Value Engineering: Definition, Meaning, and How It Works

Value Engineering

Investopedia / Dennis Madamba

What Is Value Engineering?

Value engineering is a systematic, organized approach to providing necessary functions in a project at the lowest cost. Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality. It is focused solely on the functions of various components and materials, rather than their physical attributes. Value engineering is also called value analysis.

Key Takeaways

  • Value engineering is a systematic and organized approach to providing the necessary functions in a project at the lowest cost.
  • Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality.
  • Value engineering is often broken into six steps or phases starting with generating ideas and ending with change implementation.
  • Value engineering is primarily focused on the use, cost, esteem, and exchange values.
  • The ultimate formula for value is often defined as function divided by cost, with value engineering striving to maximize function while minimizing cost.

Understanding Value Engineering

Value engineering is the review of new or existing products during the design phase to reduce costs and increase functionality to increase the value of the product. The value of an item is defined as the most cost-effective way of producing an item without taking away from its purpose. Therefore, reducing costs at the expense of quality is simply a cost-cutting strategy.

The concept of value engineering evolved in the 1940s at General Electric, in the midst of World War II. Due to the war, purchase engineer Lawrence Miles and others sought substitutes for materials and components since there was a chronic shortage of them. These substitutes were often found to reduce costs and provided equal or better performance.

With value engineering, cost reduction should not affect the quality of the product being developed or analyzed.

Ratio of Function to Cost

Miles defined product value as the ratio of two elements: function to cost. The function of an item is the specific work it was designed to perform, and the cost refers to the cost of the item during its life cycle. The ratio of function to cost implies that the value of a product can be increased by either improving its function or decreasing its cost. In value engineering, the cost related to production, design, maintenance, and replacement are included in the analysis.

Product Value = Function Cost \begin{aligned}&\text{Product Value} = \frac { \text{Function} }{ \text{Cost} } \\\end{aligned} Product Value=CostFunction

For example, consider a new tech product is being designed and is slated to have a life cycle of only two years. The product will thus be designed with the least expensive materials and resources that will serve up to the end of the product’s life cycle, saving the manufacturer and the end-consumer money. This is an example of improving value by reducing costs.

Another manufacturing company might decide to create added value by maximizing the function of a product with minimal cost. In this case, the function of every component of the item will be assessed to develop a detailed analysis of the purpose of the product. Part of the value analysis will require evaluating the multiple alternate ways that the project or product can accomplish its function.

Steps in Value Engineering

Value engineering often entails the following six steps, starting from the information-gathering stage and ending with change implementation.

Step 1: Gather Information

Value engineering begins by analyzing what a product lifecycle will look like. This includes a forecast of all the spending and processes related to manufacturing, selling, and distributing a product.

Value engineers will often break these considerations down into more manageable data sets. In addition to assigned financial values, value engineers may prioritize processes or elements along a product's manufacturing plan. Value engineering may also call for expectations regarding time, labor, or other resources for different manufacturing stages.

Step 2: Think Creatively

With the core baseline expectations for the product having been documented, it's now time for the value engineering team to consider new, different ways for the product to be developed. This includes trying new approaches, taking risks on things never been done before, or creatively applying existing processes in a new way.

Levering these creative ideas, value engineers will re-imagine how the product will be created and distributed from state to finish. This phase is the "idea-generation" stage where members of the team should be encouraged to brainstorm freely without fear of criticism.

Examples of thinking creatively may include changing the materials used, changing the product's design, removing redundant features, trading off reliability for flexibility, or changing the steps/order of the manufacturing process.

Step 3: Evaluate Ideas

With a bunch of ideas now on the table, it's time to decide which are reasonable and which aren't Each idea is often assessed for its advantages and disadvantages. Instead of focusing on the quantity of each tally, the value engineering team must consider which pros and cons outweigh their counterpart.

For example, a single change may result in five new benefits. However, doing so would outlaw distribution to a country that the company exports the most goods to. In this case, the five benefits may not outweigh the one disadvantage.

Step 4: Develop and Analyze

Once the ideas are ranked, the best ideas are taken and further analyzed. This includes drafting model plans, detailing changes and their impacts, producing revised financial projections, redesigning physical renderings, and assessing the overall viability of the change.

Be mindful of timeline constraints and considerations when analyzing changes, especially if other departments will be negatively impacted by pushed out schedules or deadline changes. Also, consider how the break-even point of a product may change as a result of the adjustment to ensure the strategy aligns with the philosophy and financial capability of the organization.

Step 5: Present Discoveries

With plans devised and presentations pulled together, it's time to deliver the best ideas to upper management or the board for their consideration. Often, more than one idea will be presented at a time so the deciding group can consider and compare alternatives. Each alternative should be consistently presented with fair representation across each choice.

Value engineering calls for enhancing the value of each product; therefore, presentations should begin and end with how the change will benefit the company. Presentations should also include revised timelines, financial projections, drawings, and risks. Often, management may seek specific answers on changes or desire to see different analysis performed than what is presented.

