example of a function can be “disinfect water.”
The function should be as non-specific as possible, to leave room for multiple options that perform the function presented by the project. A cost is assigned to each identified function.
The creative phase follows the function analysis phase, and it involves exploring the various ways to perform the function(s) identified in the function analysis phase. This allows team members to brainstorm alternatives to existing systems or methods that are in use.
Brainstorming forces people to be creative and allows team members to speculate on all possible solutions to the problems presented, or alternatives to the function. The team is required to develop a list of potential solutions to the function formulated by the verb/noun combination.
In the evaluation phase, the merits and demerits of each of the suggested solutions and alternatives from the creative phase are listed. The team should describe each advantage and disadvantage in general terms.
When the disadvantages exceed the advantages, the alternative is dropped in favor of other solid alternatives. The team performs a weighted matrix analysis to group and rank the alternatives, and the best alternatives are selected for consideration in the next phase.
The development phase involves conducting an in-depth analysis of each best alternative to determine how it can be implemented and the cost involved. The examination of each alternative may involve creating sketches, cost estimates, and other technical analysis.
Team members formulate an implementation plan for the project, which describes the process to be followed in implementing the final recommendations.
The presentation phase is where the team meets with the management and other stakeholders to present their final report. The team is required to present their findings to the decision-makers using reports, flow charts, and other presentation materials to convince them that the final ideas from the development phase should be implemented.
The ideas should be described in detail, including associated costs, benefits, and potential challenges. The final report acts as a record of the team’s accomplishments during the study and a summary of the team’s deliberations and findings. It can also act as a reference tool for the company in future projects.
Implementation of the project begins after the management’s approval of the team recommendations. If there are changes requested by the management or other decision-makers, these changes should be incorporated into the implementation plan before the implementation begins.
When implementing the project, the team should ensure that the primary goal of increasing value is achieved. The actual cost savings of the project should be determined based on the implementation of the recommendations.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: