Value Analysis

Imagine you’re a product design engineer stuck on how to reduce the cost of your company’s existing product: reusable coffee cups. As a daily coffee drinker, you’re well aware of all the typical frustrations of travel mugs, especially when you go to take a sip… only to end up staining your shirt instead. You want to revamp the design to ensure smooth sipping—but you also don’t want to cost the company a fortune either. In this scenario, a value analysis may be your best friend in achieving this perfect balance.

A value analysis (VA) is a useful technique to introduce a reasonable price for manufacturing an existing commercial product or service.¹ As a systematic approach, a value analysis examines designs within an organization and its industry to evaluate the effectiveness of their function. It also considers the lowest cost—both in terms of production and customer willingness to pay—while ensuring performance satisfaction. This concept can be a bit confusing, especially for those of us who aren’t engineers, so let’s break it down into its key parts.¹

Separating “Value” from “Analysis”

Before diving into VA, it is important to consider what value is in general. Consumers may define value differently depending on whether they’re interested in how well a product works, how aesthetic it is, or how applicable it may be to a given situation. But as a general rule of thumb, we can consider value as equal to the function of a product relative to its cost.¹

In a typical value analysis, value is systematically calculated in team settings, usually amongst management. Critically, the analysis part of this approach comes into play when determining the function of a product or service in meeting the customer’s needs. This is usually achieved through a review process that tests the “fit” between a product and its value—and most importantly, whether this feels justifiable to the target consumer or not. In particular, this process may include determining what a fair price is for the average customer, as well as distinguishing between the product’s use value (practical utility) and esteem value (personal desirability).¹

Value Analysis, Simplified 

A lot of VA can feel abstract. Here is a brief summary of what a value analysis looks like in its simplest form (using our travel mug example from above):

1. Determine the function of a product or service. Taking coffee on the go when you (unfortunately) don’t have time to sit and chat. 
2. Set a value for the given function of a product or service. For a to-go cup that really works by keeping coffee hot and avoiding spills, you decide the fair value is $25.00.
3. Provide the necessary function of a product or service relative to the overall cost. You consider how the mug’s assigned cost and its functions are relative to the manufacturing cost, design cost, or any other overheads. 

Value Analysis, Expanded

We can further break down VA to understand each phase involved in how a product, process, or service may be improved relative to cost. This comprehensive breakdown is also known as a value analysis job plan, which is usually brainstormed in workshop settings and includes alternative plans to ensure a product’s function is maintained. The six phases are as follows:³

Value Engineering and Value Management

While a VA approach analyzes existingproducts or services, value engineering (VE) evaluates a newproduct or service from a design perspective, while value management (VM) optimizes the overall project from a bird's eye view.⁴ The principles across the board are essentially the same, but we can further distinguish VA, VE, and VM by asking the following questions:

Value Engineering (VE): A systematic way to reduce the cost of a product or service while maintaining its function. Related but distinctive from value analysis, value engineering is for new products or services, while value analysis is for existing ones.³

Value Management (VM): A system that helps to define, plan, and implement a program or management strategy with the goal of increasing a company’s overall value.³ A key goal of VM is striking a balance between various stakeholder needs and company resources. 

Value: In both VA and VE approaches, value is the ratio of the function of a specific product relative to its cost. This ratio tells us how value can be increased by either improving the function or decreasing the cost.⁵

Use Value: The value of a product in terms of its practical utility that satisfies a human demand, such as a want or need. For instance, a travel mug has the use value of making sure you can take coffee to go, that it stays hot, and that it doesn’t spill.¹

Esteem Value: The value of a product in terms of non-quantifiable elements like appearance, social status, or other qualities that make the owner feel good about owning it. For instance, a coffee cup may have aesthetic appeal or brand recognition, thereby increasing its esteem value.¹

Value Analysis Job Plan: The specific steps or phases that are applied to analyze a product or service, including alternatives to achieve a desired function. The job plan is done in a creative, team-based workshop context over six distinct phases: information, function analysis, creative, evaluation, development, and presentation.³

Functional Analysis System Technique (FAST): A technique used in VA to make a graphical representation between the functions of a product or service by exploring how to achieve a product function, why we want to achieve this function, when we do this function, along with what other functions are necessary.³ 

Functional Performance Specification (FPS) Technique: A technique used in VA to help define the requirements for a product or service based on the necessary functions and their needs.³ This technique was initially used in France to determine the requirements of new products. FPS allows the consumer to think of what a solution must do for a product instead of what it specifically must be.

Function-Based Brainstorming: A way to brainstorm a large variety of ideas on how a product or service function can be found in a short amount of time. It is a participant-based technique where questions are asked relative to a product or service function.³ For example, if a product is meant to “inform the public,” this would be reframed to the VA team as, “How can this product inform the public?”³

Utility: The value a product or service has in relation to the total satisfaction the consumer receives from using it. Many theories in economics assume that people want to maximize their utility,⁶ where we may consider decision utility when we pick what is best for ourselves.

