VALUE ANALYSIS

THE CONCEPT OF VALUE

The value of a product will be interpreted in different ways by different

customers. Value is subjective. Just as beauty lies in the eyes of the
beholder, value is highly dependent upon perspective. Frequently, the
analyst will discover that the different perspectives will lead to conflicting
definitions of value. But usually its common characteristic is a high level
of performance, capability, emotional appeal, style, etc. relative to its
cost. This can also be expressed as maximizing the function of a product
relative to its cost:

Value = (Performance + Capability)/Cost = Function/Cost

Value is not a matter of minimizing cost. In some cases the value of a

product can be increased by increasing its function (performance or
capability) and cost as long as the added function increases more than its
added cost. The concept of functional worth can be important. Functional
worth is the lowest cost to provide a given function. However, there are
less tangible "selling" functions involved in a product to make it of value
to a customer.

INTRODUCTION TO VALUE ANALYSIS

Lawrence Miles conceived of Value Analysis (VA) in the 1945 based on

the application of function analysis to the component parts of a product.
The technique simultaneously pursues two complimentary objectives:

• Maximizing the utility provided by the product or service

• Minimizing or eliminating waste.

The analyst's goal is to eliminate as much of the non-value-added

elements as possible by reengineering the design of the product or
process. Equally important, the analyst also considers the possibility of
substituting functionally equivalent elements for the value-added
elements of the product or process design. In the latter case, a
substitution is justified when the functionality of the element is
maintained or enhanced at a reduced cost to the producer. Value
analysis may be applied to the design and redesign of products, services,
and processes

Component cost reduction was an effective and popular way to improve

"value" when direct labor and material cost determined the success of a
product. The value analysis technique supported cost reduction activities
by relating the cost of components to their function contributions.

Value analysis defines a "basic function" as anything that makes the

product work or sell. A function that is defined as "basic" cannot change.
Secondary functions, also called "supporting functions", described the
manner in which the basic function(s) were implemented. Secondary
functions could be modified or eliminated to reduce product cost.

Finally, design changes may be proposed to eliminate, reduce, or replace

elements that fail to add sufficient value to the overall product or
process.

As VA progressed to larger and more complex products and systems,

emphasis shifted to "upstream" product development activities where VA
can be more effectively applied to a product before it reaches the
production phase. However, as products have become more complex and
sophisticated, the technique needed to be adapted to the "systems"
approach that is involved in many products today. As a result, value
analysis evolved into the "Function Analysis System Technique" (FAST)

VALUE ANALYSIS METHOD:

Identifying the function in the broadest possible terms provides the

greatest potential for divergent thinking because it gives the greatest
freedom for creatively developing alternatives. A function should be
identified as to what is to be accomplished by a solution and not how it is
to be accomplished. How the function is identified determines the scope,
or range of solutions that can be considered.

That functions designated as "basic" represent the operative function of

the item or product and must be maintained and protected. Determining
the basic function of single components can be relatively simple. By
definition then, functions designated as "basic" will not change, but the
way those functions are implemented is open to innovative speculation.

As important as the basic function is to the success of any product, the

cost to perform that function is inversely proportional to its importance.
This is not an absolute rule, but rather an observation of the consumer
products market. Few people purchase consumer products based on
performance or the lowest cost of basic functions alone. When
purchasing a product it is assumed that the basic function is operative.
The customer's attention is then directed to those visible secondary
support functions, or product features, which determine the worth of the
product. From a product design point of view, products that are perceived
to have high value first address the basic function's performance and
stress the achievement of all of the performance attributes. Once the
basic functions are satisfied, the designer's then address the secondary
functions necessary to attract customers. Secondary functions are
incorporated in the product as features to support and enhance the basic
function and help sell the product. The elimination of secondary functions
that are not very important to the customer will reduce product cost and
increase value without detracting from the worth of the product.

The cost contribution of the basic function does not, by itself, establish
the value of the product. Few products are sold on the basis of their basic
function alone. If this were so, the market for "no name" brands would be
more popular than it is today. Although the cost contribution of the basic
function is relatively small, its loss will cause the loss of the market value
of the product.

