Value Engineering is a term that is becoming popular today and for good reason. To understand value engineering one must first understand target costing which is a big part of value engineering and can be explained through the equation: Target cost = Target price - Target margin. A very famous engineer by the name of Dr. Preston G. Smith and his colleague Dr. Reinertsen found that more than 50% of eventual product costs are locked in by the time the product arrives to the development team. The amount of influence a person has over the cost of a product decreases exponentially over time. The moral is to start early!!
This is true in everyday life as well. We all know the phrase, "you can’t teach an old dog new tricks!" The humans character is 50% locked in by the time their development starts, due to their genetic make-up. Through knowledge and understanding of one's predisposed triggers, change happens. Just because one has a genetic disposition to become an alcoholic does not mean they will be. It is through understanding all functions of the human psychos that we can change pre-disposed harmful conditions. If a person knows the reason they have certain thoughts or urges they will have a better chance at changing those unconscious triggers.
In industrial engineering we fix these all too common business failing concepts of "if you make it, they will buy it" through obtaining knowledge through value engineering. Value engineering in short, breaks down every component to its core and keeps only the parts that are integral to functionality, safety, or what a customer will pay for. A company can have a basic, step-up, and premium addition, but everything must be appropriated.
Value Engineering: A discipline for determining costs of a product and its subsystems, based on value to the customer or user, i.e. no. durability tests, mean time between failures, etc.
Value Index = Worth to customer/Cost to me
There are many types of techniques to use but my favorite is the weighted matrix (if you’re interested in how to calculate the function-subsystem matrix contact me).
Target Costing: A disciplined process for determining and realizing a total cost at which a proposed product with specified functionality must be produced to generate the desired profitability at its anticipated selling price in the future.There is a four step process to target costing that includes: defining the product, setting the target, achieving the target, and maintaining competitive costs.
Kaizen Costing: Focuses on continuous reduction of costs, which should be realized for existing products in a company. For example, continuously finding ways to reduce non value adding cost drivers like deferred deliveries, wrong deliveries, late deliveries, transportation time, cycle times, while increasing first pass yield (throughput yield) etc. Remember: Small rain drops will eventually make an ocean!
Kaizen Costing is used after Target Costing and Value Analysis take place. Its a way of improving an already established/controlled process.
It is important to note that in value engineering the market dictates the price of a product not the other way around. In short, a simple cost-plus approach is a recipe for failure, while giving the customer more that they are willing to pay for is a recipe for insolvency.
For example, if I have an electric razor and the technology exists to install a transistor radio in the razor, to listen to music while shaving, should I install it? Will a customer pay extra for this option?
My body can take 12 beers in a sitting but should I down all 12 beers or will the law of diminishing returns come into play after three or four (depending on alcohol content)?
If you have any questions or comments, please let me know
Next Blog:
The Make or Buy Decision (popular question)- Sore Dewa Mata!
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