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Vol. 5, No. 2 (2010) 39-46

International Journal of Information Systems for Logistics and Management

http://www.knu.edu.tw/academe/englishweb/web/ijislmweb/index.html

Sustainable Value Engineering Model: A Case Study

in Energy Cost Saving

Supphachai Nathaphan*1and Sarayut Nathaphan21Department of Industrial Engineering, Mahidol University, Nakhon Pathom 73170 Thailand

2Business Administration (Finance), Mahidol University, Nakhon Pathom 73170 Thailand

Received 30 March 2009; received in revised form 18 December 2009; accepted 7 June 2010

ABSTRACT

The aim of this study is to develop a mechanism for using energy more efficiently namely Sus-

tainable Development Model of Value Engineering. The sustainable development model has been

developed by integrating the Value Engineering concept, the Deming Cycle concept, and the Juran

Trilogy concept and will lead to sustainable value in its engineering application. By gathering facts and

information from those working in the industry, actual problems and the authority of each party are

defined. Following which, solutions to a particular problem are recommended via brainstorming under

the premise that what can be done or replaced in order to enhance or retain a level of efficiency at a

lower life-cycle cost? The major costs of production in any industry are the energy costs. Higher

values could be obtained by the firm from generating net positive cash flows, which can be achieved by

increasing the firms revenue and/or reducing production costs. This study explores and suggests ways

to reduce the major costs of production based on an activity called energy cost saving. Results from an

experimental study applying the sustainable development model of value engineering in energy saving,

indicates that our suggested mechanism help to reduce energy costs drastically. Furthermore our pro-

posal has been approved for implementation by the Administrative Committee. As expressed by one of

the Administrative Committee members the thinking and analytical processes are sound and valid due

to each responsible party being clearly assigned with their roles.

Keywords: value engineering, value management and energy cost saving.

1. INTRODUCTION

Value Engineering (VE) is a procedure that elimi-

nates any redundant or unnecessary processes from the

manufacturing scheme, and retains the necessary process

at its minimum cost. In other words, VE is the process

that determines the needs and defines the appropriate du-

ties and responsibilities of each user prior to implement-

ing the real manufacturing processes in order to maximize

firms values. According to Lawrence D. Miles, value

can be stated as shown below:

Value =FunctionCost

(1)

From equation (1), we may have the same, or a higher

function, at the lower production cost by incorporating

the process of Deming cycle and the Juran Trilogy, which

yields higher efficiency in applying value engineering.

The integrating process above is called the Value

Engineering Model. Applying the Value Engineering

Model could result in a higher value to the firm due to

higher operating cash flows. The value of a firm is stated

in equation (2).

*Corresponding author: [email protected]

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40 International Journal of the Information Systems for Logistics and Management (IJISLM), Vol. 5, No. 2 (2010)

VF=E OCFt(1 T)

(1 + k) t

t = 1

T

(2)

where: VF= Value of a firm

E(OCFt(1 T)) = Expected Operating

Cash Flows after tax

k= appropriate cost of capital of a firm

The value of a firm increases due to three factors.

The first factor is a reduction in the appropriate cost of

capital, based on the firms optimal capital structure. The

second factor is the increase in the firms revenue due to a

higher output from an efficient production process. The

third factor is the reduction of the life-cycle costs in the

manufacturing process. This paper focuses on the proper

treatment of the second and third factor; to promotevalues in equation (1), by increasing efficiency (higher

revenue) and reducing life-cycle costs.

Although the VE concept can increase the value of

a product by promoting the effectiveness of the function

and on the costs, there are three weak points occur that

occur with this concept:

(1) The concept of VE does not represent the notion of

continuous improvement.

(2) The assigning of the responsibilities of each individual

process is not defined to each person involved in

specified work.(3) There are no strategies or goals of the projects that

appear to support the success of the project, and

show how to conduct it as well.

The objective of this study is to show the adap-

tation model of the VE framework can lead to be con-

tinuous improvement, and develop the concept of VE to

Sustainable Value Engineering (SVE). We have con-

ducted a case study which applies the Sustainable Value

Engineering Model to save energy costs in an animal food

processor.

