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Value engineering: The mantra for success

Posted: 12 Jul 2013     Print Version  Bookmark and Share

Keywords:EDA  value engineering  manufacturing 

Innovation and cost-effective pricing are two most important things required to make a product successful in the market. Daniel Pfeifer, global R&D manager at Escatec, a company specialising in EDA and manufacturing solutions, shares tips on how to work out the costing of a new product.

Traditionally, there are two ways to work out the costing of a new product. The first, cost-plus pricing, calculates the materials, labour and overhead costs and then adds a profit margin. With this approach, the final cost depends on how you implement the functionality specified. The second, target costing, starts with a final customer price and works back from there to provide figures for costed bill of labour and costed bill of materials. This time, the implementation of functionality depends on what can be built in for the price.

With value engineering, costs are apportioned according to the importance of the each function of the device. Resources are focused where they can make the most difference to the success or failure of a new product. Using a coffee machine as an example, this table shows all the functions that matter for the end-user.

Value engineering

Figure 1: Necessary functions relevant to end user.

The next stage is to weight each function according to its importance to the end user. This gives the relative importance of each function. Brewing quality is the most important feature, followed by coffee temperature in the cup and so on.

Value engineering

Figure 2: Factors why an end user buys this machine.

This enables each function to be allocated a slice of the budget. Brewing quality gets 25% of the budget, etc. Assuming the target for the estimated bill of material is $75, the following break-down can be made:

Value engineering

Figure 3:Target costs identified for each function.

To ensure that these costs are kept to, they can be graphed as below which shows a forbidden zone. Entry of a function into this zone means that too much cost is being incurred for the function relative to the importance.

Value engineering

Figure 4: Avoid incurring higher cost for less important function.

This methodology enables costs to be kept under close control as well as ensuring that design resources are focussed appropriately. This gives a funnel shape as the estimated cost becomes refined over time.

Value engineering

Figure 5: Refine costs appropriately.

Research by McKinsey & Co has shown how important it is to get the design correct at the start of a project and this includes design for manufacture. Even a 50 per cent overspend on design costs won't reduce the overall project profitability by more than 5 per cent if that overspend enables the project to be on schedule and the production costs on budget.

This highlights the importance of perhaps spending a bit more on designing right first time to maximise the profitability of a project. It is a wise investment as the costs of redesign escalate further along into the project. Correcting a poor initial design at the production stage can cut the overall profitability by between 25 per cent and 50 per cent as it costs a thousand times more to correct than at the design stage. Value engineering provides a new way to look holistically at all aspects of a project and budget them according to their importance for the success of product.

- Daniel Pfeifer for Escatec
  EE Times Europe





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