One objective of value analysis or function analysis, to improve value by

reducing the cost-function relationship of a product, is achieved by
eliminating or combining as many secondary functions as possible.

VALUE ANALYSIS PROCESS

The first step in the value analysis process is to define the problem and
its scope. Once this is done, the functions of the product and its items are
derived. These functions are classified into "basic" and "secondary"
functions. A Cost Function Matrix or Value Analysis Matrix is prepared to
identify the cost of providing each function by associating the function
with a mechanism or component part of a product. Product functions with
a high cost-function ratio are identified as opportunities for further
investigation and improvement. Improvement opportunities are then
brainstormed, analyzed, and selected.

FUCTION COST MATRIX APPROACH:

The objective of the Function Cost Matrix approach is to draw the

attention of the analysts away from the cost of components and focus
their attention on the cost contribution of the functions. The Function
Cost Matrix displays the components of the product, and the cost of
those components, along the left vertical side of the graph. The top
horizontal legend contains the functions performed by those components.
Each component is then examined to determine how many functions that
component performs, and the cost contributions of those functions.

Detailed cost estimates become more important following function

analysis, when evaluating value improvement proposals. The total cost
and percent contribution of the functions of the item under study will
guide the team, or analyst, in selecting which functions to select for value
improvement analysis.

VALUE ANALYSIS MATRIX:

A variation of the Function-Cost Matrix is the Value Analysis Matrix. This

matrix was derived from the Quality Function Deployment (QFD)
methodology. It is more powerful in two ways. First, it associates
functions back to customer needs or requirements. In doing this, it
carries forward an importance rating to associate with these functions
based on the original customer needs or requirements. Functions are
then related to mechanisms, the same as with the Function-Cost Matrix.
Mechanisms are related to functions as either strongly, moderately or
weakly supporting the given function. This relationship is noted with the
standard QFD relationship symbols. The associated weighting factor is
multiplied by customer or function importance and each columns value is
added.

These totals are normalized to calculate each mechanism's relative

weight in satisfying the designated functions. This is where the second
difference with the Function-Cost Matrix arises. This mechanism weight
can then be used as the basis to allocate the overall item or product cost.
The mechanism target costs can be compared with the actual or
estimated costs to see where costs are out of line with the value of that
mechanism as derived from customer requirements and function analysis

FUNCTION ANALYSIS SYSTEM TECHNIQUE

Function Analysis System Technique is an evolution of the value analysis

process created by Charles Bytheway. FAST permits people with different
technical backgrounds to effectively communicate and resolve issues
that require multi-disciplined considerations. FAST builds upon VA by
linking the simply expressed, verb-noun functions to describe complex
systems.

FAST is not an end product or result, but rather a beginning. It describes

the item or system under study and causes the team to think through the
functions that the item or system performs, forming the basis for a wide
variety of subsequent approaches and analysis techniques. FAST
contributes significantly to perhaps the most important phase of value
engineering: function analysis. FAST is a creative stimulus to explore
innovative avenues for performing functions.

Bytheway's set of original questions for FAST includes the following:

1. What subject or problem would you like to address?

2. What are you really trying to do when you?
3. What higher level function has caused to come into being?
4. Why is it necessary to?
5. How is actually accomplished or how is it proposed to be
accomplished?
6. Does the method selected to cause any supporting functions to
come into being?
7. If you did not have to perform, would you still have to perform the
other supporting functions?
8. When you, do apparent dependent functions come into existence as
a result of the current design?
9. What or who actually?

The FAST diagram or model is an excellent communications vehicle.

Using the verb-noun rules in function analysis creates a common
language, crossing all disciplines and technologies. It allows multi-
disciplined team members to contribute equally and communicate with
one another while addressing the problem objectively without bias or
preconceived conclusions. With FAST, there is no right or wrong model or
result. The problem should be structured until the product development
team members are satisfied that the real problem is identified. After
agreeing on the problem statement, the single most important output of
the multi-disciplined team engaged in developing a FAST model is
consensus. Since the team has been charged with the responsibility of
resolving the assigned problem, it is their interpretation of the FAST
model that reflects the problem statement that's important. The team
members must discuss and reconfigure the FAST model until consensus
is reached and all participating team members are satisfied that their
concerns are expressed in the model. Once consensus has been
achieved, the FAST model is complete and the team can move on to the
next creative phase.

