An important function of the purchasing executive is that of finding proper substitutes for raw materials. For this, a management technique developed during the Second World War period called Value Analysis (VA) or Value Engineering (VE) might be of much help. It is a systematic method of thinking about substitutes. It basically consists of studying in detail the ‘value’ of the material. The value could be due to the functional characteristics (i.e. performance) of the product or due to other considerations of value such as the ‘esteem’ value. In organizational purchasing we largely do not encounter the latter kind of value. The idea behind value analysis is to find a substitute giving the same functional value, yet costing the same or less.
In general, we can divide the value Analysis into the following steps:
Step I – Information Stage
Here, all the relevant information regarding raw material and the finished product in which it is incorporated such as the cost, the manufacturing method the performance characteristics etc is gathered. The more detailed the information gathered in this initial stage, the better will be the Value Analysis. Here one may ask question in detail, such as what, where, when, how and why (for each of them).
Step 2 – Functional Analysis
At this stage, the functions that the material performs are listed in terms of basic function and secondary functions. It is advised that the functions be described in two words –a verb and a noun – as far as possible. This is to avoid long winding descriptions of the functions. After having listed the functions, each of these functions is given the value points or the weightages in terms of its importance or desirability. If the value (or worth, as it is alternative called) is expressed in terms of 0—100 points, then the total for all the functions of a materials should add to 100 points. Alongside, we also mentioned the cost incurred (or price paid) for each of the functions. Placing the cost and the value points side by side immediately reveals those areas of the material where much money is spent for little value. These high cost-to-worth functions are the focus of our attention in suggesting a substitute design of a bought-out part or a substitute material. If the value of a function is small, then that function can be dropped altogether in the substitute product.
Step 3 – Brain Storming
Having done the analysis of the function and costs of the material, we are now ready to think of various alternative possibilities for the material. The main idea, here; is to encourage creativity. Many of the suggestions may seem like wild guesses. Still, these recoded are recorded even if all suggestions are not feasible. The idea is to break away from rigid thinking and encourage creativity. Some systems of brainstorming start idea generation from such widely differing ‘triggers’ as politics and geography, and develop them further so as to apply to the problem at hand which could be finding an alternative product design. For such idea-generation, heterogeneous group ideas are preferred.
Step 4 – Evaluation Phase
Each of the ideas is evaluated again in terms of a functional analysis i.e. by finding the various functions that the substitute can perform to what extent and at what cost for each of those functions. Such an analysis will indicate a few of the alternatives which might offer similar functional value as the earlier materials, but at a reduced cost. We may even find some substitutes with enhanced important functional values.
In this phase, the selected substitutes or new ideas are discussed with the appropriate departments for their implementation. Its possibility will be screened out and only or two ideas might be implementable.
Such a systematic analysis of the functional values of input material along with their cost structure will help the purchasing executive in finding alternative materials of equal functional value or better value while reducing the procurement costs. Value analysis, of course, should be done as a team work since it involves a lot of creative and interdisciplinary thinking.