How to make value based decisions like a pro

Hey there, Skill Miner is online. I am excited to share with you one more skill that can help you in your everyday life and work. It is a Function and Value Analyses or also known as Value Engineering methodology. I will not go deep into the details of this complex methodology and will provide you with only the very necessary side. The side that will help you make the right and well-assessed decisions.

Theoretical overview

Item Functions

There is no secret that every time when we buy something the main thing we are pursuing is to satisfy one of our needs (or some of them simultaneously). To be able to do this producers and service providers endow their goods with special functions.

These functions can be divided into two big groups:

  • The main function
  • Auxiliary functions

Functions definition

The main function of a mobile telephone, for example, is to call, but nowadays any of cell phones have to be also equipped with a camera, Internet access and thousands of various apps. The second group describes auxiliary functions. Here we can also relate such things like prestige and brand. A logical assumption here is that the more functions we have the better. Thus we see this tendency in the cell phone and automotive markets to create more and more function integrated products.

Item Cost

The next point to consider is how much we have to pay for an item. This is where the costs or prices are coming into play (depending on whether you are buying or producing something). Logically we want to pay as less as possible.

Item Value

Now we need to bring somehow functions and costs together to understand a true value of a product. One of the ways to do this is to create a scale for functions evaluation to obtain some performance coefficients and then divide them by a cost. The formula is: Value=Functions performance/Cost.

Practical application

I guess it has been pretty simple so far. From this point no more theory and only practical application. Follow the written further algorithm to make an assessed decision or to conduct internal tenders in your company, or to decide whether to buy a car or a motorbike.

The best practical example is probably the purchasing of new equipment. Let’s imagine that you are a Process Engineer or a Production Manager and have to equip your line with a hydraulic press.

Decision Making

Step 0 – Define your budget

Define your budget. How much money you can afford to spend on it.

Step 1 – Define item’s parameters

If you come to the point of buying a new press then you most probably have developed already a certain product you want to produce, you have a market and know the quantity. Combined with the strategic vision of your company it may help you to specify the technical parameters of the equipment. For a press in a simplified way they 5 key parameters are:

  1. Clamping force – a maximum force that a hydraulic system of the press can build up;
  2. Platen size – the size of the press table platens – defines a final product maximum size;
  3. Daylight – a distance between the bottom and top press table platens – defines the maximum height of your product;
  4. Closing and opening speed – a speed with which press can be closed/opened – defines the shortest possible cycle;
  5. Parallelism control – defines your product geometry. If the feature is missing you, you have limitations with a final product shape;

Applied to other areas this step would be: define what are the key parameters of the product you are interested in and their values.

Step 2 – Define system’s constraints

Define the limitations in your system. Oh boy, you can’t possibly imagine how frustrating it is when equipment arrives and doesn’t fit just one centimeter through the gates. Physics is merciless in such cases and usually, you end up with either breaking the gates our the goods. Or imagine that you set up a heavy duty press without considering your flooring and one day you find a huge crack propagating right through the middle of your workshop.

Such limitations must have the second highest priority in the decision making process after the budgeting and defining the parameters. Let’s imagine that we have a small workshop and our limitations will be:

  1. Maximum height;
  2. Maximum weight;

Decision Making

Step 3 – Appoint importance factors

Now we need to give some mathematical meaning to all the specified above parameter. Let’s call it an importance factor and it can take a whole value from 1 – 3. Where

  • 1 – doesn’t affect the final performance;
  • 2 – important but not critical, better to have, but can survive without;
  • 3 – absolutely must, without this parameter, everything will collapse;

It is probably obvious that all the points from step 2 will have an importance coefficient 3. We can’t physically put a bigger press into a smaller workshop (in this simplified example we don’t consider a possibility to dig a pit).

In regards to the step 1, it depends of course on your application but these parameters must have from 2-3. Not less.

Step 4 – Define your suppliers

Define your suppliers (or let’s say opportunities). Here the more the better. By having 10 different options you can achieve the following:

  • Better pricing and discounts due to competition among the suppliers;
  • You can develop your expertise by discussing the technical aspects of various presses  (products) with your suppliers;

In this step, your main goal is to get a final specification of the product including the quotation and all the other possibilities. This is the moment when the list of press parameters can be enlarged with some additional (auxiliary) functions which should have not more than 1 importance coefficient.

Step 5 – Evaluate performance

Define how well is an overall performance of each solution (press). For this, you should introduce one more coefficient. Let’s call it a performance coefficient. It can vary from 0-5 or 3.

  • 0 – no performance
  • 1 – 2 – can perform a function with an additional investment
  • 3 – can perform a function  with some small limitations;
  • 4 – performs the function as we need;
  • 5 – outperforms the necessary level;

What we should have by now is the table like this:

Make this table in excel or in google spread sheets.

Step 6 – Calculate the overall functionality coefficient

We have now all the parameters and we evaluated them. To make an evaluation as unbiased as possible it can be done by a group of experts. Now we need to calculate an overall functionality coefficient let’s call it FC. For this, we need to multiply each importance factor by a performance coefficient and then sum all of them up for each solution accordingly. The FCs will be:

  • 1 – FC=84;
  • 2 – FC=79;
  • 3 – FC=97;
  • 4 – FC=87;

At a first glance, it seems that solution 3 is the best fit for us. But we still need to consider the prices.

Step 7 – Calculate Value Coefficient

Now we need to divide each of the FCs by a press price. To make a final figure scalable we can additionally multiply it by 1000 (because 84/1,000,000 is a pretty small figure to work with).

Let’s say the prices are as the following:

  • 700,000.00 EURO;
  • 600,000.00 EURO;
  • 1,200,000.00 EURO;
  • 925,000.00 EURO;

Budget is 1,200,000.00 EURO, thus all of them fit in.

Let’s calculate the Value Coefficient (VC). For this, we need to divide FC by the price. Let’s have a look at what we’ve got:

  • 0.12
  • 0.13
  • 0.08
  • 0.095

The higher the VC the better is the function. Now you can make a decision on which solution is the best. It is the second solution.

Please, consider that it is also possible to slightly complicate this calculation by involving savings into the calculations.

Conclusion

So, now I hope that you presses and other giant machines will fir properly through gates and you will not jump every time when press closes. This tool can be easily applied to any decision you want to make but have no idea how to assess it. when you decide for example where to spend your holiday you can follow the same algorithm. Don’t also miss out how to implement 5S and PDCA in your everyday activity.

Making Engineering Decisions

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