DIFFERENCE BETWEEN FAST AND VALUE ANALYSIS:

FAST differs from value analysis in the use of intuitive logic to determine
and test function dependencies and the graphical display of the system
in a function dependency diagram or model. Another major difference is
in analyzing a system as a complete unit, rather than analyzing the
components of a system. When studying systems it becomes apparent
that functions do not operate in a random or independent fashion. A
system exists because functions form dependency links with other
functions, just as components form a dependency link with other
components to make the system work. The importance of the FAST
approach is that it graphically displays function dependencies and
creates a process to study function links while exploring options to
develop improved systems.

There are normally two types of FAST diagrams, the technical FAST
diagram and the customer FAST diagram. A technical FAST diagram is
used to understand the technical aspects of a specific portion of a total
product. A customer FAST diagram focuses on the aspects of a product
that the customer cares about and does not delve into the technicalities,
mechanics or physics of the product. A customer FAST diagram is usually
applied to a total product.

VALUE ADDED ASSESSMENT:

The function of each design element is then reviewed against the

operational definition of value to determine whether and how it
contributes to the worth of the product or process. Although each
situation is unique, several functions are commonly considered to be non-
value-added. The following list is a small sample of highly suspect verbs:

• Administration: allocates, assigns, records, requests, or selects.

• Waiting or delay: files, sets up, stages, updates, or awaits.
• Motion or transportation: collates, collects, copies, delivers, distributes,
issues, loads, moves, or receives.
• Oversight or control: approves, expedites, identifies, inspects labels,
maintains, measures, monitors, reviews, or verifies.
• Rework or repair: adjusts, changes, reconciles, repairs, returns,
revises, or cancels

However, identifying non-value-added design elements is only one aspect

of the value assessment. The value-added elements should also be
appraised. For example, assume that our evaluation has determined
that the function of a bolt is to "attach-component." Our initial analysis
reveals that this is a secondary function that supports the overall
operation of our product and is therefore value-added. However, during
the information-gathering phase of our analysis we discovered that
several warranty claims can be traced to the failure of this bolt. Based
upon this information we should then consider whether a substitute
component might provide a higher level of value. In this situation we
might consider a bigger, stronger bolt. If the revised design leads to
fewer failures, our customers might experience fewer field failures. In
addition, even though the new component presumably costs more than
the original, we may find the overall product profitability improved if the
reduced warranty claims offset the higher production costs. We might
also choose to extend our analysis to consider other functionally
equivalent components to the original bolt. Returning to our example, the
function of the bolt was to "attach-component." Several other design
elements might perform the same fastening function at either a reduced
cost or improved performance level. A more complete analysis might
consider substituting a screw, a rivet, adhesive, or even a weld for the
troublesome bolt. Each potential substitution has its own implications for
production costs and stakeholder satisfaction.

VALUE ANALYSIS AND DESIGN PROCESS

The analysis of value is intrinsic to the design process. Design

professionals evaluate materials and systems as part of the process of
responding to the client's needs. The resultant design is really a series of
recommendations to the client that address constructability, program
requirements, and life-cycle costs including operational and maintenance
expenses.

Generating alternatives to produce the greatest worth for the client often
takes skill sets beyond those of design professionals. A team approach
can best incorporate the expertise of value and constructability
consultants into any analysis that the designers of record provide. Used
properly, value analysis can increase the return on investment and
create greater overall project value for the client.

Assessing Functional Alternatives

The basis of value analysis is an organized effort focused on achieving

the lowest life-cycle costs consistent with required performance,
reliability, quality, and aesthetics. This organized effort should
acknowledge that the design team's participation will result in additional
time and liability exposures, and the professional service fee should be
increased accordingly. Usually, the best results are achieved when value
analysis begins early in the design process. Beginning at the schematic
design development phase, initial and long-term expenses as well as
construction costs can decrease through use of more cost-efficient
materials and reduction in construction time, increasing the client's
profitable use of the facility.

