Value analysis: method, steps and a worked example

What value analysis is

Value analysis is a structured review of a product that's already on sale. A mixed team works out what each part is for, what that job costs and what it should cost, and then redesigns, re-sources or removes what doesn't earn its place. The aim is the same product doing the same jobs, or better ones, for less.

It began at General Electric in 1947, where Lawrence D. Miles turned the wartime habit of finding other ways to do the same job into a method. He called it value analysis. When the same method is used during design, before the product exists, it's called value engineering. Together they're known as VAVE.

Value analysis is not a price negotiation, and it's not a list of cuts. It starts from what the product must do, so the functions customers pay for are kept or improved while the cost of everything else comes down.

When to use value analysis

• Margins are being squeezed by price pressure, material costs or a cheaper rival.
• A teardown shows a competitor doing the same job for less.
• Warranty or quality problems point at parts that could be designed out.
• The product will sell for years yet, so one-time costs such as new tools and testing have time to pay back.
• On a calendar: companies that do this well review each high-volume product every year.

It's a poor fit for a product with less than a year or two of sales left. There, look only for changes that need no new tools, and save the bigger ideas for its replacement, where value engineering can use them.

The five classic questions

Every value analysis is organised around five questions, always in this order:

1. What is it? The product, its parts and how it's made.
2. What does it do? Its functions, each written as a verb and a noun, such as heat water.
3. What does it cost? The costed parts list, checked by finance.
4. What is it worth? The cheapest reliable way to do each job.
5. What else could do the job? Only now, the ideas.

Four questions of fact come before one question of ideas. That order is what separates a value analysis from a brainstorm: by the time anyone suggests a change, the team knows where the money is.

The steps of a value analysis

Value analysis follows the same six-phase job plan as any value study, set out in SAVE International's Value Methodology Standard:

1. Information. Fix the starting cost with finance. Rank the costed parts list with a Pareto chart (usually about 20% of the parts carry 80% of the cost), walk the production line and read the warranty data.
2. Function analysis. Name the functions, draw a FAST diagram and compare each function's cost with its worth.
3. Creative. Generate ideas for the functions that cost far more than they're worth.
4. Evaluation. Screen out anything that fails safety or standards, then score the rest.
5. Development. Cost each idea properly: saving per unit, one-time costs, payback and the tests needed.
6. Presentation. Get a decision, an owner and a date for every idea, then track each one until it's in production.

Phase by phase in detail: the value engineering job plan.

A worked example: the K-17 kettle

This example is the capstone study in the free VE Academy. The kettle and its figures are made up for practice, but the steps and sums are real.

• The facts. The K-17 costs £9.00 to make and sells 250,000 a year. To keep its margin at the shop price, it needs to cost about £7.88. The biggest costs are the heating element, the body and assembly.
• The functions. Convey esteem costs £1.30 (chrome trim and body finish) but is worth about 30p: a buyer survey found 60% of buyers don't care about the chrome. Control temperature costs £1.30 but is worth about 60p.
• The ideas. Fourteen ideas, each starting with the function it serves. The best: replace the chrome trim with moulded-in colour and an in-mould film (saves 62p a kettle), and use one combined thermostat and switch from a catalogue (saves 38p).
• The business case for the trim idea. A saving of 62p on 250,000 kettles is £155,000 a year. The one-time costs (tooling, testing and engineering time) come to about £59,000, so it pays back in under five months.
• The decision. Each idea gets an owner and a date. Savings count only when the change is in production and finance has checked it against the £9.00 starting cost.

Work through it yourself: the capstone kettle study (about 90 minutes, free).

Value analysis in purchasing

Buyers use value analysis to move a negotiation from price to cost. Three tools do most of the work:

• Should-cost. Build up what a part ought to cost from material, process time, labour, scrap, overhead and a fair margin. The gap between quote and should-cost is the agenda for the supplier meeting. See the cost levers.
• Supplier workshops. Suppliers know their own costs best. A joint session on the functions of their part often finds savings neither side would find alone, shared under an agreed gain-share.
• Teardown. Taking a rival's product apart shows what a function can cost. How to run a teardown.

Checklist and common mistakes

• ✓ The starting cost is agreed with finance and fixed for the whole study.
• ✓ The team mixes design, manufacturing, purchasing, quality and finance.
• ✓ Every function is a verb and a noun; "provide" and "allow" are not allowed.
• ✓ Targets are chosen by cost against worth, not just by size.
• ✓ Every idea that goes forward has a named owner and a date.

Common mistakes: attacking the most expensive part instead of the poorest value; counting approved ideas as savings before they reach production; and forgetting one-time costs such as tooling and re-approval, which can turn a good idea into one that never pays back.

Free templates: function–cost matrix, should-cost build-up, savings funnel tracker.

Frequently asked questions