2. MODEL DEVELOPMENT

Based on the conceptual framework of model

management integrating VE, Deming Cycle and Juran

Trilogy, SVE Model1is proposed as shown in Fig. 1. A

brief elaboration regarding the processes of sustainable

value engineering model is as follow.

The stages of the SVE start from dividing par-

ticipants horizontally into three teams, which are the

administrator and the expert teams; the value engineering

teams; and the shop floor teams. Each team will have

the responsibilities as shown in Fig. 1. The duties and

responsibilities of each group (Chen and Lu, 1998) are

as follows.

(1) The administrator and expert teams must play a

crucial role of motivating and guiding the VE teams

and the shop floor teams.

(2) VE teams should undergo extensive training and

encourage their subordinates to do likewise in ac-

cordance with the firms strategies.

(3) Shop floor teams or Quality Control Circles (QCCs)

focus on improvement. A shop floor team is a small

group of staff, who contribute to the improvement

of the organization by brain-storming systematically

and analyzing the problems critically, until these

problems are completely solved.

A brief elaboration regarding the processes of the

sustainable value engineering model is as follow.

Problems in the production processes are raised by

the shop floor team, in order to find solutions by propos-

ing improvements and operational plans to the adminis-

trator for approval. After approval, the selected plans

are executed, together with the validation processes, by

the value engineering team. If the problems are solved,

the value engineering team will write a report of the

executed processes called the execution plan stan-

dardization. If the problems are partly solved, the value

engineering team along with the shop floor team willfigure out the real cause of the problem by redefining

the problems and suggesting new improvements and

operational plans to the administrator for further approval.

These processes are repeated until the entire problems

are solved.

Value Engineering (VE) can be viewed as a special

case of the generic discipline of Value Management (VM),

as suggested by Shen and Liu (2004). VE methodologies,

set up value engineering team to define the problem,

propose operational plans to the administrative team,

and validate the executed plan of the value engineering

team, and are a subset of the activities of VM. VM is

synonymous with such terms as value engineering andvalue analysis (Ibusuki and Kaminski, 2007; Male

et al., 1998). The VM process (Webb, 1993a, 1993b)

consists of identifying the project focused on, develop-

ing the project team, gathering information, performing

function analysis, generating alternative ideas through

brainstorming, selecting the best idea, and planning for

change and implementing the change.

Growing competition in the marketplace has forced

firms to improve the quality of products and services,

1The first team, on the top of the model in Fig. 1, is the administrator and the expert team responsible for the quality planning process, the second team,

in the middle of the model in Fig. 1, is the value engineering team responsible for the quality planning and the quality improvement processes, and thethird team, at the bottom of the model in Fig. 1, is the shop floor team responsible for the quality control and quality improvement processes.

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S. Nathaphan and S. Nathaphan: Sustainable Value Engineering Model: A Case Study in Energy Cost Saving 41

establishing an organization of quality.

2.1 The Principle

From the previous information, we have shown the

VE concept and the SVE concept that comes from the

integrating of the VE, the Juran Trilogy and the Deming

Cycle. This section will answer the question Why did

we integrate the Juran and Deming concepts in orderto fulfill the VE in terms of theory.

The Juran Trilogy is a systematic and comprehen-

sive system of break-through quality improvements to

meet customer needs. The components of the Trilogy

(Juran, 1989) are Quality Planning which develops and

puts in place the strategic and tactical goals that must be

achieved in order to attain financial, operational, and qual-

ity results. Setting organizational goals are called the

strategic goals: discovering customer needs and design-

ing adequate processes, Quality Control is comparing

actual performance and taking action on the differences,

and Quality Improvement is the attainment of unprec-edented levels of performance in order to make sure that

the problems have already solved.

The Deming Cycle is a method that can aid man-

agement in the pursuit of a continuous and never-ending

process of improvements by forming groups of volunteer

employees or QCCs to solve the problems. The Deming

Cycle composes of four basic stages: a plan stage, a do

stage, a check stage and an act stage. Hence, the Deming

Cycle is sometime referred to as the PDCA cycle.

