REDUCED OVERHEAD 12.9% USING VALUE ANALYSIS

BUSINESS SAVED $5.9 MILLION

*Case studies have been anonymized for client confidentiality

CHALLENGES:

In the Transmission and Engine Components Division of an automotive plant located in Illinois, the target goal for the yearly cost reduction, process improvement, and product improvement program, was set at 5% of sales. This goal was normally met by changing manufacturing procedures and performing Value Analysis on key product lines. But over the years, this goal got progressively harder to reach because over half of the costs of these products were in an areas product teams could not touch – the corporate overhead expenses.

OBJECTIVE:

The company decided it was time to include these overhead expenses in their cost reduction efforts. The problem was how to attack these costs. They knew that the agile process of Value Analysis (also known as Value Engineering) had worked on past product improvements, but they had never heard of it being used to reduce overhead expenses. After discussing their specific goals and needs with their team of business strategy consultants, they were assured that Value Analysis, with the proper planning, would work on overhead expenses.

SOLUTION:

Preparation consisted of two main steps. First, team members were chosen from those who would be the key players in the implementation process once it started. This meant using department heads. This was an unacceptable idea at first, because no one wanted to tie up the department heads’ time in more meetings. But, because the department heads are the ones who directly controlled the overhead expenses, they ultimately had to be put on the teams. With this in mind, seven five-person teams were formed with the department head in charge of the team from their respective areas.

The next step required that each department restructured its costs so they could be analyzed on a lean, functional basis. As an example, a department like Management Information Systems (MIS), had to reallocate their costs charging them back to those departments that were getting the benefit of MIS’s services. Since this kind of costing was a drastic change in the company’s accounting methods, the program was postponed for two months until these documents were ready.

BENEFITS:

Once these steps were completed, the Agile, Value Analysis program was conducted. Ten weeks after the costs were restructured, the teams completed their Value Analysis Study to reduce overhead. The results of the study are shown below:

1 YEAR SAVINGS 3 YEAR CUMULATIVE
DEPTARTMENT # OF CHANGES $ SAVED % SAVED $ SAVED % SAVED
Accounting 4 105,000 8.7 340,000 9.4
MIS 5 44,000 3.7 256,000 7.8
Materials 4 290,000 12.9 1,000,000 14.9
Production 26 2,400,000 11.2 9,500,000 13.3
Engineering 20 380,000 8.1 1,200,000 8.5
Mfg. Services 12  2,200,000 22.0 6,800,000 23.0
H.R. 6  242,000 11.0  690,000  10.6
5,661,000 19,786,000

*Note: Some savings were not shown because other groups were already working on similar ideas

SUMMARY:

Using Value Analysis, guided by an experienced business strategy consultant, a company can reduce overhead, and improve a product in the process.

The typical guidelines are as follows:

Adjust Priorities

Adjust the company’s priorities to allow time for the study

Establish Team

Establish the team based on the “right people”, not on whoever is available

Numerical Goal

Establish a numerical goal to work towards

Involve Company

Involve as much of the company as possible to get faster results and more variety

Fix Faults

Fix all serious faults identified by the assigned teams