2. Flow of presentation
The Origins of Value Engineering
Meaning ,purpose
Value engineering vs. Cost cutting
Primary elements
Application of VE
Techniques
Cost Benefit Analysis
Live Cases
Target Costing
3. The Origins of Value Engineering
Value engineering began at General Electric Co. during
World War II. Because of the war, there were
shortages of skilled labour, raw materials, and
component parts. Lawrence Miles and Harry Erlicher
at G.E. looked for acceptable substitutes. They
noticed that these substitutions often reduced costs,
improved the product, or both.
4. Meaning
VE seeks optimum Value by balancing performance
and cost
It is a systematic effort to improve the value of a
product, project or system and optimize the life cycle
cost.
It is an organized approach to the identification and
elimination of unnecessary cost while assuring that
the quality; reliability, performance, and other critical
factors meet the customer’s expectations.
5. Purpose
Value = (Function + Quality) / (Cost)
Where,
Function = The specific work that a design/item must
perform
Quality = The owner’s or user’s needs
Cost = The Life Cycle Cost, LCC, of the product
So,
Value = The most cost effective way to reliably
accomplish a function meeting the users needs,
desires and expectations
6. Value engineering vs. Cost Cutting
Value Engineering Cost Cutting
It is Function based Equipment/mater
ial based
Focus Poor value
functions
Big cost
functions
Results Increased value Scope reduction
Optimizes Overall design Local design
Clarifies Client requirements Nothing
8. Primary elements
To deliver functions at a minimum cost
To use group brainstorming and consensus to
broaden the solution space and avoid narrow
thinking
9. When is VE applied…
Can be applied at any time in its design and construction
cycle but most effective at early stage
Usually undertaken after the conceptual design stage,
prior to detailed design and manufacture with the goal of
increasing the net value
Typically the earlier it is applied the higher the return
This mitigates redesign costs, schedule delays, and
disappointment for the owner, user, designer, and
community members
VE follows R&D but is usually done before the launch of
the product.
10.
11. Applications of VE
(manufacturing sector)
Used on new plants/revamps:
-clarifies scope
-encourages focus on poor value
-encourages alternatives
-basis for cost reduction
Used on existing plants:
-highlights poor value operations
-encourages alternative operations
-compares costs of operation with benefits
12. Value Engineering Techniques
Value Engineering follows a basic eight stage process –
A structured problem solving approach.
Orientation Stage
Information Phase (Provide team will all known facts)
Creative Phase (Use brainstorming)
Function Phase
Analytical Phase (Use structured, consensus decision making)
Proposal/Presentation Phase (Make action plan and
communicate decisions)
Implementation Phase (Follow through on action plan)
Verification Phase
13. Analytical Phase
Select the product, sub-system, or component for VE
application
Determine the functions and pull together information about
the requirements, history and present costs
Cost each of the functions
Determine the functions worth
Identify VE targets by imbalance between cost and worth
Create ideas, move into concepts, and refine concepts
Analyse the alternative concepts for cost and requirements
satisfaction
Test and verify the alternative
14. Tata Main Hospital (Jamshedpur)
Biggest hospital in country providing free medical treatment to 60000
employees and their families
Application of "Value Engineering" to Rationalize the Cost of Cataract
Surgery in Eye Clinic in the year 2001
Materials and methods
In the period Apr 2000-March 2001, large turnover of eye cases including
1100 cataract operations
Application of Value engineering (step by step process)
15. Orientation Phase (Selection of a project and a
team)
Identify “high cost/low value” area; analyze and evaluate projects for
potential;
Finally, select the project for “VE” study.
Cataract extraction identified as high cost area
98.5% of surgical cases admitted in Jamshedpur Eye Hospital (JEH) were
for cataract extraction.
98% of budget expenses utilized for cataract extraction
Team consisting of doctors of eye clinic was formed
16. Information Phase (in-depth review of factual
data)
Number of admission in eye clinic almost doubled from 597 in 95-96 to 1163 in
99-2000
Study of present protocol followed in hospital
Admission Time:
Morning cases are admitted on previous day 2nd half.
Evening cases are admitted on the same day 1st half.
Discharge Time:
Patients are discharged after dressing next day
Cases operated on Saturdays are to overstay till Monday next as no
discharge is made on Sundays at JEH.
Average Hospital stay: 97-98 (3.08) ; 99-2000 (2.33)
Bed Charges at JEH: Rs. 200/- per day; Rs. 100/- for half day.
Number of operation on Saturdays: 150 per year approx
17. Function Phase (to assess the major function, cost and “relative worth”)
• Two functions : Basic :Stay on operation day
Secondary : Pre-operative and post-operative day
stay
• Cost Worth analysis of functions
Creative Phase (To speculate alternatives through brain storming)
• Reduce Pre- and Post- operation stay in hospital
• Discharge should be made on Sundays
• Change the Saturday O.T. to some other week day.