Stage 1. Planning the collection of data about process

variables is critical when determining a plan of

action on what must be accomplished in order

to decrease the difference between customer

needs and actual process performance.

Stage 2. Carry out the plan, established in stage1 and set

into motion a trial basis known as the Do stage.

The trail plan should be conducted in a labo-

ratory, production setting, office setting, or on

a small scale with customers (both internal and

external).

Stage 3. Check the trail plan, which was set into motionin stage 2, is monitored to answer two questions.

Value Engineering Teams

Shop Floor Teams

s

Administrator andExpert Teams

1. Determining

strategy

2. Setting up

VE teams

3. Training

technique of VE

4. Forming shop

floor teams

5. Defining problems

and energy lost

6. Prioritizing problems

and determining causes of

problems

Quality Planning

Quality Control

Quality Improvement

10. Approving the

best plan

11. Planning execution

and follow up processes

12. Standardization of

the successful plan

9. Proposing suggested

plans to administrator

7. Suggestingand proposingimprovement

plan

8. Conducting aFeasibility study

and operationplan

Fig. 1. Sustainable value engineering model

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First, are the manipulated process variables be-

having according to plan and causing a decrease

in the difference between customer needs and

actual performance? And second, are the down-

stream effects of the plan creating problems

or improvements?

Stage 4. The purpose of the Act stage is to implement

the modifications to the plan discovered in the

Check stage, or to implement the process

improvements. If, at the Act stage, we learn

that the manipulated process variables have not

diminished the difference between customer

needs and process performance, the PDCA cycle

returns to the plan stage to search for other pro-

cess variables.

To maintain the sustainability in certain processes

or states, we integrate the Deming Cycle and the JuranTrilogy to the VE to make a feedback loop of the SVE

framework, to ensure continuous improvement and also

use the Quality Planning of the Juran Trilogy for set-

ting the strategies or goals of the projects in order to con-

duct and measure their success. Responsibility will be

defined to the administrator and the expert terms as shown

in Fig. 1. We also set the QCCs team to define the pro-

blems, and suggest improvement plans by following the

concept of Deming Cycle. From the integrating of these

theorems the SVE was developed.

2.1.1 Quality planning

Quality planning is the planning process which will

be used in determining strategy and goals, training, the

setting up of value engineering teams, and forming shop

floor teams. Details are discussed below.

(1) Determining strategy by identifying 8 stages for

benchmarking (Fonget al., 2001) in which VE must

determine how to maximize value, as shown in equa-

tion (1); that can remove unnecessary costs whilst

ensuring that quality, reliability, performance, and

other critical factors will meet or exceed the

customers expectation (DellIsola, 1982), givenproduction costs associated with a thorough un-

derstanding of the function. As a result, the strategy

plan with objectives and goals is defined.

(2) Setting up value engineering teams by selecting rep-

resentatives from each division to support the shop

floor teams and assist in coordinating the project.

From this a list of the value engineering team mem-

bers is obtained.

(3) A training process for each team based on an inte-

grating process amongst procedures/applications and

specific techniques of value engineering. After the

training process, participants will understand the fourfoundations which are determining the problem,

planning, making improvements, and the follow up

processes.

(4) Forming shop floor teams for specific tasks to create

and develop alternative solutions. Duties and respon-

sibilities for each of the work force have to be clearly

identified by the value engineering team. The head

of each work force is selected by a member of the

value engineering team or selected by a member of

the particular work force. The scope of the operation

has to be specified.

2.1.2 Quality control

Quality control is the investigation and follows up

process under a specific standard as set by each manu-

facturer.

(1) Define the problem and energy loss in the produc-tion process (as stated in the objective and the goal)

by investigating possible problem and cause of the

energy loss.

(2) Prioritize problems and determine the cause of these

problems. This process is suggested by the work force

and is aimed at selecting problems that need to be

resolved. Problem prioritization can be done by ap-

plying a Pareto Flow Chart. After the problems are

determined, a brain storming process within the

work force is conducted.

2.1.3 Quality improvement

Quality improvement is a continuous process which

aims to increase standards suggested by the work force.

