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1. THE IMPLEMENTATION OF VALUE ENGINEERING IN AN AUTOMOBILE INDUSTRY

1.1 INTRODUCTION

According to the history of automotive industries, major automotive companies have

implemented several of differentiation strategies in the production of passenger cars. The changes in Technological and market created the possibility for Henry Ford to improve the rules of the game by embracing the classic strategy of leadership by cost, by engaging in lower production costs of a standard model sold at low price. However, before the final conclusion of 1920s economic growth, progressing familiarity with the automobile and technological changes had establish the potential for General Motors to change the rules

one more time, utilizing a game plan of differentiation with a wide range of products and details at premium price. With the increase in competition, recently companies found a way to create higher value in their products for customers. Hence, a program of new product development should comprise projects designed to lower product cost and to enhance the value to the customer, because due to increase competitiveness, customers regularly demand new products with better quality and functionality, at the absences of an increase in price (Roy et al., 2004 ).

The idea of value engineering derived during the Second World War and was advanced by the General Electric Corporations (GEC). This strategy has gained popularity due to its possibility of gaining high Returns on Investment (ROI). This methodology is broadly applied in business re-engineering, automakers, government projects, transportation and distribution, industrial equipment, construction, assembling and machining processes, health care and environmental engineering, and many others. Value engineering process demand a deep study of a product and the intent for which it is used, for instance, used raw materials; the processes of transfiguration; the equipment required, and so on. In addition, it questions whether if what is being used is the right and economical. This applies to all aspects of the product. And so, value is the lowest price you must pay to arrange a decisive function or service. The example can be found in figure below.

Figure 1; Fade Elayache, Dubai

Value analysis is a problem-solving system applied by the use of a particular set of techniques, a form of knowledge, and a group of expert skills. It is an organized creative approach that has for it is aim the efficient identification of unnecessary cost, i.e., cost that provides neither quality nor use, life, appearance, customer features (Lawrences.Miles, 1989).

2.  APLLICATION OF VALUE ENGINEERING TO MANAGEMENT (target cost)

Value engineering can be implemented in management and also used to define the target cost of a product. At the early of the project phase, the knowledge of the product’s technical attributes by the development team is as valuable as the definition of the product cost. For that reason, it is at this period the product target-cost should be defined (Ferreira, 2000 ). As stated by  Monden (1995) , a target-costing system has two aims:

Decrease the cost of new products so that the level of appropriate profit could be guaranteed, simultaneously accomplishing the levels of quality, development time and price required by the market.

Motivate all the employees to achieve the target profit in the midst of new product development, turning target-costing into an activity of profit administration for the entire company, utilizing the creativity of employees from various departments to formulate alternative plans that allow higher cost reductions.

The definition of target-costing comprises, basically, product planning so as to satisfy customer features and the profit generation to the company given the market requisite (Yoshikawa et al., 1994 ). Value analysis approach may benefit all branches of an engineering enterprise, manufacturing, marketing, and management by acquiring better to answer their particular problem by providing customer requirements at lower production cost.

 Levels to determine the target-cost

The application of a target-costing approach and the determination of the product target-cost involve the ten steps described below, which were based on the research of Crow (1999).

1. Re-orient culture and outlook. Firstly, the most crucial stage is to re-orient thinking toward market-driven pricing, prioritizing customer features as a basis for product development. This is an important change of attitude in most organizations, where cost is derived from the design rather than one of the project requirements.

2. Organize a market-driven target-price. A target price needs to be set up based on market factors such as the company positioning in the market place (market-share), the market penetration strategy, competitors and competitive price, the targeted market-niche and the flexibility of demand.

3. Decide the target-cost. Once the target-price is set up, the target-cost must be calculated by subtracting the target-profit and any uncontrollable allocations, such as taxes and some indirect fixed costs. It can be abstracted in a margin-denominated Mark-up.

4. Balance target-cost with demands. Before the target-cost is finalized, product requirements must be acknowledged. The greatest chance to control product costs is through proper setting of requirements and specifications. This demands a careful understanding of customer needs, the use of conjoint analysis to understand the value

that customers place in specific product functions and the use of techniques such as

quality function deployment (QFD) to help make these tradeoffs among various product

requirements, including target-cost.