Avoiding the Cost-Cutting Mentality

Mere cost cutting is not true value analysis. Cost cutting that results in a
loss of quality and functionality does not qualify as the systematic
identification of a component's true function. And this does not provide a
component's essential function at the lowest overall cost. Most value
analysis ideas involve some compromise on quality, but performance,
quality, and cost must be weighed against each other before agreeing on
changes. If the solution is developed early enough in the design process,
the overall benefit to the client will be greater.

Achieving True Benefits

Reducing project construction costs, improving project schedules, and

decreasing operational and maintenance costs can be a significant
challenge. The first step in meeting that challenge is to make sure the
client has a well-prepared budget and a clear program. Then the value
analysis process, conducted early in the design phase, can have positive
results. Gaps in the client's program or insufficient funding can lead to
significant problems during construction if not addressed up front.

Value analysis should not be a one-time effort, however. The design team
must review and evaluate each proposal on the basis of project goals,
technical considerations, implementation consequences, and both initial
operations and life-cycle cost savings. The design team also is
responsible for defending quality to the client and explaining the
downside of any value analysis ideas. A client must be able to express
informed consent when deciding on design team recommendations.

All stakeholders in a construction project must understand the

procedures and timing of value analysis if the process is to achieve a true
benefit rather than illusory savings to the client.

SIGNIFICANCE OF VALUE ANALYSIS:

Value analysis is an important analysis tools. This methodology leads to
improved product designs and lower costs by:

• Providing a method of communication within a product development

team and achieving team consensus
• Facilitating flexibility in thinking and exploring multiple concepts
• Focusing on essential functions to fulfill product requirements
• Identifying high cost functions to explore improvements

CASE STUDY 1

Business Value Analysis of mySAP CRM on BlackBerry at SAP

America

IDC OPI NION

As organizations across the globe leverage mobile solutions to extend
beyond their initial use for mobile email, significant opportunities for
strategic differentiation begin to materialize along with tremendous
quantitative and qualitative benefits. Such benefits bring exceptional
value not only to the intended mobile user base but also to a larger set of
workers across the organization in the form of streamlined workflow and
improved business processes. SAP America created and deployed an
extension of its mySAP Customer Relationship Management (mySAP
CRM) application to its mobile sales force on their BlackBerry devices.

This undertaking yielded the following results:

An initial deployment of a Web-based portal provided the necessary
gateway between desktop and the mobile application for many
users. The visibility and usage of the portal allowed for a better
overall understanding of business processes and ultimately
contributed to increased adoption of the subsequent mobile
application. The plan to use the SAP xApp Mobile Sales composite
application on BlackBerry sought to present a "My Opportunities"
view and enable updating of customer and company contact
information, viewing and modifying of in-process opportunities,
changing status and close date, adding members to a virtual
account team, viewing an opportunity's internal order number, and
providing revenue modification at the line-item level.
The SAP team completed a rapid deployment and delivery cycle
that brought mobile CRM to nearly 100% adoption in six months.
An initial phase of deployment had yielded little adoption by the
sales force due to slow performance and unwieldy security policies.
Additional enhancements, such as single sign-on features and
improved ease of use, significantly increased user adoption.
Key hurdles to overcome included heavy reliance upon support staff,
combined with inefficient communication and workflow mechanisms
among account executives, managers, and virtual account teams.
Qualitative benefits included operational and quality improvements,
significant increases in sales productivity, numerous efficiency
improvements, and cost reductions.

