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Value chain analysis and value engineering
This document discusses using value chain analysis and value engineering to reduce costs for an army. It proposes six ideas to redesign a sword's hilt to reduce the material cost by at least Rs. 20 without compromising functionality. These ideas include reducing part counts, commonalizing rivets, benchmarking designs from other armies, using alternative cheaper materials, reducing weight, and improving manufacturing yields. Testing the new design could save Rs. 10 lakhs annually without raising taxes. The emperor decides to teach value engineering techniques to engineers in the army's four divisions to identify cost-saving redesigns worth Rs. 25 lakhs each.
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Value chain analysis and value engineering
- 1. V C A Preparedby: Ayushi Gupta C013 Prasham Jain C015 Shreya Khare C018 Akshay Khatri C019 Apurve Paharia C027 (Group-7) 1
- 2. First Key toeffective cost management. Value Chain Analysis is a useful tool for working out how you can create the greatest possible value for your customers Chain of activities adding value at each step In a company. 2
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- 4. 4 PRIMARY ACTIVITIES contributeto the physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale. inbound logistics, operations, outbound logistics, marketing and sales, and service
- 5. 5 SUPPORT ACTIVITIES • activitiesof the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities • These activities include procurement, technology development, human resource management, and general administration.
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- 8. 1. Identify thevalue chain activities and disaggregate the firm into separate activities. 2. Establish the relative importance of different activities in the total cost of the product. 3. Compare costs by activity. 4. Identify cost drivers. 5. Identify linkages and interrelationships in the value chain. 6. Identify opportunities for reducing costs and/or improving value. 8
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- 10. 10 Cost advantage This approachis used when organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs. Step 1. Identify the firm’s primary and support activities. Step 2. Establish the relative importance of each activity in the total cost of the product. Step 3. Identify cost drivers for each activity. Step 4. Identify links between activities. Step 5. Identify opportunities for reducing costs. Sourcing coffee from diverse coffee beans producers and maintaining relationship with them. Company-operated restaurants, foodservice, Licensed stores Its price per pound of coffee beans, which Starbucks sources from numerous continents Sourcing beans and transforming them into coffee cup , providing customer a good ambience in locations. closing unprofitable stores, eliminating corporate jobs, reduce milk wastage.
- 11. 11 Differentiation advantage The firmsthat strive to create superior products or services use differentiation advantage approach. Step 1. Identify the customers’ value-creating activities. Step 2. Evaluate the differentiation strategies for improving customer value. Step 3. Identify the best sustainable differentiation. makes customers feel at home , forming a strong emotional attachment, great ambiance in mind in accessible locations Starbucks Rewards Card, Finest Coffee Beans well trained staff, more welcoming decor with friendlier baristas, premium product mix
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- 13. 13 Welcome to thecourt of Emperor Jalaluddin Muhammad Akbar
- 14. 14 Noble men! There isa very important matter before the court today. The raw material price is shooting up. The material cost of a sword has gone up by Rs.10 . And …. We are adding 50,000 soldiers to our army this year. I want to handle this situation without increasing the taxes. Please give your valuable suggestions as to how we should face this situation.
- 15. 15 !? !! ?? Why everyone’s quiet? Birbal! Iam surprised that you too have become silent!!
- 16. 16 !? !! ?? Your Majesty, Ihave six ideas which can reduce the cost of a sword by atleast Rs.20 without compromising the functional requirements.
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- 18. 18 Presently, the hilt has 7parts. The proposed design will have 4 . Existing Design 7 parts New Idea 4 parts Part Count Reduction
- 19. 19 For the newhilt, instead of designing exclusive rivets, we can use the rivets of daggers. Part Commonisation x
- 20. 20 When the Shahof Persia was our Guest last month , I observed that the hilt in his sword does not have a curved portion. We can design similar hilts for our experienced soldiers. Benchmarkin g New IdeaExisting Design Curved portion
- 21. 21 Alternate Material Blade Sheath Copper Steel The sheath whichhouses the blade is made of copper now. We can switch over to Alloy steel which is cheaper.
- 22. 22 Weight Reduction Blade Sheath Since alloy steelis stronger than copper, we can reduce the thickness by 0.5 mm which will save material 2 mm 1.5 mm
- 23. 23 Yield ImprovementThe curved blade designis yielding only 2 pieces per die. If a straight blade is designed, we can extract 3 pieces per die. 2 Blades 3 Blades
- 24. 24 Your majesty. The presentdesign is being used since the time of Babur without any failure. We should not risk any design change.
- 25. 25 Saheb, there isno doubt that the present sword designed by you for my Grandfather’s army is superior. However, let us test this new design in our barracks.If they pass the tests, we will deploy them in the battle field.
- 26. 26 If the ideaspass the test, we can save at least Rs. Ten Lakhs this year, thus serving the purpose of cost reduction.
- 27. 27 There is an advantagealso. I do not have to increase the tax.
- 28. 28 Birbal! I wonderhow you developed these ideas! Is there a systematic way by which others can also be trained to generate such ideas.
