Product Life Cycle and Cost Management Quiz

Course Information

• Course Title: Strategic Management Accounting
• Course Code: JM1R24
• Lesson: 3 + 4
• Professor: Dr Jan Alpenberg
• Date: 9/10/2024

Today's Agenda

• Value management
• Target costing
• Value engineering
• QFD-matrix
• Customer value attribute

Value Management (VM)

• VM is more than a tool for reducing product cost
• It's a set of disciplines to solve management issues and create a competitive advantage
• Value is a fair return or equivalent for goods, services or money exchanged
• VM is a marketing term; the price assigned to goods/services to attract customers and profit from sales
• "Improving value" refers to improvements that increase buyer perceived worth, reducing production cost

History of VM

• Began during World War II, General Electric (GE) faced difficulty sourcing materials for war equipment
• Electrical engineer L.D. Miles assigned to find material substitutes
• He found that material properties could be used to enhance products post design modification

Value Management Components

• Value Management, the method
• Value Criteria
• Value Analysis, concerning the product
• Value Engineering, concerning the process

Objective of VM

• To take deliberate action to improve cost effectiveness
• Includes education, training, planning, organizational identity and accountability
• Involves cost reduction, avoiding cost, increasing sales and improving profits

Relationship Between Function and Value

• Value = Function / Cost or Function / Price
• Cornerstone of VM
• Function is the intent or purpose of a system, product or process operating normally

Functional Family Tree

• A logical diagram of a product or service's functions
• Shows functions, not individual parts
• Helps determine product success in the market

Functions

• Each function defined in terms of verb and noun
• Matrix useful with part number, name of part, transitive verb, noun and cost

Principal Value Elements in VM Studies

• Esteem Value (Want): Buyer's desire to own for the sake of ownership
• Exchange Value (Worth): Describes the buyer's perception, not the seller's
• Utility Value (Need): The primary value element design engineers must address

Value Relationship

• Value = Esteem * Exchange * Utility / Cost

Good and Poor Value Options

• Good value options show a positive relationship between cost and function
• Poor value options show an inverse relationship between cost and function

Value Management and the Problem

• Begins with identifying problems needing resolution
• Miles' five questions:
  • What is it?
  • What does it do?
  • What does it cost?
  • What else will do the job?
  • What does that cost?
• Process called Job Plan

The Job Plan

• Key to the VM method
• Step 1: Information/Translation into function terms
• Step 2: Speculation - developing ideas to achieve functions
• Step 3: Planning (or Analysis) - evaluating ideas using guidelines & requirements to sort for "BEST" ideas
• Step 4: Execution - clustering selected ideas, evaluating scenarios
• Step 5: Reporting - presenting team proposals to management board

Function Analysis

• Function is the end result desired by the customer, not the action.
• Function analysis separates the intent or purpose of something from its description to improve value through function manipulation
• Examples of function descriptions include:
  • A spring stores energy, not moves parts
  • A screwdriver transmits torque, not turns screws
  • An oil filter traps particles, not cleans oil

Describing Functions

• Use active verbs when describing functions
• Verb describes action, noun defines the object of action
• Avoid verbs like "provide," "review," "attend", and those ending in " -ize"

Measurable Nouns

• Measurable nouns are easier to determine when the study is a hardware example
• Examples include weight, force, load, heat, light, radiation, current, flow and energy

Defining and Classifying Functions

• Defined as "an intent or purpose that a product or service is expected to perform"
• Words are "intent" and "expected" to define the service use
• Miles classified and defined functions to assist in separating functions from design descriptions
• Functions analyzed to determine their contribution to the value equation

Two Functions

• Basic function: the primary reason for a product's/service's existence
• Secondary function: carry out basic functions, support functions & features

Rules Governing Basic Functions

1. Once defined, a basic function cannot change
2. Cost to satisfy a basic function is usually less than 5% of total cost
3. Cannot sell basic functions alone but supporting/secondary functions must satisfy basic function first
4. Loss of basic functions results in loss of market value

Illustration - Functions of a Pencil

• Table illustrating pencil functions (basic vs supporting)

Your Own Example

• Template for creating your own example

Function Cost Matrix

• Table showing function costs for different components

Function Analysis System Technique (FAST)

• A powerful analysis that allows people from different backgrounds to interact
• Translates management goals/objectives into action using two key questions:
  • How?
  • Why?

