Value management and new product development.

Palcic, Iztok ; Semolic, Brane ; Polajnar, Andrej 等

Abstract: This manuscript deals with the concept of value and customer satisfaction that is directly related to the value that a product or a service brings to customer. The concept and importance of value management is discussed, as well as product value and product functions. The final part of the paper presents a traditional value management job plan, used for value management process. The authors have modified this traditional job plan and present an improved value management methodology, used particularly for new product development.

Key words: value, value management, new product development, product function, project

1. Introduction

It is recognised to be successful in business, we must satisfy our customers. High customer satisfaction is thought to build loyalty and retain customers while also attracting new customers. Consequently, improving customer satisfaction is viewed to be a means to grow business (Dumond, E. J., 2000). It is also well recognised fact that it is extremely hard to measure customer satisfaction. One way is to relate customer satisfaction to the concept of value. The customer will be satisfied if the product or service provides them with value. There are many definitions of value concept, common themes through these definitions are:

* Customer value is linked to the use of a product or service, thereby removing it from personal values;

* Customer value is perceived by the customers rather than objectively determined by the seller;

* Customer value typically involves a trade-off between what the customer receives (e.g. quality, benefits, and worth) and what he or she gives up to acquire and use a product or service (e.g. price, sacrifices).

Kelly and Male (1993) define value as a measure expressed in currency, effort, exchange, or on a comparative scale which reflects the desire to obtain or retain an item, service or ideal. To manage value, one must recognise the distinction between "price" and "worth". Price is assigned to goods and services at a level to attract customers and profit from their sale, whereas worth reflects the buyer's view of the price as it relates to the perceived benefits, or functions and attributes, of the product or service. When worth equals or exceeds price, the customer is likely to buy the product or service.

Value management methodology with its unique techniques and tools is often used as a help for new product development. Developing new product or a new service can be described as a project. Value management and project management are interrelated in many ways. We will present authors' methodology to develop new products using value management tools and techniques.

2. Value management

Value management is an organised effort directed at analysing the functions of goods and services to achieve those necessary functions and essential characteristics in the most profitable manner. Organised effort means that value management is a well structured process--a job plan. Value management makes a deliberate effort to identify what the market needs, as opposed to the supplier's perceptions of wants. The process interfaces engineering and marketing to define the priority requirements from the point of view of the customer and includes the target price and life cycle costs. In addition to achieving the basic functions of the product or service, the product or service must also satisfy other requirements and attributes such as quality, time to market, safety, maintainability etc. Beside that value management methods determine cost generation and evaluate a range of alternatives including new concepts, reconfiguration, eliminating or combining items, and process or procedure changes. These elements interface marketing, engineering and manufacturing (Kaufman, 1998).

Value Management is a style of management particularly dedicated to motivating people, developing skills and promoting synergies and innovation, with the aim of maximizing the overall performance of a company or organization. The value management approach involves three root principles:

* a continuous awareness of value for the organization, establishing measures or estimates of value, monitoring and controlling them;

* a focus on the objectives and targets before seeking solutions;

* a focus on function, providing the key to maximize innovative and practical outcomes (The Institute of Value Management, 2006).

At the heart of value management tool is focus on analysis of functions and requirements. Done properly, this seeks to achieve the most cost effective alternative, or best way to obtain all performance and capabilities at optimum price. This does not necessarily mean cost reduction. Typical application is during planning, to develop conceptual alternatives, and during design or construction for cost reduction efforts. Recently, value management applications have begun to include work processes, systems, and programs as part of any activity to achieve results needed by fixed funding or reengineering activities (Department of Energy, 1997).

Value management is more then a tool or technique for reducing product cost. Over the last fifty plus years of its existence, value management has matures into a methodology that employs a set of disciplines proven to solve a broad range of management issues successfully and dramatically to create competitive advantage for the company. In value management, value is a marketing term. It is the price assigned to goods or services at a level to attract customers and profit from their sales. Worth is a more personalised term. It expresses the buyer's view of the price as it relates to the benefits--the functions and attributes of the product or service offered. Many value management practitioners define worth as the lowest cost to perform basic functions reliably. However, this does not consider the market's influences in making the sale. In value management, the marketplace exerts a major influence because it is the buyer, not the seller, who determines the value/worth relationship of a product (Kaufman, 1998).

Value management consists of the integration of proven and structured problem-solving techniques known as value methodology. They are implemented by a multidisciplinary team under the guidance of a knowledgeable value practitioner to seek out the best functional balance between the cost, reliability and performance of a product or project (Zimmerman & Hart, 1982).

3. Value of the product

The value of a product is a measure expressed in units of currency, which reflects the desire to obtain or retain the product, and is equal to the cost of the product and a subjective marginal value. Interrelation of cost and value could be expressed as follows:

Value = Cost [+ or -] marginal value (1)

where marginal value is the subjective part of the value and depends on the owner(s)'/buyer(s)' value system.

