Cost Reduction through Value Engineering and Value Analysis
Case study of furniture manufacturing MSME
India is a developing country and it has also been facing challenges in areas development of micro, small & medium enterprises (MSMEs). As we all know that MSME sector as always, plays an important role in the country’s economy. The manufacturing sector of India has always been facing tough competition in the national and international market. The micro, small & medium industries cannot afford to have their captive Tool Rooms.
Due to acute competition, MSME’s engaged in manufacturing, now a days are forced to focused to produce better products at lower cost by keeping that there should not be any compromise in terms of quality, utility of the product. Customer’s satisfaction and customers expectation are the dominating factors in the market. If manufacturing units wants that there products are and will remain competitive and maintain a healthy profit margin, in that case management has to be very focussed about value, usefulness, affordability, utility, durability of the product.
Value, as defined, is the ratio of function to cost. Value can therefore be manipulated by either improving the function or reducing the cost.
Value of a Product= Functions/Cost
If the functions are increased and satisfying the customer’s need, the value of the product will increase. At the same time, if you reduce the cost by keeping the functions constant, it will increase the value of the product
In case of Indian MSME, the biggest hurdle in the success of MSME is “last time individual MSME has developed a new product or done something new to increase the value of the product” neither any support for research nor the Costing awareness.
The success of industry and its sustainability depends on the product acceptability, durability, utility and its innovative approach towards development of new product or increasing the usefulness of the existing product. So, the success of industry depends on major intervention viz. Technology, Innovation, Finance, Training, Marketing and personnel.
For sustainable development of small industries there must be effective eco system which has linkages with policy framework and also link between the requirement of parts, components, intermediate products etc. by large industries and also with domestic consumption in the market, for example auto majors, Plastic, house-fold appliance, furniture and other high value engineering sectors.
So, to make our products more competitive either in national or international market, Indian manufacturer specially MSMEs engaged in manufacturing has to be focussed more and more on innovations, increasing functionality so as to increase the value of the product and the same can be achieved through value engineering.
Value Engineering is a systematic method to improve the “value” of goods or products and services by using an examination of function. Value engineering helps in improving the productivity of the product by reducing waste, rework, and downtime and also by improving the quality of products and services, value engineering can also help reduce the need for repairs and replacements
Though high-quality components can be used in designing the product, but value engineering facilitates manufacturers to go for alternative components or substitutes available in the market that have low-cost. This will certainly help in avoiding unnecessary costs in the production process as ultimately, customers will have to bear such additional costs.
Here is an example of how Value Engineering can be used for product costing.
1. Identifying and analysing the functions of the product: The first step is to identify the functions involved in the manufacturing process of the product and also the product performs and then identify the key function that product performs and the requirements that product must meet.
2. Investigate the value of each function involved: After performing the first function successfully and effectively one has to move on to the next step that is to investigate, analyse, calculate or determine the value of each function by assessing its contribution to the customer’s needs and the cost of providing it.
3. Identification & Pin-pointing cost drivers: As we all know that cost driver is a unit that derives the all the elements of costs and sets a basis on which a particular cost is to be allocated or apportioned between the different factory, departments, product, activity etc. The cost is allocated based on the driver’s activity completed. The cost drivers for each function are then identified and analysed, to determine how they affect the cost of the product.
4. Conceptualization, Inventions of alternative solutions: A dedicated team of experts has to be on toe every time in finding out, development of alternative solutions to each function, keeping in mind the factors such as cost, utility, quality, durability and feasibility.
5. Evaluation of alternative solutions: After conceptualization of alternative solution now group of experts has to evaluate the alternative solutions available and the most cost-effective solution is selected.
6. Implementation of the best evaluated alternative solution: The selected solution are then implemented, and simultaneously the cost savings are closely monitored and measured.
By using systematic and organised approach of Value engineering, MSMEs can identify opportunities to reduce costs and improve the value of their products, while maintaining or even improving the quality and functionality of the product.
