Defining Cost And Value

Defining Cost and Value

Any attempt to improve the value of a product must consider two elements, the first concerns the use of the product (known as Use value) and the second source of value comes from ownership (Esteem value). This can be shown as the difference between a luxury car and a basic small car that each has the same engine. From a use point of view both cars conduct the same function – they both offer safe economical travel (Use value) – but the luxury car has a
greater esteem value. The difference between a gold-plated ball pen and a disposable pen is another example. However, use value and the price paid for a product are rarely the same, the difference is actually the esteem value, so even though the disposable pen is priced at X the use value may be far less.

It is important for all managers to understand the nature of costs in the factory and for any given product. Whilst there is no direct relationship between ‘Cost’ (for the factory) and customer ‘Value’ in use and esteem, this education process is important. A shocking figure, that is often used as a general measure, is that typically 80% of the manufacturing costs of a product will be determined once the design drawing has been released for manufacturing. The costs of production are therefore ‘frozen’ and determined at this point. These costs include the materials used, the technology employed, the time required to  manufacture the product and such like. Therefore, the design process creates many constraints for the business and fixes a high degree of the total product cost. It is therefore a process that demands periodic review in order to recover any ‘avoidable’ costs that can be removed throughout the life of the product (by correcting weaknesses or exploiting new processes, materials or methods) and lowering the costs of production whilst maintaining its Use value to the customer.

Basically, there are three key costs of a product:

• Cost of the parts purchased: These are costs associated with the supply of parts and materials.

• Cost of direct labour used to convert products.

• Cost of factory overheads that recover the expenses of production.

Although there are three elements of total cost accumulation it is traditionally the case that cost reduction activities have focused on the labour element of a product. Activities such as work-study, incentive payments and automation have compressed labour costs and as a result there is little to be gained, for most companies, in attempting to reduce this further. Instead, comparatively greater gains and opportunities lie in the redesign and review of the products themselves to remove unnecessary materials and overhead costs. This approach to the ‘total costs’ of a product involves taking a much broader look at the way costs in the factory accumulate and the relationship between costs and value generation. These new sources of costs and evaluations would therefore include such sources as:

• Cost of manufacture

• Cost of assembly

• Cost of poor quality

• Cost of warranty

A detailed understanding of how costs are rapidly accumulated throughout the process of design to the despatch of the product is key to exploiting the process of VA. All VA activities are aimed at the reduction of avoidable and unnecessary costs, without compromising customer value, and therefore the VA process should target the largest sources of potential cost reduction rather being and indiscriminate or unsystematic process (such as focusing on labour alone). It is therefore preferable to take the holistic approach to understanding costs and losses in the ‘entire system’ of design and conversion of value in order to determine how to achieve customer service ‘functionality’ at a minimal cost per unit.