Based on the above definition, the value of a product is the cost of the product plus or minus a marginal value. The cost of the product is the total price paid for the product. The marginal value of the product, which depends on the owner(s)'/buyer(s)' desire to obtain or retain the product is a subjective value and would be referred to as the owner(s)'/buyer(s)' value system. A criteria weighing method can be used in obtaining the marginal value. The methodology is illustrated in Figure 1. The first column represents the steps of the method, the second column represents market input and third column represents the owner(s)'/buyer(s)' confirmations (Shevket Neap, Celik, 1999).

[FIGURE 1 OMITTED]

4. Value and function

Function is the basis of value management; function analysis is a fundamental step in any value study. Function analysis is what distinguishes value management from all other similar techniques. A function is a concept by which value management describes a need in terms of its expected performance rather than its expected solution. This concept enables the value team to generate creative alternatives that are not based on paradigm (Thiry, 1997).

Focusing on function as the way to improve, the value can be expressed in the following relationship:

Value = Function / Cost (2)

As pointed out this relationship is the cornerstone of value management. Value can be increased by favourably influencing function and/or cost. Value practitioners should not disturb those customer-sensitive functions that are primary reason for the product's success. Customer-sensitive functions are not always obvious, so the value practitioners should use caution and check with market sources before deciding on this course of action (Kaufman, 1998). There are different types of functions. Primary or basic functions are those functions for which the product exists and that guaranties its performance. They can be divided into use functions (needs) and esteem functions (wants). For example, a chair must support weight, but it also should indicate status. Primary functions should be customer-oriented, dictated by the client's wants and needs. Supporting functions, also called secondary functions, are not secondary at all. They correspond to a complementary need that must be satisfied just as much as the basic need; e.g. a chair must not only support weight bust also provide comfort. The supporting function is as important as the primary function, even it is not essential to the product's performance (Thiry, 1997).

5. The job plan

The job plan is a key to the value management methodology. This is a disciplined approach consisting of sequenced steps that guide the value management team through the problem (or opportunity) solving process (Kaufman, 1998). It has been successfully applied to manufacturing, system processes, construction projects, health care facilities, software development and others. There are a number of standardised value management job plans, depending on the country and/or organisation; every value manager develops his own variation of the job plan. Value practitioners traditionally follow a standard five-phase job plan that includes the following:

1. information phase--during this phase all participants are presented the project and documents, at the same time function analysis is performed,

2. creative phase--ideas are generated in a brainstorming sessions,

3. judgement phase (planning phase)--ideas are evaluated by the team,

4. development phase--kept ideas from the phase three are developed into proposals,

5. recommendation phase--proposals are presented to the client for implementation (Thiry, 1997).

As the value management methodology is progressed from reducing the cost of components to more complex issues, a "pre-event" step was added to the job plan process. This step mostly encompasses a series of steps to define, confirm and plan the project (Kaufman, 1998).

6. New product development project and value management concept

The authors of this manuscript have developed a more detailed value management methodology for the purpose of new product development. This methodology has been developed through the years of working with students, different case studies and our findings. It is based mostly on new product or service development projects. It has been well proven that project management and value management are highly interrelated (see e.g. Thiry, 2002).

Our methodology consists of four phases:

1. preparation for value management,

2. value planning,

3. value engineering,

4. final value management analysis and report.

[FIGURE 2 OMITTED]

The preparation for value management phase deals mostly with selecting the members of the project team that will be involved in the new product development. As in any team it is vital that it consists of experts from different company areas and posses different expert background. The use of a multidisciplinary group is essential for creating completeness and consensus on proposed alternatives. A complete value management team includes those who "own" the problem or opportunity (supplier); those responsible for its resolution (supplier's experts and consultants); and those who are impacted by its decision (buyer). This phase also deals with securing the right conditions for the team to work and with the formation of detailed plan with basic goals and time schedule.

The second phase consists of three sub-phases:

* Gathering data--the first step in value management is the definition of the problem. Why do we have to develop a new product or improve the existing one? Defining the root cause problem for interdisciplinary teams to resolve is particularly important in value management process. For example, cost reduction is not a problem; it is a solution to one other problem. The next question is "what are the goals of the company?" With the resolution of the problem statement, the team establishes the goals and objectives based on the root problem. The team can now consider the business and product/service performance goals. The second step is actual data gathering. We need data about our existing products, market potentials, out competitors etc. We must gather data from different areas in the company: sales, marketing, purchase, engineering, manufacturing, quality assurance, finance, cost accounting, general management etc. We can use different methods, e.g. SWOT analysis, SWOT matrix, benchmarking, stakeholders analysis. The last step is "info" analysis, where we actually analyse all received data and select the one we need for our future work. Once information is classified and consolidated it must be communicated to all team members. We conclude this sub-phase with a report that encompasses all relevant data needed to implement next steps in the value management process.