18. Evaluation Phase (an in-depth review of various alternatives & short-list the best ideas)
• “Weighing Criteria” technique : Quality of operation (16)
Cost effectiveness (9)
Ease of implementation (5)
Idea No 1: (Score: 106) No compromise with Basic Function and easy to implement
Most Cost-effective (saving of approx Rs. 200/- per patient)
Idea No’s 2 and 3: (Score: Idea 2=78 & Idea 3=92)
For Idea 2, hospital office had to be opened for management permission
For Idea 3, OT date decided by hospital superintendent
Recommendation Phase (thoroughly analyze the best alternative and prepare Cost
estimates and modify proposals to ensure flexibility if implemented)
• To reduce Pre and Post Op Stay (Idea No.1)
• Saturday O.T. to be changed to some other working day. (Idea No.3)
(For idea 2: overtime required and against current policy)
Presentation phase (put the Recommendation Alternatives convincingly)
Implementation phase (ensure proposal translated into action)
19. Post Implementation schedule:
• Cases for Operation in the morning half:
– Admission: same day in the morning
– Discharge: same day in the evening
– Post Op: Advised to visit TMH Eye OPD next morning for exam and dressing
• Cases for Operation in the evening half:
– Admission: after 12 noon on the day of operation
– Discharge: next day morning after Post Op exam and dressing
• Saturday evening O.T. was changed to Wednesday evening
Effects of Implementation of Recommendation No. 1:
Item
Pre-
implementat
ion Per
patient (Rs.)
Post
implementat
ion per
patient (Rs
Saving per
patient(Rs.)
Total
Cataract Op
in Year (No.)
Total Saving
in year (Rs.)
Bed days 2.33 1.11 1.22 1100 1342
Bed Cost
(Rs.)
400 200 200 1100 220000
20. Post Implementation schedule:
• Cases for Operation in the morning half:
– Admission: same day in the morning
– Discharge: same day in the evening
– Post Op: Advised to visit TMH Eye OPD next morning for exam and
dressing
• Cases for Operation in the evening half:
– Admission: after 12 noon on the day of operation
– Discharge: next day morning after Post Op exam and dressing
• Saturday evening O.T. was changed to Wednesday evening
21. Effect of Implementation of Recommendation. No. 2:
• Savings per Patient operated on 1st day = Rs. 200.00
Saturdays: Total number of operations on Saturdays 150 in the Year
• Total Saving due to 200×150 = Rs. 30,000.00
Total Saving by implementing Recommendations: 2,20,000 + 30,000 = Rs. 2,50,000 in
one year.
Feed-back from patient/Customer
Happy Unhappy Indifferent
On stopping of admission one day
prior to operation
370 – (80%) 78 – (17%) 14 – (3%)
On stopping Post operative day
stay:
277 – (60%) 153 – (33%) 32 – (7%)
23. Costs of VE
Implementation Cost
Life cycle Cost (costs of operation, maintenance,
overhaul/replacement and even ultimate disposal should be
considered)
Non financial Costs like schedule delays
Human Factors like conflicts of interest among
stakeholders
24. Benefits of VE
Proactive Results Oriented Methodology That "Adds
Value" To Products And Services. It Is Not A Suggestion
Program.
Reduces Capital And Life Cycle Costs.
High Returns On Your Investment
Provides "Performance / Productivity / Quality"
Improvements.
Reduces Time To Market / Improves Project Schedules.
Provides A Step Change Rather Than Just An
Incremental Change In Your Business.
Helps to arrive at target cost
25. Continued…..
Provides Creative And Cost Effective Solutions To Complex
Technical And Organizational Problems.
Managements Decision-Making Capabilities By Presenting
Alternative Solutions To A Problem
Effective Means To Promote And Manage Change Within An
Organization.
An Excellent Alignment Tool Between Your Customer’s Needs
And The Design Teams.
It Teaches You To Do The "Right" Job, TQM Helps You To Do
The Job "Right."
28. What is target costing ??
Target costing builds upon a design-to-cost (DTC)
approach with the focus on market-driven target
prices as a basis for establishing target costs
Target costing is based on the following premises :
1. orienting products to customer affordability or market-
driven pricing,
2. proactively working to achieve target cost during product
and process development
29.
30.
31. Target cost V/S Expected product cost
Options before the company :
1. First, to lower costs, the product design and /or the
engineering process can be changed
2. Secondly, the management might consider accepting
a less-than-desired profit margin.
3. If there is no way for the company to earn the profit
margin that desires, its third alternative would be to
abandon that particular product.
32. Shortcomings of target pricing
1. Mistaking partial applications of target
costing for a fully implemented system
2. Insufficient supply chain involvement
3. Immaturity of process
4. Organizational structures which do not
support cross-functional teams
5. Poor adherence to planned targets
6. Lack of appropriate performance
monitoring systems