- 29. 29 Yes, your Majesty. Withthe help of Functional Analysis System Technique(FAST) any body can generate such ideas. FAST is a powerful tool used in Value Engineering (VE) which is an extremely effective system to improve products and services for cost and productivity improvement.
- 30. 30 If six ideasfor the sword itself can save Rs. Ten lakhs , imagine how much money we can save on other weapons like spears, arrows and cannons etc.
- 31. 31 Birbal! There arefour divisions in my army – Infantry, Cavalry,Artillery and Elephant brigade. I want you to teach the engineers in each of these divisions the application of Value Engineering (VE). Each division should release Armoury Change Requests (ACRs) for the worth of Rs.25 lakh.
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- 34. From the textbook… Themain aim of value engineering is to achieve a product's target cost, by: * Identifying improved product designs that reduce the product's cost without sacrificing its functionality * Eliminating unnecessary functions that increase the cost of product. 34
- 35. Phases of ValueEngineering 35 Information phase Function analysis phase Creative phase Evaluation phase Development phase Presentation phase
- 36. VE: a holisticapproach 36
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Editor's Notes
- #11 Cost advantage To gain cost advantage a firm has to go through 5 analysis steps: Step 1. Identify the firm’s primary and support activities. All the activities (from receiving and storing materials to marketing, selling and after sales support) that are undertaken to produce goods or services have to be clearly identified and separated from each other. This requires an adequate knowledge of company’s operations because value chain activities are not organized in the same way as the company itself. The managers who identify value chain activities have to look into how work is done to deliver customer value. Step 2. Establish the relative importance of each activity in the total cost of the product. The total costs of producing a product or service must be broken down and assigned to each activity. Activity based costing is used to calculate costs for each process. Activities that are the major sources of cost or done inefficiently (when benchmarked against competitors) must be addressed first. Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the costs, managers can focus on improving them. Costs for labor-intensive activities will be driven by work hours, work speed, wage rate, etc. Different activities will have different cost drivers. Step 4. Identify links between activities. Reduction of costs in one activity may lead to further cost reductions in subsequent activities. For example, fewer components in the product design may lead to less faulty parts and lower service costs. Therefore identifying the links between activities will lead to better understanding how cost improvements would affect he whole value chain. Sometimes, cost reductions in one activity lead to higher costs for other activities. Step 5. Identify opportunities for reducing costs. When the company knows its inefficient activities and cost drivers, it can plan on how to improve them. Too high wage rates can be dealt with by increasing production speed, outsourcing jobs to low wage countries or installing more automated processes. Differentiation advantage VCA is done differently when a firm competes on differentiation rather than costs. This is because the source of differentiation advantage comes from creating superior products, adding more features and satisfying varying customer needs, which results in higher cost structure. Step 1. Identify the customers’ value-creating activities. After identifying all value chain activities, managers have to focus on those activities that contribute the most to creating customer value. For example, Apple products’ success mainly comes not from great product features (other companies have high-quality offerings too) but from successful marketing activities. Step 2. Evaluate the differentiation strategies for improving customer value. Managers can use the following strategies to increase product differentiation and customer value: Add more product features; Focus on customer service and responsiveness; Increase customization; Offer complementary products. Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and customer value will be the result of many interrelated activities and strategies used. The best combination of them should be used to pursue sustainable differentiation advantage. Example This example is partially adopted from R. M. Grant’s book ‘Contemporary Strategy Analysis’ p.241. It illustrates the basic VCA for an automobile manufacturing company that competes on cost advantage. This analysis doesn’t include support activities that are essential to any firm’s value chain, thus the analysis itself is not complete.
- #12 The differentiation strategy of being a premium and unique coffee drinking provider has allowed Starbucks to achieve a sustained competitive advantage
- #36 Information phase – In this phase further familiarization of the project by the team takes place. All team members participate to determine the true needs of the project and to identify the areas of high cost and low worth. The team reviews and defines the current conditions of the project and identifies the goal of the studies. Function analysis phase – The team defines the project functions using a two word active verb/measurable noun context. The team reviews and analyzes these functions to determine which need improvement, elimination or creation to meet the goal of the project. Creative phase – The team lists creative ideas generated from its review of the project with the aim of obtaining a large number of ideas through brainstorming and association of creative proposals. The team employs creative techniques to identify other ways to perform the project’s functions. Evaluation phase – During this phase, creative ideas are analyzed and the team selects the best ideas for further development. The team follows a structured evaluation process to select those ideas that offer the potential for value improvement while delivering the project functions and considering performance requirements and resource limits. Development phase – The team prepares alternative designs with capital and/or life cycle cost comparisons of original designs and proposed alternatives. All recommendations are supplemented with written descriptions, sketches, basic design concepts; technical information and cost summaries. The team develops the selected ideas into alternatives (or proposals) with a sufficient level of documentation to allow decision makers to determine if the alternative should be implemented. Presentation phase – The objective in this phase to present the VE study report to the decision makers. The team leader develops a report and/or presentation that documents and conveys the adequacy of the alternatives developed by the team. The report includes a statement of the follow up necessary to ensure implementation.