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The current business scenario is very demanding with a continuous demand from the market forces to reduce the product price. The pricing as demanded by the market, forces the businesses to reduce product development and manufacturing costs to remain competitive.
Manufacturing costs of a product can be broadly categorized in the following heads:
â€¢ Raw material
Technology driven Product engineers are constantly faced with the following challenges:
â€¢ Reduce production cost
â€¢ Reduce the material cost
Value Analysis and Value Engineering (VAVE) methods are very important and useful in driving down the product cost which helps companies retain market share and sustain their profitability.
What is VAVE?
Value engineering began at General Electric Co. during World War II. Because of the war, there were shortages of skilled labor and raw materials. Lawrence Miles and Harry Erlicher at GE looked for acceptable substitutes for materials. They noticed that these substitutions often reduced costs, improved the product, and in some cases, both.
What started out as an experiment driven by necessity was turned into a systematic process. They called their technique "Value Analysis". As others adopted the technique, the name gradually changed to "Value Engineering". VAVE is a systematic process used by a multidisciplinary team, directed at analyzing the functions of a project, product, process, system, design, or service for the purpose of achieving the essential functions at the lowest life cycle cost consistent with required performance, reliability, availability, quality and safety.
VAVE is the process of reducing costs in a development project. This process is achieved by assessing materials, processes and or products and offering alternatives. The outcome should result in savings to the client / end user without compromising the intent of the design, i.e. by maintaining or improving performance and quality requirements of the product.
The key metric/factor is to achieve the desired results without compromising on quality and performance of the product. Projects that use Value Engineering in the early development or sonable deliverables, and requirements. At this point, major design and development resources have not yet been committed and the manner in which the basic function of the project is to perform has not been established, so alternative ways may be identified and considered. Applied with flexibility and creativity, Value Engineering is almost unlimited in its ability to identify areas of potential savings.
An important aspect of Value Engineering lies in its ability to respond with timeliness, flexibility, and creativity. It can be used for new or existing programs, all phases of a project, and for organizational processes. Value Engineering can be used to improve quality, achieve lower costs, assure compliance, improve efficiency, build teamwork and reduce risks.
COST REDUCTION BY USING TQM
The aim of the TQM is to produce the Top quality goods at a reasonable low price and thereby satisfying customer expectations.
Costs of Quality
"costs of doing it right the first time"
Â Manufacturing a quality product, providing a quality service, or doing a quality job - one with high degree of customer satisfaction - is not enough. The cost of achieving these goals must be carefully managed, so that the long term effect of quality costs on the business or organization is desirable one.
These costs are a true measure of quality effort. A competitive product or service based on a balance between quality and cost factors is the principal goal of responsible management. This objective is best accomplished with the aid of competent analysis of the costs of quality.
The analysis of quality related costs is a significant management tool that provides:
A method of assessing the effectiveness of the management of quality.
A means of determining problem areas, opportunities, savings, and action priorities.
Â The necessary activities will incur costs that may be separated into
The creation and maintenance of the quality system
Â Resources devoted to prevention give rise to the 'costs of doing it right the first time
Appraisal costs include:
Appraisal activities result in the 'costs of checking it right'.
Failure costs can be further split into those resulting from
Internal failure costs
External Failure costs
Internal failure costs:
Â Internal failure includes the following:
Rework or rectification
External Failure costs
External failure includes:
Repair and servicing
Loss of goodwill
External and internal failures produce the 'costs of getting it wrong'.
Merits of TQM
Focus on quality from top to bottom
Quality focus increases customer goodwill and market share
Zero tolerance for even small inefficiencies
In TQM, there is a team approach in solving problems
Waste is also reduced down to a minimum
Limitations of TQM
TQM does not just happen in a day
It needs commitment from the employees
This means that the company needs a very low labour turnover rate this because the staff needs to be very well trained.
Some staff members maybe resistant to change because there so much involved to change to a TQM.
COST REDUCTION BY ABC
Instead of charging overheads to production by using just one factor, ABC adopts a considerable number, depends on how many activities can be isolated within a particular entity (Dyson, 1997). ABC avoids over-costing high volume products and under-costing low volume ones. The profits rise because the cost drivers reflect the activity generated by particular products. For example, in an ABC system, if both products A and B require one set-up, but A consists of one unit and B 1000, they will both be charged the same amount of overhead.
Activity-based costing systems use more types of cost driver than the traditional volume-based costing systems.
Merits of ABC
Highlights Value added activities to save costs and improve profits
Eliminates Non-value added activities
Links cause and effect i.e. cost drivers that effect overheads.
Identification of cost drivers helps in allocating ohd's in more accurate wayand thereby achieve product costing.
Avoids under / over pricing that leads to better decision making
Limitations of ABC
More detail analysis required
Does not always conform to SSAP 9.
The ABC system encourages all costs, including selling and distribution costs, to be charged to work-in-progress and finished goods as product costs. This cuts across the normal basis for valuing stocks for financial accounting purposes. 'SSAP No.9 requires stocks and work-in-progress to be valued at total production cost up to the stage of production reached' (Hussey & Hussey, 1999: 313), which would normally exclude selling and distribution costs.
A more complex system of absorption costing - ABC is regarded by some as not so very different from absorption costing in that absorption rates for each driver are still required.