5. Organize a target-costing process and a team-based organization. A well-defined process should integrate activities and tasks to support the target-cost, be based on early and reactive application of target-cost, and combine the tools and methodologies described afterward. Furthermore, a team-based organization is needed that integrates essential disciplines such as Marketing, Engineering, Manufacturing, Purchase and Finance.

6. Create ideas and analyze alternatives: The greatest chance for cost reduction lie in the multiple alternatives of product concept and design, its manufacturing and support processes at each stage of the advancement cycle. They can be seized when there is creative consideration of the alternatives coupled with exact analysis and decision-making.

7. Generate product cost models to support decision-making: Product cost models and cost tables provide the tools to estimate the implications of multiple concept and design alternatives. At the early stages of development, these models are based on parametric evaluation or analogy techniques. The product and process become more defined, and these models are based on industrial engineering or bottom-up estimation techniques (reverse engineering). They need to be broad to address all of the proposed materials and production processes, promising reasonable accuracy.

8. Apply tools to reduce costs. Tools and methodologies correlated to design for manufacturing and assembly (DFMA), modularity and part standardization, design for inspection and test, and VE or function analysis are applied in the development of databases, guidelines, training and procedures supporting the analytic tools.

9. Minimize indirect cost application. Since a considerable portion of a product’s costs is indirect, the company must also address it by examining these costs, re-engineering indirect business processes and reducing non-value-added costs. However apart from these steps, development personnel generally be in short of an understanding of the relationship of these costs to the product and process design decisions they make.

10. Measure results and retain management focus: Current evaluated cost needs to be tracked against the target-cost throughout the whole development. The management needs to focus on the target-cost achievement during project and phase-gate reviews to convey the importance of target-costing to the organization.

3.  APPLICATION OF VE TO TECHNICAL CONCEPT

In order to achieve the target-cost with the calculated cost during the PDP, a methodology centralized on the technique of VE was proposed with an approach in three different steps:

• Concept-VE: focused on the conceptual stage of product development, aiming at functional innovations;

• Project-VE: To focus on the design stage of the product and process, intends for improvements during their development stage;

• Validation-VE: To focus on the validation stage of the product and process, and also at the time of the production stage, focused at improvements mainly in the production process.

By this systematic VE application, the increase of potential cost reduction and

quality (function) improvement was aimed at. In the following items, every of the proposed VE techniques is detailed, and also how they could

be implemented, searching integration in the PDP stages of the company.

3.1  Concept-VE

The proposal of Concept-VE consists in the search of likely innovation at the conceptual

level of a product, though at the conceptual stage of development, ahead of the requirements of quality, cost and investment are decided. It represents the logical

extension of the VE methodology aimed on improvements at an early stage.

 Contrary to the conventional proposal of VE, which acts to maximized the value of a product through the improvement in existent functions without increasing their costs, the proposition of Concept-VE lies in the introduction of some concept that had not

been already identified. Therefore, it proposes a level of innovation search as a constituent phase of the PDP, maximizing the chances of developing revolutionary products.

 In order implement that ideas, independent of the period of their generation, must be managed for future use in the process of Concept-VE.

 3.2. Project-VE

The proposal of Project-VE consists in the search for functional improvement of a product but at the design stage. It is the most traditional form of the VE methodology, which acts to maximized the value of a product by improving existent functions without increasing their costs. In order to do that, a work plan was proposed based on SAVE’s (1998) framework

and divided in six steps along with the following objectives:

• Preparatory: to select the product, decide targets, form a work group and plan activities

• Information: to gather general information about the product under study, such as the details, costs and values

• Analytic: to spot functions and their costs, correlate function and cost, determine critical functions and formulate the difficulty

• Creative: to gather ideas, choose and grade them.

• Judgment: to formulate and establish alternatives, propose technical and economical solutions and, lastly, determine which is the best alternative

• Planning: to demonstrate the proposal, plan implementation and practice it.

 3.3. Validation-VE

The proposal of Validation-VE consists in the search for functional development of a product at its validation stage. At this stage, the components of the main functions are recognized and prototypes are assembled, acting to maximized the value through the functional improvement of physically existent components, without creating new components. Consequently, the results are feeble than in the proposals of Concept-VE and Project-VE.