Steps to be followed during Value Engineering
- Functional Analysis worksheet is to be prepared for different parts of the product
- Functional Evaluation is to be done for each part
- Numerical evaluation sheet is prepared
- Creativity worksheet
- Selection of alternative is done through decision matrix
- Finding & Recommendation
Functional Analysis Worksheet of one of the product “King Size Bed” of furniture manufacturer
| Part Name/ Description | Qty | Function | Part/Assembly |
| Frame | One | Is to hold assembly
Is to hold parts Is to provide strength Is to provide Grip |
Basic
Secondary Secondary Secondary |
| Bed Top Lower & upper | Two | It provides lower surface for the box
It provides support to frame also It improves the utility and appearance of the bed box |
Basic
Basic Utility Basic Appearance Secondary |
| Back Top | One | It provides support to frame
It improves the appearance It also provides comfort to user (customer satisfaction) |
Basic
Basic Utility Basic Appearance Secondary |
| Bed Box Folding | Two | It provides space
It fulfils customer’s needs It provides more strength and power to entire product |
Depends
Basic Basic |
| Side Strip (long) | Two | It supports frame
It also supports to bed box It improves appearance |
Basic
Basic Secondary |
| Side Strip (short) | Two | It supports frame
It also supports to bed box It improves appearance |
Basic
Basic Secondary |
| Leg Strip | Four | It supports frame
It also supports to bed box It improves appearance |
Basic
Basic Secondary |
Now Evaluation of cost of each part or components taken above in functional analysis of the product
| S.No | Part Name/ Description | Measurement | Quantity required | Cost per unit | Total Cost | % Contribution to Total Cost |
| 1. | Frame (4 sides) | 6.5 feet x 6.5 feet x 1 inches | 4 | 700 | 2800 | 23.23 |
| 2. | Bed Top Upper | 6 feet x 6 feet x 8 mm | 1 | 1000 | 1000 | 8.30 |
| 3. | Back Top | 6 feet x 3 feet x 8 mm | 1 | 850 | 850 | 7.05 |
| 4. | Bed Box Folding | 6 feet x 3 feet x 6mm x 2 | 2 | 1200 | 2400 | 19.92 |
| 5. | Side Strip (long) | 6 feet x 2 feet x 2 x 8mm | 2 | 900 | 1800 | 14.94 |
| 6. | Side Strip (other side ) | 6 feet x 2 feet x 2 x 8mm | 2 | 900 | 1800 | 14.94 |
| 7. | Leg Strip of wood | 6 inches x 3 inches | 4 | 350 | 1400 | 11.62 |
| Total Cost | 13050 | 100 | ||||
Above given details are the basic information about the cost and functions of the product where no value analysis or value engineering for the product. Till yet we have not done any creative analysis. Before moving forward we also have to focus on the relation between the parts, which is technically known as functional evaluation of the parts. Actually one part is not only performing its own function but it also helps the other part in performing its own functions, it means all the parts are helping each other in performing their own functions. So to analyse the support of each part to other we have to develop a grading system to calculate the performance and support to each other.
For example Frame and bed top upper and lower are supporting too much in holding, providing strength, grip etc. so we allot it grade 1 (Major performance) like that Grade 2 as Medium Performance and grade 3 as minor performance.
| S.No | Part Name/ Description | % Contribution to Total Cost | Weight on the basis of performance (only example) |
| 1. | Frame (4 sides) | 23.23 | If we have given Grade -1, then weight is say 10 |
| 2. | Bed Top Upper | 8.30 | If we have given Grade -1, then weight is say 10 |
| 3. | Back Top | 7.05 | If we have given Grade -2, then weight is say 7.5 |
| 4. | Bed Box Folding | 19.92 | If we have given Grade -1, then weight is say 5 |
| 5. | Side Strip (long) | 14.94 | If we have given Grade -3, then weight is say 10 |
| 6. | Side Strip (other side) | 14.94 | If we have given Grade -2, then weight is say 7.5 |
| 7. | Leg Strip | 11.62 | If we have given Grade -1, then weight is say 5 |
So after analyzing the weights, their importance of the individual component or part and also their contribution to total cost now we are in a position to understand and focused where to put our effort in creative analysis to reduce the cost by alternatives, substitutes, or options available, keeping in mind that there should not be any compromise with respect to performance, quality, utility of the product.
So we have to work more on improving the performance in same cost, so question arises how it can be done. So we have to work on creative phase such as:-
1. Work on making design simpler
2. Work on how it is easily movable
3. Use of small pieces of woods left out where ever it is required
4. Use less thicker board in sides
5. We can also use iron frames instead of wood frames
6. Alternative material in case of wood for upper top of the bed box
7. Design as per space requirement, folding options
8. Instead of MICA use paints, coated powder, or PVC material etc.
So after analyzing it, we found one more solution that leg strips of wood can be replaced either with wheels or with iron strips or by removing it (depending on requirement of the customer) etc. because leg strips removal or changing it with other will not affect the performance of the bed much. We have planned to go for 6mm board in place of 8 mm board in sides and 4mm ply in case of 6 mm. Similarly we did that we created a box and generate a space which can be used further by just using the base which has increased the performance of the bed and its utility to the consumer.
So after creativity phase we have to do the “Function cost worth analysis”
| S. No | Part Name/ Description | Measurement | Quantity required | Cost per unit | Total Cost | So total cost saving (Cost Gap) |
| 1. | Frame (4 sides) | 6.5 feet x 6.5 feet x 1 inches | 4 | 700 | 2800 | 0 |
| 2. | Bed Top Lower & Upper | 6 feet x 6 feet x 8 mm | 2 | 800 | 1600 | -600 |
| 3. | Back Top | 6 feet x 3 feet x 8 mm | 1 | 750 | 750 | 100 |
| 4. | Bed Box Folding | 6 feet x 3 feet x 6mm x 2 | 2 | 1000 | 2000 | 400 |
| 5. | Side Strip (long) | 6 feet x 2 feet x 2 x 8mm | 2 | 800 | 1600 | 200 |
| 6. | Side Strip (other side ) | 6 feet x 2 feet x 2 x 8mm | 2 | 700 | 1400 | 400 |
| 7. | Wheels used in place of leg strip with iron base | 4 | 250 | 1000 | 400 | |
| Total Cost | 11150 | 900 | ||||
Graphical representation of cost after modification (in PDF attached)
Comparative Sheet showing Cost Gap
So by the functional cost worth analysis we have reduced the cost by Rs. 900 and simultaneously by going through creative phase (Value Engineering) we have increase the utility of the product and by using wheels we have made the bed movable one.
It is also necessary to mention here that it is not always possible to find the cost gap, so in case of no cost gap it means there is as such no option to reduce the cost.
In our next article, we will discuss more about the “How Cost Accountants are helpful in Price Driven Costing (Target Costing)”
Author Bio
A power pack bank useful for professionals specifically Cost and Management Accountants.