A feasibility study of each suggestion is conducted. Qual-

ity Improvement plans will then be proposed to the

administrator for approval.

(1) Suggestions and proposed improvement plans are

the processes that create more alternatives, in order

to get to the root of the problem, and are based on

brain storming by the shop floor team. Four sub-

processes are discussed below:

Efficiency Improvement by studying technologyadvancements, emphasizes on better performance

given the same or lower production costs. This

process should be conducted before the final in-

vestment decision.

Good design and concept is a procedure that takes

into account value increments in order to reduce

operating costs. This process includes organiza-

tion extensions and creation which may cover the

concept of replacement.

Appropriate equipment usage and maintenance pro-

cesses as suggested in equipment manuals, together

with an appropriate maintenance program thatwould result in maximum efficiency of the equip-

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ments utilization.

New investment in machinery and equipment. This

process requires a long-term decision regarding

whether to undertake such a large investment.

After the shop floor team has suggested improve-

ment plans, the next step is to conduct a feasibility study.

(2) The feasibility study and operational plan are divided

into two parts. Firstly, an economic evaluation analy-

sis emphasizes on the energy cost savings. Secondly,

a technical analysis, which can be divided into an

evaluation of the efficiency analysis, reliability, ease

of maintenance, user friendly attributes, safeness, and

other criteria as suggested by members of the shop

floor team. After the appropriate plan has been ap-

proved based on both economic and technical analysis,

the operational plan with outlining the responsibleparty and the time frame of the suggested plan are

determined.

(3) The shop floor team proposes suggested plans to the

administrator for approval. Details regarding pro-

cedures, time frames, cost of the plans, net savings,

and payback periods are provided for the administra-

tor to choose from.

(4) The best plan will be approved by the administrator

based on cost and break-even analysis, return on

investment, and sensitivity analysis.

(5) The plan is execution and follow up processes are

exercised to ensure that the objectives and goals havebeen met, by assigning a responsible person or a

project manager.

(6) Standardization of the successful plans future im-

provement is achieved after applying a quality system,

namely quality planning, quality control and quality

improvement.

After all 12 procedures, as shown in Fig. 1, have

been executed, each shop floor team must revisit step 5 in

order to ascertain whether the suggested plan has helped

solve the problems and the write up a proposal of any

problems found to the administrator and the expert team.

2.2 Sustainable Value Engineering Model: A Case

Study in Energy Cost Saving

The two largest sectors of energy usage in Thailand

are transportation (36.4%) and manufacturing (36.3%)

during the year 2007 and 20082. Energy usage for trans-

portation purposes are difficult to control and manage.

This is because various projects regarding energy saving,

such as the gasoline saving project, promoting mass trans-

portation to the public, etc. are hard to control due to many

factors (such as consumer behavior and preference) and

are difficult to identify and manage. However, energy

usage for manufacturing can be dealt with because most

decisions an energy usage are made by the administrators

of each entity. For example, the administrator may an-

nounce an energy saving program in his/her own factory

aiming at reducing production cost caused by higher costs

of energy. To use energy effectively and efficiently, the

administrator may switch from the existing system, an

inefficient system, to the suggested system namely the

valued engineering system. This implies that a group or a

committee incorporating related stakeholders (the value

engineering team) is set up to study the root causes of the

problem, such as high energy costs in the production

process. After the causes of problem are clearly defined,

recommendations to solve such problem via brainstorm-

ing are carried out. For example, root causes of high

energy cost in a manufacturing process could be due toinefficient equipment in the production process, or a poor

floor plan at the production site. Suggested solutions could

be incorporated by acquiring more efficient equipment and

better management techniques leading to higher quality

in the production process. In other words, by applying

the valued engineering process, manufacturing value in-

creases whist either costs reduce or the function increases.

The major issue is how to create an appropriate mecha-

nism that drives the whole energy saving program to its

full efficiency. Therefore, the motivation of this study is

to propose a sustainable development model of value

engineering.An animal food processor was selected for our

experiment. The objective was to suggest an energy

saving plan which is also one of the policies of the

administrator. An evaluation form based on the value

engineering concept was created to set the direction for

the problems that needed solving. The production

capacity of the selected food processor manufacturer is

10,000 tons per day. Each production process is con-

trolled and monitored by integrated computer systems.