The work flow must follow a cycle of five stages, considering Fig. 2 (Ibusuki and Kaminski, 2003), functional analysis/target-cost–initial project–prototype construction–quality and cost estimation–VE study, which is repeated until quality and target-cost were achieved.

  Generally, the application of Validation-VE to achieve the target-cost is oriented towards two directions: decrement in material and process costs. The methods used to decrease the direct material cost include reducing the number of parts, designing smaller and lighter parts, using cheaper parts and designing parts that do not demands special high precision or very expensive production processes. The methods used to reduce process costs could be

raising tolerances, diminishing investments in plant, maximize productivity and implementing the process with focus on cost reduction.

3.4  Flow chart of the proposed methodology. The flow chart analyze the summary of the

proposed methodology, segmented as a act of the PDP stages, also highlighting the departments in charge of each activity (Fig. 3 (Ibusuki and Kaminski, 2003)). The application of VE techniques rely upon the PDP stage in which product improvements will be searched for. Better results are achieved at earlier stages of the PDP.

4.   CASE STUDY

The case study was developed based on an idea proposed by an employee of the VE department of applying new technology concepts to the existent systems of the GM motors, aiming at a break of paradigm that may lead to great innovations.

4.1. Concept-VE

The intention was to develop a new concept for the function ‘‘start engine’’ in diesel engines of GM motors product/vehicle, according to the proposal of Concept-VE of presenting some concept that had not been previously identified.

A market research was performed, by the Internet and contact with suppliers, in search of concept alternatives on market for the function under analysis. It was confirmed that, apart from the currently used electric drive system, hydraulic, spring and pneumatic engine-starters were available as well. The analysis was carried out on an engine-starter with a pneumatic drive due to the availability of this system in commercial vehicles. Therefore, the following advantages of the pneumatic drive have been listed, as indicated by the supplier and by specialists in the company.

• Longer useful life: unlike what happen with the electric starter, overheating and burning problems do not occur

• Low maintenance cost: a longer useful life minimizes cost and time, with maintenance affiliated with change and repair

• More force and less weight: it acquires more torque with less weight

• Safe operation: the cold operation of the pneumatic starter got rid of the danger associated with electric systems, i.e sparks, shocks and heating,

• Potential cost reduction: at the system level, a potential of cost reduction is identified, mainly due to the possibility of utilizing the already existent compressed air tank (to drive the brake system).

The possible disadvantages in comparison with the current product are thus:

• Increase in cost and weight: with the possibility to adapt a new compressed air tank, and to improve a specific engine-starter for the diesel engine of the company.

• Failure in drive: absence of pressure due to possible leaks in compressed air systems.

• Increase in maintenance cost: due to leaks in the compressed air system becoming unsuitable.

Because this component is obtained from suppliers, the target-price to the supplier was defined as the actual acquisition price of the electric starter, the system in use. Therefore, the target-cost consists of the target-price deduct the mark-up of the supplier. Afterward, at the stage of Project-VE, the target-costing study will be specified for the product under analysis.

5.  CONCLUSION

The establishment of cost management does not mean establishing limit of value, however guaranteeing, prior to the beginning of production, that they will be reached. Any effort to forecast profit or market participation will be obstructed without the definition of target-cost for the whole productive chain, without the participation and the dedication of suppliers and employees to the objective of reaching the target-cost and without taking into consideration the product life cycle.

Hence, the incorporation of VE and target-costing in a work methodology could be interesting in that it advances for the PDP problems and decisions that would have direct effect on the economic result of a company. VE and target-costing are interdependent processes, because while VE allows the identification of where cost reduction could be achieved, the target-costing shows the target to be achieved to guarantee the long-term profitability plan of a company.

This study allowed the identification of some positive points which are the keys to the success of an integrated system of VE and target-costing. They are as follows.

1. Strong execution of cost planning in the PDP. Although the company possesses an image of advancing expensive products, with strong core on quality, cost planning is progressively present as an active parameter of the project. PDP has three clear objectives: time, quality and cost.