In the 1940s, the General Electric Company in New York was trying to solve problems involving a lack of skilled labor, raw materials, and product parts following WWII. A trio of engineers, Lawerence Miles, Jerry Leftow, and Harry Erlicher, were in search of substitutes for these shortages.⁴ To address the gap, these engineers found alternatives to aspects of a company, such as labor, materials, and product parts, that could reduce costs and make the product better. After coming to this epiphany, the engineers developed what we now know today as value analysis—or as they first called it, “value control.”

Value analysis soon gained popularity in a range of government and industrial settings like construction, manufacturing and engineering. This method presented an unique opportunity to have large returns without large investments—something that any company likes to hear. Miles, one of the three General Electric engineers, took VA further in 1957 by scaling it to an entire industry. He oversaw the U.S. Navy’s Bureau of Ships as it officially introduced a value engineering (VE) program into its Department of Defense organization (the term, at the time, being used interchangeably with VA).⁷ Miles, along with General Electric co-worker Raymond Fountain, supervised the VE program in the U.S. Navy to reduce the cost of how ships were made—a cost that almost doubled during WWII times. It was the Bureau of Ships itself that seemed to prefer the technique to be called “value engineering” in the late 1950s, as engineers started to be staffed under a general engineer job description for this purpose.⁷

In the following years, VA and VE approaches were adopted in other corners of American systems in significant ways. One example is the U.S. Government’s General Accounting Office (GAO), who has highlighted the positives of value engineering since the 1970s as a concept that is evidentially effective at cost saving from the perspective of the GAO.⁷ In 1974, the GAO recommended that all federal construction organizations start using a VE approach after observing how it could reduce costs at ten different construction sites. A decade later, in 1984, GAO reported that more use of value engineering may lead to saving 3-5% of the Department of Transportation’s project costs.  

In the 21st century, value analysis and value engineering continue to demonstrate success stories across a wider range of industries. In Canada alone, the expanding influence of VA for saving costs may be seen in highway alignments in Ontario, the reusing of nuclear power plants, and even the implementation of food services in educational settings.⁸ With VA often being applied to material problems and products, how VA fits into the digital world remains open-ended. We still have yet to discover how such methods may reduce costs related to fields like big data, AI, and other digitized realms.

Lawrence Delos Miles

An American engineer who created valued analysis and helped popularize these approaches. His book, Techniques of Value Analysis and Engineering, became a foundational text for these methods. In 1977, the Miles Value Foundation (MVF) was established in his honor to support education for VA-based projects.

Jerry Leftow 

An American engineer was one of the original three who established value analysis at General Electric Company. Leftow worked alongside Miles and Erlicher to spread VA to various American industries post-WWII, though Leftow seemed to be the least involved.

Harry Erlicher

An American engineer who was the Vice President of Purchasing at General Electric Co. Erlicher. He was the one who assigned Miles to the purchasing department, where the two of them worked together to come up with VA along with Leftow. 

Value analysis has significantly helped companies reduce costs. Its methods can benefit both individuals and entire organizations, particularly by improving team dynamics. Importantly, VA also contributes to greater customer satisfaction by enhancing product outcomes.

Cost Reduction

The most obvious benefit, but the number one purpose of a value analysis, is to reduce costs at a company. There’s a good chance you’re thinking: how much money can this type of analysis really save? Believe it or not, the numbers can be quite striking. For instance, according to the GAO in 1985, savings in wastewater projects more than doubled from $25 million USD to $57 million USD annually.⁷ Another example is with the Department of Defense, where a 1983 report outlined nearly $145 million USD in savings—and that’s $145 million in the 1980s. These early pieces of evidence for the efficacy of VA are just the tip of the iceberg in possible applications, where costs have been significantly deducted in settings like healthcare, city construction, highways, nuclear energy, and water treatment.⁸ With such significant savings seen decades ago, it will be interesting to see how VA applies to a world with mutli-trillion valued companies in the 2020s. 

Increase Customer Satisfaction

While the initial focus of redesigning a product is usually to reduce costs, the customer still needs to be happy with the price and usage to make this all worthwhile. Put simply,  if your target market doesn’t want to buy your product or service post-VA, then neither you nor your boss will be happy—as you won’t be generating the revenue you expected in the first place to make a profit, let alone cover costs.

To avoid letting this happen, there is a subset of VA companies that can use aimed at addressing customer satisfaction, appropriately named customer value analysis (CVA).⁹ This research tool allows a company to comprehend how its product is being perceived by its customer base. Some common ways a company may conduct a CVA include identifying customer needs, optimizing product offerings, and improving the customer service experience overall.