The Solution
The SAP team completed a rapid deployment and delivery cycle that
brought mobile CRM to nearly 100% adoption in six months. The
following timeline shows the implementation cycle for SAP America:
• In 2002: Rolled out mySAP CRM application to account executives
• April 2005: Launched CRM portal
• June 2005: Rolled out online version of SAP xApp Mobile Sales on
BlackBerry (read-only capabilities)
• August 2005: Added single sign-on capabilities (eliminated
significant adoption barrier)
• November 2005: Integrated opportunity and sales-cycle
management capabilities (update capabilities added)

A key component of the mobile solution was the initial deployment of the
CRM portal. The portal acted as an important bridge to move users
from the desktop-based mySAP CRM solution to SAP xApp Mobile Sales.
Portal usage, understanding, and functionality actually led to a
broader adoption of the sales application on the BlackBerry devices.
The BlackBerry device and SAP xApp Mobile Sales enable account and
opportunity management processes including:
• Update customer and company contact information
 • View and modify in-process opportunities
• Change status and close date
• See a "My Opportunities" view 6 #205182 ©2007 IDC
• View and add members to virtual account team
• View an opportunity's internal order number
• Modify revenue by separate line item
• Use mobile email and voice communication "Improving the accuracy
and frequency of our customer information has been a constant
goal. BlackBerry is one of the tools that help us."

Implementation Challenges
Adoption was a challenge to the account executives for several reasons:
Since existing processes still worked well, account executives needed
training before they recognized the value of the solution.
Because account executives focus on sales, any disruption to their
existing processes can meet with resistance. Demonstrating how such a
mobile solution could improve efficiencies and enhance productivity
had to resonate for an account executive to consider adoption, and
it was critical to a successful deployment.
Since account executives already used BlackBerry devices for mobile
email that certainly went a long way toward influencing adoption of
the new sales application. However, old habits were not easy to break,
such as calling super users and administrators for CRM information.

SAP focused on simple yet vital features, So the company

succeeded in nearly 100% adoption of the application.

Cost Reduction and Improved Efficiencies

Mobile access to mySAP CRM allows account executives to be more self-

reliant and reduces interactions with the following office-based workers.
• Super users
 • Reduces calls for opportunity status checks, as this is a core feature
of the application on BlackBerry devices
• Eliminates "thank you letter" responsibility, since the mobile
application automatically generates an "e-letter" from the
BlackBerry device
• Marketing
• Promotes faster handoff to sales through mobile lead acceptance
• Results in fewer demos scheduled for mobile CRM, as this can be
performed by the account executive leveraging his or her own
device
• Keeps marketing resources focused on activities that add value
• Sales executives
• Makes informed resource allocation decisions based on the most up-
to-date Information
• Leverages workflow capabilities to ensure follow-through on all
account activity

Benefits with use of SAP

Qualitative Benefits
With the implementation of SAP xApp Mobile Sales on BlackBerry,
SAP America recognized a number of qualitative benefits, including
increased user productivity and improvements to sales efficiency and
effectiveness, along with significant cost reductions.
Overall workflow and quality improvements were beneficial to
account executives, their teams, and their executive management.
Account information can be updated immediately and at the point of
doing business, improving its accuracy and potential for making it into
the system.
Management reports are more likely to contain the most up-to-date
account and opportunity information, providing more actionable data

Quantitative Benefits
The number of cross-sell and up-sell opportunities increased by 9.3%. In
addition, calls required for closing a sale decreased by 4.5%.
Sales executive efficiency increase by 2.7%. There were 36.6% fewer
calls to administrators per month and productivity loss decreased by
$13.15 per user per month. Use of the mobile sales application on
BlackBerry by SAP account executives also generated tangible cost
savings in the form of reduced administrative support and lower
telecom costs. SAP America's implementation of SAP xApp Mobile Sales
on BlackBerry delivered a number of measurable benefits
"The goal was not to save money, but to improve the accuracy
and timeliness of data regarding opportunities."

CASE STUDY 2

VALUE ANALYSIS FOR SHARE HOLDERS

Shareholder Value Analysis (SVA) is one of a number of methods being

used as substitutes for traditional business measurements.
SVA calculates the value of a company by looking at the returns it gives
to shareholders, and is based on the view that the objective of company
directors is to maximise the wealth of the company's shareholders.
This checklist introduces the financial calculations involved in carrying
out SVA and advises on its implementation.SVA is a method of financial
analysis which measures. Advantages of Shareholder Value Analysis:

• It provides a long-term financial view on which to base strategic

decisions.