2. Improvement through multifunctional teams. The basis of the multifunctional teams includes people from the Engineering, Purchase and VE departments. This let on an exchange of knowledge to make cost reduction proposals in order to accomplish the goals of target-cost. Strong coordination and cooperation among people from all departments of the company allow the maintenance of a good activity flow.

3. valuable function of Finance. The financial function is important to manage target-costing. It acts to supply information that guides the activities of cost planning for the whole company, measuring and monitoring the activities to acquire the company’s strategic objectives.

4. Integration of cost planning alongside the company’s global strategy. The head office in Germany created a great part of product design, and its unit in Brazil essentially complete the project, apart from the systems under its responsibility (technical competence). This reduces the activities of VE that could be implemented locally, as the basic concept and its parameters have been set initially. But, it was confirmed that there are still many improvement opportunities in product design, which are developed after being approved by the head office. It is achievable to improve the original design by developing studies with local suppliers, altering materials or production processes and simplifying the design for local needs.

5. Use of tools and techniques that support VE. As described previously, VE is not applied in a systematic approach to the cost reduction process to achieve the target-cost. However, it was discovered that many of the cost reduction techniques used by the company, e.g., Reverse Engineering, QFD, modularity and part standardization, DFMA, support the methodology of VE and target-costing.

6. THE BENCHMARKED FIRM

The fuzzy-logic application compares Ford’s and GM’s leanness counter that of Honda Motor Company. For that reason, we have two propositions stated as follows:

P1: Honda Motor Company is an appropriate choice for benchmarking.

P2: Ford Motor Company’s automotive operations are much leaner than those of General Motors visa` -vis Honda Motor Company’s operations.

These propositions are accurate with Zadeh’s (1978, p. 395) argument that, ‘‘the truth-value of a proposition is defined as there is similarity with a reference proposition, given two propositions p and r, we can compute the truth of p relative to r’’. We employ (Honda’s system as a benchmark (i.e., a reference) for comparing the range of leanness of Ford’s and GM’s operations over the long run, where the long run is defined as a 3-year period. The truth of the first proposition is logically created as follows. Honda is the only major Japanese automobile company whose consolidated financial statements are published following the US generally accepted accounting principles (GAAP). Thus, comparing Ford’s and GM’s audited financial information with that of Honda to determine if their leanness is valid. In addition, Their return on investment (ROI) of 8.83, 10.90 and 11.16 for the years 2001– 2003, respectively exceed those of Ford (_0.23, 0.21 and 0.70) and GM (0.45, 1.21 and 1.32) (S&P Compustat, 2005) and also top the ROI industry average (4.70, 4.90 and 3.70) for the same periods RMA, 2004, p. 671). Furthermore, during this time, Honda has generated market several innovative, fuel efficient vehicles. For example, in 2004, Honda manufactured the Honda FCX reportedly considered as ‘‘the world’s most advanced fuel cell vehicle and the first and only fuel cell car to be certified by the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) for regular daily uses . . .. Honda also guides the automobile industry in the development of cleaner and more efficient gasoline-powered vehicles including gas–electric hybrid technology’’ (Lexis Nexis, 2004). In brief, Honda’s concern with lean production systems begins in the early 1960s when it began building cars and building its BP (best practice, best process and best performance) as the main supplier development activity (MacDuffie and Helper, 1997). Honestly, the second proposition is developed in the following sections.

6.1 Fuzzy components of leanness

The ED of Ford Motor Company is given by Zadeh (1978, 1989):

ED. POPULATION [COMPANY; RATIOS; YEARS] +RATIOS [VALUE; STDEV]

Components uv 1 _ uv4 values are the means of ratios R1–R4’s values over 3 years, respectively (Fig. 2, Relation 3):

Fig. 1

Components u5–u8’s values are the percentage change between years 2001 and 2003:

equivalent computations for uv6, uv7 and uv8 yield _0.058, _0.068 and _0.056, respectively.

They use the standard deviation of the 3-year values of the eight components R1–R8 to measure the fluctuations in these ratios. And assume that the lower the STDEV, the powerful the company’s commitment to leanness. Lower standard deviation may also show that the company is closer to its target level of leanness because at that level, fluctuations will be less. This resembles the closely flat part of the learning curve when learning reaches its ultimate level.

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