Encouraging Collaboration and Teamwork

In all of the phases of value analysis, it is clear how everyone at a company can get involved before an analysis is passed up to upper management. What truly promotes teamwork is the workshop nature of VA—where engineers, designers, and other contributors come together to analyze their products or services. This team-oriented approach encourages employees to collaborate within and across teams,  and share ideas that they might not have had the chance to otherwise. This may be one way a company not only saves costs, but also promotes knowledge across the board.

No type of analysis is perfect. After all, a value analysis means cutting costs—not eliminating them completely. Plus, companies might pay the price of saving money, such as compromising the value of the product itself. There may be some issues of how VA must be catered to specific industry needs, while we also must consider how “value” is an idiosyncratic term. 

Value Analysis is Not “One-Size-Fits All”

Despite the success that the GAO saw from the 1970s onward in various American industries, the department itself cautioned that VA may not necessarily be useful in every case. Any type of agency or organization may need to consider how a value analysis approach fits into their practice. This may especially be true for companies that focus more on other important variables beyond costs and productivity.

One example is the nonprofit sector—where the function of a service is often prioritized over profitability. While a value analysis is mainly for cost reduction, how the customers, clients, or consumers appraise how well a product or service works for them matters, too. A less-cost-oriented type of analysis may be better suited for these organizations, where it may not be about monetary value but rather human or organizational values in themselves that are more attuned to clients needs. 

Value is Subjective 

Although this type of analysis boils value down to absolute numbers and costs, how each individual or company appraises a value is not the same. Put simply, $10 has a different value for a broke college student compared to a billionaire—it may technically still be $10, but it doesn’t feel like the same amount of money. For this reason, VA may have companies saving a great deal on costs, yet subjective value may present issues in how beneficial owners, stakeholders, or even adjacent managers interpret these numbers. One way to address this issue may be bringing the concept of utility into a value analysis process.

Utility helps us determine what the value is of a given product or service. For each consumer, or a company on a bigger scale, this is the total satisfaction that is gained from using a product or service.⁶ This presents a gap within the VA framework: we may think that, in our VA workshops, we know exactly how much we will pay for that to-go coffee cup, but there are always individual differences in the utility of a product. A more robust version of value analysis may be able to incorporate utility into the creative phase before implementation. Perhaps some thorough desk research analyzing the utility of a given product could be conducted to better understand a company’s customer needs and expectations. 

Value Analysis for Hospitals and Healthcare Teams

Any industry would probably like to spend less money than it does while also making sure its customers are satisfied with their products. But what about when there is a different kind of “customer,” such as a patient?

As you may have guessed, the healthcare industry is exemplary of value analysis success stories. Depending on where you live, the cost of healthcare can be a real strain, while other problems such as wait times are more so the issue. However, as patients, we may also think critically about the costs hospitals, health organizations, and all medical professionals are faced with when providing care.

Healthcare industry experts have investigated how value analysis might be a tool for better financial usage and patient outcomes. One such expert, Kara L. Nadeau conducted a deep dive into the importance of healthcare VA.¹⁰ This author found a handful of benefits here aside from saving costs, such as higher quality of care, clinical outcomes (e.g., less complications, short length of stay) and supply chain benefits (e.g., reducing clinical waste, standardizing health products). A unique result Nadeau also spoke to, in connection to our impact of teamwork for VA, is the idea of value analysis committees (VACs),¹⁰ where multidisciplinary groups of stakeholders from supply chain, clinical, and financial settings can come together to manage how medical products are used in a hospital.

Aside from seeing the benefits of the VA team in an American healthcare context in Nadeau’s review, the same can be said of Canada—two countries close in proximity but with vast differences in medical care. In British Columbia, Provincial Health Services Authority (PHSA) has designated value analysis teams (VATs) where healthcare professionals collaborate to take on clinical and sourcing issues on a provincial scale.¹¹ From operations leaders to clinicians, these teams have the goal to uphold client safety and quality of patient care while reducing costs.

Value analysis is not always about big companies saving money in selling their specialty product—it's about people and their well-being, too. As this type of analysis has proven to make a difference in healthcare settings, where else it may be able to have a positive economic effect while rooted in helping professions may be discovered soon. 

The Value Perception Dilemma

All of this talk of value might have us thinking: what are the products or services I’m using really worth? In this piece, the price we are willing to pay for various goods and how we perceive such values is discussed. Some elements brought into this perception are context, customer experience, and a famous dual system for our brains. 

The Halo Effect in Consumer Perception: Why Small Details Can Make a Big Difference

Sometimes the price of a product or service isn’t simply about the cost and function. Here at TDL, we like to consider what cognitive biases might play a role in our decisions. In this article, the halo effect is explained as having an influence on how small details might impact product consumption. 

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