• It provides a universal approach that is not subject to the particular

accounting policies that are adopted. It is therefore internationally
applicable and can be used across sectors.

• It forces the organisation to focus on the future and its customers, in

particular the value of future cash flows. Traditional measures are
 cost-based, bearing little relation to the economic income generated
during a period.

STEPS TAKEN TO CHECK THE VALUE

1. Understand and calculate the organisation's shareholder value

It is important when planning to adopt shareholder value as a significant

financial objective that you understand the implications and best
approach for your business. This can be achieved by planning the
approach first with professional advisers, such as accountants or
consultants who specialise in this area.

A company's shareholder value can be calculated as follows:

Shareholder value = Total business value—Debt

Total business value =Present value of future cash flows + Residual value
of future cash flows

If the result of this equation is greater than one, then the company is
worth more than the invested capital and value is being created.

* Future Cash Flows Future cash flows are affected by growth, returns
and risk,

* Residual Value The residual value is an important figure, which

represents cash flows arising after the normal planning period.
* Weighted Average Cost of Capital (WACC) WACC consists of the cost of
equity added to the cost of debt, and its purpose is to express the return
that a company must earn if it is to justify the financial resources that it
uses.

2. Gain top management commitment

SVA is based on the belief that creation and maximisation of shareholder

value is the most important measure by which to assess business
performance. This overriding objective must be accepted by top
managers for it to be achieved and take root in the organisation. There
should also be an acceptance that traditional measures and approaches
may fall short of achieving this objective.

3. Identify the key value drivers of the organisation and set targets.

This analysis of value drivers links financial and operational objectives,

and provides a framework for:

* setting targets for performance

* assigning responsibility to individual managers

* reviewing the financial performance of the business (and benchmarking

against competitors)

* developing strategic plans--in using SVA, it is possible to measure the

incremental change in shareholder value arising from each strategy, by
calculating the difference between the present value of future cash flows
before and after implementation of the strategy.

Identifying the key factors influencing each value driver is invariably a

process of trial and error. However, this process is fundamental to
managing, controlling and making improvements in the business which
will lead to improved cash flows.

4. Communicate the approach and train staff:

Managers need to understand the broad nature of creating shareholder
value, particularly when appraising potential projects, but the technical
aspects of SVA are unlikely to be of concern. Managers need to
understand the importance of identifying, controlling and improving the
performance of the value drivers, and the key factors influencing them.

5. Change the organisation's information systems to monitor and

measure progress:
The organisation's financial reporting systems and information systems in
general, will probably need to be revised when SVA is implemented.
Conventional reporting systems are unlikely to provide all of the
information required, or to provide it in the most effective format. In
order to implement SVA and unlock shareholder value, managers must
be able to regularly measure and monitor information concerning the key
value drivers and targets that have been set.

6. Change the financial incentive schemes employed for managers:

One key area to address is that of incentive schemes. For senior
managers incentives should reflect the need to increase shareholder
value over realistic time periods, rather than focusing simply on short-
term profit growth or earnings per share. Incentives and bonuses for line
managers should reflect their success in exerting a positive influence
over the value drivers that they control.

7. Monitor and review progress, and refine targets:

Creation of sustained value will require permanent monitoring.
Appraisals, performance reviews, management meetings and key
decisions will all need to focus on the progress that has been achieved,
and the action that is required to continue building shareholder value.
Failure to emphasise value creation can result in managers focusing on
targets which are no longer relevant, or which are actually harmful to the
long-term value of the business.

Acknowledgement

On the successful completion of this project, we feel worthwhile to

convey our acknowledgement to all those associated with it.

We are also extremely grateful to our management institute NARSEE

MONJEE COLLEGE OF COMMERCE AND ECONOMICS for providing us the
opportunity to carry out such an informative project report.

We would like to express our gratitude to our project guide, Prof. Reema
for her valuable advice, suggestions and the help given to us in
completion of this project.

We also take this opportunity to express our gratitude to all those who
directly or indirectly helped us to successfully complete this project.