Step 6: Implement Changes

As management gives confirmation to move forward with changes, value management shifts from a theoretical practice to an change management implementation process. When proposed changes are accepted, new teams are formed and assigned areas of oversight. Value engineer team leads often remain engaged with the changes to monitor what is being adjusted and how expectations are being aligned with new realities.

If a company lacks the required expertise to brainstorm changes, it may rely on external third parties to manage the first five steps (with the company taking over once it has decided what changes to make).

Types of Value

When performing value engineering, analysts must often consider how to define 'value'. After all, one customer's perception of a product may be very compared to another customer based on their assigned value of the good. In general, there are four primary types of value recognized by value engineering:

Use Value

Use value is the primary type of value and it is determined by the attributes of the good. These attributes define what the product is able to do, how it is used, and what its purpose is. This heavily ties to product differentiation where consumers can only derive value from a specific good without competitors.

The use value of a product is the primary purpose of value engineering. Without a use value, consumers would not initially purchase the good. For instance, if a type of shoe did not adequately protect someone's feet or make it so they could walk down the street, the shoe has little to no use value. Without use value, products will ultimately fail because they serve no purpose.

Cost Value

Assuming we have a good generating use value, it's now time to consider how it takes to make that good. Let's assume the shoes from above are tremendous for hiking, rugged wear, and waterproof protection. This means the shoes may require experienced labor to craft, specifically-treated raw materials for its production, and premium quality control for consumer safety.

In this example, all of the variables mentioned above represent different cost variables with different values. A consumer may value the shoes at $50/pair; if the company determines its cost value is $75/pair, the company must assess how to rebalance the equation. Alternatively, charging a customer prices too high will likely yield negative cost value.

Esteem Value

While the use value describes the physical benefit of a product, consumers may also experience intrinsic value that often extends beyond what the product is. For example, should the shoe above come from Nike, consumers may be willing to pay higher premium for the shoe because of the added esteem benefit of the brand recognition.

Though esteem value is often positive and associated with brand recognition, it can also be negative and correlated to brand dissonance. This is often related to the target consumer of the product. For example, low-cost, budget-conscious consumers may have negative esteem value when considering Apple's innovative, higher-cost product line.

Exchange Value

The last and smallest component of value relates to a product's ability to be exchanged. With the introduction of international shipping and supply chain analytics, it is now becoming easier for almost any consumer to receive any product in a reasonable amount of time.

Still, a value engineer must how to facilitate the distribution of a product, the physical characteristics of a product, and other attributions that make it so the good can easily be bought or traded. Should consumers find it very difficult to buy or receive the good, value may be lost or destroyed.

There are countless ways to define or categorize customer value. In reality, value engineering encompasses every value perceived or received by a customer whether it conforms to the four primary types above.

Value Engineering vs. Value Analysis

While value engineering is the technique often used before a product has been fabricated, value analysis is the technique used to analyze an existing product. The goal of value analysis is often to review an existing set of costs and benefits with the intention of enhancing its value.

While value engineering occurs earlier to prevent value loss, value analysis occurs after-the-fact and may be used to remediate product deficiencies. Value engineering is generally used to aid manufacturing, while value analysis may sometimes be used more heavily in the business or sales department.

Though the two terms may often be used interchangeably, value engineering is the practice of preventing unnecessary costs or deficient value while value analysis is the practice of eliminating costs or negative value components. Changes made in response to value analysis may be brought about during different stages of a product's life span, while value engineering only occurs at the initial product stage.

What Is the Role of Value Engineering?

Value engineering is the process of designing a product to ensure the value a customer receives is maximized. This is a careful activity of balancing the functions of the product along with the financial consideration of a product. In general, value engineering strives to maximize the benefit a consumer receives while minimizing costs.

What Are the Phases of Value Engineering?

Value engineering is often broken into six stages: information gathering, brainstorming, evaluating, developing plans, presentation, and implementation. The phases range from collecting relevant data to designing alternatives to see what management thinks of the potential changes.

Why Is Value Engineering Important?

Value engineering is the process to ensuring your customer's satisfaction and utility of a product is maximized. Without considering a product's use, cost, or functionality, a good may lose its place in the marketplace because it doesn't solve a problem or reflect accurate financial prices. Value engineering is important because it forces a company to evaluate its future plans to maximize profitability.

What Are the Types of Value in Value Engineering?

Value engineering often breaks values into the use, cost, exchange, and esteem value. Though other departments may use different categories to define consumer benefit, the end goal is to ensure all benefits of a consumer are captured for analysis.

The Bottom Line

Value engineering is the process of ensuring a product doesn't waste away its potential. Products that lack purpose or drive value will get lost in the marketplace, becoming cost centers for a company that yields little to no profit. By implementing value engineering, a company evaluates how a product can better serve its customers, how value can be created, and costs can be minimized.

Article Sources
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  1. Washington State Department of Transportation. "The Methodology for Maximizing Project Value," Page 3.

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