Education

Value Analysis and Value Creation

The subjective meaning of value is anything that satisfies human needs and wants. It is the quality of something which makes someone give something of equivalent value in order to possess it. However, in business management the value is defined as worth estimated by any standard of purchasing power, especially by the market price, or the amount of money agreed upon as an equivalent to the utility and cost of anything.

Mr DMA Kulasooriya

Value is decided by customers and the same is created by providers. Lean equation for creating value is so simple and easy to understand. The equation is: Value Addition is equal to Price of a product minus Cost of the same: [Value Addition = Price - Cost]. As Manufacturers or Service Providers we have two major options or strategies to create value: One of them is to add value to the product and to increase the price of the same (top line) to match the value added. Second strategy is to reduce cost associated with the product in order to increase the bottom-line.

The subject of Value Engineering (VE) began at Generic Electric Co. during World War 11. Because of the war, there were shortages of skilled labour, raw materials, and component parts. Lawrence Miles, Jerry Leftow, and Harry Erlicher at G.E. looked for acceptable substitutes.

They noticed that these substitutions often reduced costs, improved the product, or both. What started out as an accident of necessity was turned into a systematic process. They called their technique "value analysis".

Lean management views the cause of poor performance of a business process as a wasteful thing. Lean is a time-based strategy and uses a clear definition of waste (non-value-adding work) as any task or activity that does not produce value from the perspective of the end customer. Increased competitive advantage comes from assuring every task is focused on rapid transformation of raw materials into a finished product with a greater value.

How to understand the real meaning of Value
That value is the key of everything which motivates and opens any transaction. The client always buys a package, made up of a mixture of tangible and intangible attributes that s/he values, and the business obtains money for its costs which generates benefits that it values. This package, when examined, is called the Model of Value and it is formed at the same time that the business is designing, buying, manufacturing, inspecting, administrating, selling, etc.

The different people involved are those that are going to add or detract value from the deliverable.
How does this apply to my business activities?

If value is the perception that the client has of what s/he receives, of whether it will give or produce satisfaction, it is clear that not everything that adds cost adds value. As a result, no client will consciously accept paying for our inefficiency. Detecting what it is that has value for the client becomes a search for competitive opportunities. Success of a firm depends on the total value being created to offer for its customers through a total package. This is where value engineering plays a key role .

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