* Function analysis--cornerstone of value management, where function is defined as intent or purpose of a system, product or process operating in its normally prescribed manner. We assign basic and secondary functions of the product, but we have to consider several rules for determining basic functions. The next step is ranking the functions according to their importance. All functions are not equally important for the product. The basic functions are, of course, the most important functions, where as secondary functions can be ranked in a specific order of importance. The most important functions of the product are at the same time the ones that a value management team must focus on. The following step is assigning costs to functions. The objective of this process is to draw attention of the analysts away from cost of components and focus their attention on the cost of the functions. At this point is more important to determine the relative cost impact of the functions than to attempt to determine the actual manufactured cost of those functions. Another important technique in this sub-phase is FAST--Function Analysis System Technique, where we link simply expressed random functions to describe complex systems. By using FAST we create a graphical model that allows communication between different areas. FAST enables creating a system, where all functions are linked according to their dependency. This is done by establishing how and why the function is performed.

* Criteria selection--first we must select evaluative criteria by which we judge the worth of alternative solutions to a problem. This criteria must be measurable and independent, that is, mutually exclusive. The next step is defining limits to establish the range over which valid decisions can be made. With this criteria and limits we can form the criteria utility curve used for evaluation of each solution. As with functions, criteria are also not all equally important, that is why we assign weights to them. This is done to avoid three errors: self-interest, subjectivity and complexity. The technique that eliminates complexity and greatly minimises self-interest is called paired comparisons (Fowler, 1990). This sub-phase is a start of a method called Combinex that reflects in the third phase of our methodology, called value engineering.

Value engineering deals with problems or opportunities involving the physical sciences as the principle discipline in its resolution (product oriented). It mostly deals with finding the (technical) final solution of the product, based on all the data and methods used in previous phases of value management. This phase is a continuation of the Combinex method. By using decision matrix we compare and evaluate alternative solutions. Finally, we calculate the relative figures of merit. This is done by multiplying each rating by the weight for the criterion and by summarising the weighted ratings for each alternative. The best solution to the problem is then selected and further developed in the next stages. This solution is also presented to the company's management and project stakeholders. Value engineering part concludes with final product report. Controlling system is also established in this stage. Final value management analysis and report summarises the whole project and gives recommendations for future projects. At the same time we try to implement the value management methodology in all organisational processes.

7. Conclusion

This manuscript describes the basic characteristics of value management, with the focus on the importance of value for the customer satisfaction. Designing a methodology to systematically develop products or services that will assure appropriate value to the customer was the focal point of this manuscript and this methodology is used also in practise in companies that are involved in a new product/service development.

8. References

Department of Energy, Office of Field Management, Office of Project and Fixed Asset Management, (1997). Good practice guide--Value Management

Dumond, E. J. (2000). Value management: an underlying background. International Journal of Production and Operations Management, Vol. 20, No. 9, pp. 1062-1077

Fowler, T. C. (1990). Value Analysis in Design, Van Nostrand Reinhold, New York

Kaufman, J. J. (1998). Value management--creating competitive advantage, Crisp Publications, ISBN 1-56052-484-7, London

Kelly, J. & S. Male (1993). Value Management in Design and Construction, E & FN. Spon, London

Shevket Neap, H. & Celik, T. (1999). Value of a Product: A Definition, International Journal of Value-Based Management, Vol. 12, pp. 181-191

The Institute of Value Management. (2006). What is value management? Available from: http://www.ivm.org.uk/vm_whatis.htm#intoduction Accessed: 2006-09-02

Thiry, M. (1997). Value Management Practice, PMI, USA

Thiry, M. (2002). Combining value and project management into an effective programme management model. International Journal of Project Management, Vol. 20, pp. 221-227

Zimmerman, L. W. & Hart, G. D. (1982). Value Engineering (A practical approach for owners, designers and contractors), Van Nostrand Reinhold Ltd, New York

Authors' data: Ass. Prof. Palcic I.[ztok], Ass. Prof. Semolic B.[rane], Prof. Polajnar A.[ndrej], Ass. Prof. Buchmeister B.[orut], Faculty of Mechanical Engineering--Maribor, Slovenia, iztok.palcic@uni-mb.si, brane.semoli@siol.net, andrej.polajnar@uni-mb.si, borut.buchmeister@uni-mb.si

This Publication has to be referred as: Palcic, I.; Semolic, B.; Polajnar, A. & Buchmeister, B. (2006.). Value management and new product development, Chapter 37 in DAAAM International Scientific Book 2006, B. Katalinic (Ed.), Published by DAAAM International, ISBN 3-901509-47-X, ISSN 1726-9687, Vienna, Austria

DOI: 10.2507/daaam.scibook.2006.37