Value Engineering – Getting the best bangs for your design buck
Traditionally, there are two ways to work out the costing of a new product. The first, cost-plus pricing, calculates the materials, labour and overhead costs and then adds a profit margin. With this approach, the final cost depends on how you implement the functionality specified. The second, target costing, starts with a final customer price and works back from there to provide figures for costed bill of labour and costed bill of materials. This time, the implementation of functionality depends on what can be built in for the price.
With Value Engineering, costs are apportioned according to the importance of the each function of the device. Resources are focused where they can make the most difference to the success or failure of a new product. Using a coffee machine as an example, this table shows all the functions that matter for the end-user.
The next stage is to weight each function according to its importance to the end user. This gives the relative importance of each function. Brewing quality is the most important feature, followed by coffee temperature in the cup and so on.
This enables each function to be allocated a slice of the budget. Brewing quality gets 25% of the budget, etc. Assuming the target for the costed bill of material is USD 75, the following break-down can be made:
To ensure that these costs are kept to, they can be graphed as below which shows a forbidden zone. Entry of a function into this zone means that too much cost is being incurred for the function relative to the importance.
This methodology enables costs to be kept under close control as well as ensuring that design resources are focussed appropriately. This gives a funnel shape as the estimated cost becomes refined over time.
Research by McKinsey & Co has shown how important it is to get the design correct at the start of a project and this includes design for manufacture. Even a 50% overspend on design costs won’t reduce the overall project profitability by more than 5% if that overspend enables the project to be on schedule and the production costs on budget. This highlights the importance of perhaps spending a bit more on designing right first time to maximise the profitability of a project. It is a wise investment as the costs of redesign escalate further along into the project. Correcting a poor initial design at the production stage can cut the overall profitability by between 25% and 50% as it costs a thousand times more to correct than at the design stage.
Naturally, moving to a new way of doing this will meet resistance. The three most common push backs to Value Engineering are:
Comment 1 – “I cannot tell you the target price.”
Answer: “If you developed a business case, you know the maximum amount of cost that can be incurred on a product!”
Comment 2 – “I cannot tell you the importance of a function. Every function has the same importance!”
Answer: “If you cannot tell, you need to investigate through market research, user group evaluation, focus groups, etc.”
Comment 3 – “I do not have any accurate figures.”
Answer: “Accuracy is not important, it is all about estimates and relative measures. Be not as accurate as possible, be as accurate as necessary.”
In conclusion, Value Engineering provides a new way to look holistically at all aspects of a project and budget them according to their importance for the success of product.
About the author
Daniel Pfeifer is Global R&D Manager at Escatec – www.escatec.com