Cost minimization and value maximization from an operations management perspective


Value, as defined, is the ratio of Function to Cost. Value can therefore be increased by either improving the Function or reducing the cost. It is a primary tenet of operations management that no one is to relax the quality levels as a consequence of pursuing value enhancements.

            The concept of Value is sometimes taught within the industrial engineering body of knowledge as a technique in which the value of a system’s outputs is optimized by crafting a mix of performance (Function) and costs. In most cases this practice identifies and removes unnecessary expenditures, thereby increasing the value for the manufacturer and/or their customers.

            During the World War II, General Electric Co. started looking at aiming cost minimization and value maximization because of shortages of skilled labor, raw materials, and components experienced in the war aftermath. Lawrence Miles and Harry Erlicher at General Electric looked for acceptable substitutes. They noticed that these substitutions often reduced costs, improved the product, or both. What started out as an accident of necessity was turned into a systematic process. They called their technique “value analysis”.

Value analysis reduces costs by eliminating wasteful practices. This can be done in several areas:

  • Material substitutions – Unnecessarily expensive inputs can sometimes be replaced by less expensive ones that function just as well. If a product has a life span of ten years, then using a material that lasts thirty years is wasteful. In a perfectly value engineered product, every component of that product will function perfectly until the product is no longer useful, at which time all components will deteriorate.
  • Process efficiency and producibility – More efficient processes can be used and the product can be redesigned so that it is easier to produce. Reducing unnecessary parts, unnecessary precision, and unnecessary production operations can lower costs and increase manufacturability, reliability, and profits. Process engineering can be used to increase process efficiency.
  • Modularity – Subassemblies that are designed and developed once and reused in many slightly different products can reduce a project’s engineering and design costs. For example, a typical tape-player has a precision injection-molded tape-deck compartment. This component can be produced, assembled and tested by an independent manufacturer and sold to numerous companies as a subassembly. The tooling and design expense for the tape deck is shared over many products that can look quite different.
  • Market driven product improvements – A product with more features than customers want is inefficient. Customers will be paying for features that they don’t want to pay for. Value engineering can determine how to produce a product that exactly matches the wants of a major segment of the market. When a customer needs more features, these can be sold as options.
  • Energy efficiency – Value can be created by making a product or process more energy efficient for the user. This is particularly true in heating and air conditioning systems, transportation vehicles, industrial equipment, and other systems that use much energy.

Some examples of value maximization and cost minimization can be as follows;

  • Russian liquid-fuel rocket motors are intentionally designed to permit ugly (though leak-free) welding. This reduces costs by eliminating grinding and finishing operations that do not help the motor function better.
  • Some Japanese disc brakes have parts toleranced to three millimeters, an easy-to-meet precision. When combined with crude statistical process controls, this assures that less than one in a million parts will fail to fit.
  • Many vehicle manufacturers have active programs to reduce the numbers and types of fasteners in their product, to reduce inventory, tooling and assembly costs.
  • Often a premium forming process (like “near net shape” forming) can eliminate hundreds of low-precision machining or drilling steps. Precision transfer stamping can quickly produce hundreds of high quality parts from generic rolls of steel and aluminum. Die casting is used to produce metal parts from aluminum or sturdy tin alloys (they’re often about as strong as mild steels). Plastic injection molding is a powerful technique, especially if the part’s special properties are supplemented with inserts of brass or steel.
  • When a product incorporates a computer, it replaces many parts with software that fits into a single light-weight, low-power memory part or microcontroller. As computers grow faster, digital signal processing software is beginning to replace many analog electronic circuits for audio and sometimes radio frequency processing.
  • On some printed circuit boards (itself a producibility technique), the conductors are intentionally sized to act as delay lines, resistors and inductors to reduce the parts count. An important recent innovation was to eliminate the leads of “surface mounted” components. In one stroke, this eliminated the need to drill most holes in a printed circuit board, as well as clip off the leads after soldering.
  • In Japan (the land where manufacturing engineers are most valued), it is a standard process to design printed circuit boards of inexpensive phenolic resin and paper, and reduce the number of copper layers to one or two to lower costs without harming specifications.
  • In a US environmental species restoration for the Black Footed Ferret, a value study using recent VEVA tools enable the species to be re-established more effectively, and with less chance of harm to the animals.


Source by Dr. Chandana Jayalath