Function Logic

• Diagram highlighting how and why components of a function work

Illustration FAST

• Diagram illustrating FAST to evaluate "Make Mark" and "Contrast Color" in a house of quality

Value Analysis- An Example

• Table to analyze value-added vs non-value-added activities

Target Costing and Value Engineering

• Different pricing methods: market-based pricing, cost-based pricing, and value-based pricing

Market-Based Pricing

• Pricing based on competitors and customer wants
• Estimated price potential customers will pay
• Factors in perceived value and how competitors price

Cost-Based Pricing (Cost-Plus)

• Pricing that covers costs and profits, considering profit margins and demand.
• Prices fluctuate based on supply and demand.

Value-Based Pricing

• Pricing based on perceived value of product/service.
• Customers assess attributes and functions for importances.
• Important attributes influence the pricing level

Target Costing

• Aims to reduce the overall product/service cost by efficiently designing products and cost planning
• Does not focus on daily management
• Three components:
  • Target price: market price
  • Target margin: desired margin
  • Target cost: difference between target price and target margin

Target Costing (Breakdown)

• Target cost broken down to produce
• Functional analysis used on functions and costs
• Useful during the pre-introductory stage of the life cycle

Target Costing -Key Ideas

• Price led costing
• Customer driven costing
• Cross-functional teams
• Life cycle costing
• Value chain is the foundation

Committed versus Incurred Costs

• Diagram illustrating committed and incurred costs throughout a product/service's life cycle
• Committed Costs (80-90%): During development (research, design, testing and target costing)
• Incurred Costs: During production, sales and services, logistics
• Best time to influence the cost structure is during development (Committed Costs)
• Different engineering views (linear vs simultaneous approach)

Analyzing and Managing Activities

• Activity reduction (reduce time/effort)
• Activity elimination (eliminate entirely)
• Activity selection (select lowest cost alternative)
• Activity sharing (economy of scale)

Target Costing (Example)

• Calculation example of target cost

Target Costing in TD-ABC

• Example of calculating target cost using TD-ABC

Five Steps in Developing Target Prices and Target Costs

1. Develop product to satisfy potential customers
2. Set a target price and target operating income
3. Derive a target cost per unit
4. Perform cost analysis for cost reduction
5. Perform value engineering to achieve the target cost

Life Cycle Analysis

• Product/service life cycle defines analysis time period
• Two aspects: Market Life Cycle and Cost Life Cycle

Analyzing the Cost Life Cycle

• Diagram presenting cost changes at different stages of the product/service life cycle (research, development, production, marketing)

The Market Life Cycle

• Stages of a product/service market life cycle: pre-introductory, introduction, growth, maturity and decline stages

Product Life Cycle

• Average market life cycle used to be approximately 15 years
• It has significantly shortened in modern times (less than 3 years or even less than 1 year)

Activity Value Chain Analysis

• Research and development
• Inbound logistics
• Production
• Outbound logistics
• Marketing & Logistics
• Service

Value Creation Per Unit

• Diagram illustrating value creation formula: Value to consumer = Price - Costs of production

Value Engineering

• Systematic evaluation of all value chain aspects to reduce costs while maintaining quality and satisfying customer needs
• Distinguish between value-added and non-value-added activities and costs

Value Engineering Terminology

• Value-Added Costs: Costs that, if removed, reduce the product/service's value.
• Non-Value-Added Costs: Costs that, if removed, DO NOT affect the value for the customer.

Identifying Components for Cost Reduction

• Calculating a value index (degree of importance for the customer and percentage of total cost) for components.

Generating Cost Reduction Ideas

• Identifying potential cost reduction methods (reduction, combination, elimination, substitutions, and arrangement).

Testing and Implementing Ideas

• Testing promising cost reduction ideas to check for technical feasibility and customer acceptance

QFD Example - An Automobile Bumper

• Customer Request: Reduce low-speed crash damage of automobile bumpers
• Step 1: Identify Customers (Repair dept, Owner, Manufacturer, Sales Force)
• Step 2: Customer requirements/Constraints (looks nice, holds plate, resists dent, protect lights, don't want to pay too much)
• Step 3: Prioritizing customer requirements.
• Step 4: Competition Benchmarking (Identify, test, reverse engineer and rate competitors)
• Step 5 & 6: Translate requirements to measurable engineering specifications and target values.

Matching Capacity with Demand

• Match production capability with demand to reduce the life cycle cost