Products are distributed to the market under four brands.

Five value engineering teams were assigned to investi-

gate the working processes and define problems of both

the office and production units. This study reports theresults from the first value engineering team, namely the

logistic group since it has shown the largest energy sav-

ings amongst the five teams. The proposals of the logis-

tics group called Energy savings by using forklifts in

the raw material logistics implementation processes are

discussed below.

2.2.1 Quality planning

(1) Setting goals and a strategic plan aimed at maximiz-

2Figures are form annual reports of Thailand Energy Situation 2007 and 2008 by Ministry of Energy.

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2.2.3 Quality improvement

(1) Four steps are proposed to solve the high energy cost

problem. The first step is to switch from diesel to

biodiesel, due to its lower cost per unit. The second

step is to relocate finished products in order to re-

duce the distance of transportation within the ware-

house. The third step is to increase the size andlayout of the terminal for finished products, and scrap

from the production process in order to shorten the

distance of transportation. The fourth step is to in-

crease LPG usage in order to reduce energy costs.

(2) Conduct a feasibility study and determine an action

plan. Results from the feasibility study, based on

technical and economic principles indicate that in-

creased LPG usage would meet the objective set in

the strategic plan.

From Table 2, SVE helps reduce energy costs by

4.11 Baht/hour/forklift or 9,798.24 Baht per year

per forklift. Total energy cost savings per year are146,973.60 Baht with a 555,000 Baht initial investment

and payback period of 3.7 years. The next step is to as-

sign a responsible person and come up with time frame

for the project.

(3) Propose the SVE project to the administrator, advis-

ing the modification of the forklifts from using solely

diesel to using LPG only. The suggested proposal,

which requires modifying costs of 555,000 Baht,

generated net energy cost savings of 146,973.60 an-

nually. The payback period of the proposed project

is 3 years and 9 months.(4) The decision making and project approval was done

by the administrator. The administrator approved

the SVE project since it is the highest cost savings

project, with a shorter payback period when com-

pared with other projects.

(5) Implementation and feedback are necessary in order

to ensure that results from the SVE project have met

the goals as stated in the strategic plan. Therefore,

the head of the logistics group will be responsiblefor this task.

(6) The standardization of the SVE project after the

results of implementing the SVE showed that using

the same route in the warehouse, SVE has decreased

energy usage.

After implement the Sustainable Development

Model of Value Engineering, the logistic group will in-

vestigate the fifth step as shown in Fig. 1 in order to solve

the next important problem by submitting the next SVE

project to the administrator for approval.

3. CONCLUSION

The Value Engineering Model is developed by the

integration of the Value Engineering concept, the Deming

Cycle concept and the Juran Trilogy concept for the manu-

facturing industry where tremendous energy cost savings

were achieved by using it. As shown in Fig. 1, there are

12 steps from the 3 main processes of the Juran Trilogy

which are planning; controlling; and the improvement

process. After the solution has been ascertained for to the

most important problem, and all the processes under the

SVE model have been implemented, each shop floor team

has to conduct a feedback loop by suggesting possiblesolutions to further problems to the administrator for

Table 1. Comparison of price behavior between diesel and LPG prices during 2000 to 2009

Diesel LPG

Costs per Gallon Costs per Gallon

Average Price 141.56 81.03Standard Deviation 79.12 36.71

Max 406.63 197.94

Min 45.63 26.75

Price Range 361.00 171.19

Table 2. Cost comparison of fifteen forklifts before and after implementing the SVE model

Before Implementing SVE After Implementing SVE

Diesel Usage 1.90 litre/hour Diesel Usage 0.93 liter/hour

Average Diesel Price 23.36 Baht/litre Average Diesel Price 23.36 Baht/liter

LPG Usage 1.07 kg/hourAverage LPG Price 18.54 Baht/hour

Cost/Forklift/hour 44.38 Baht/hour Cost/Forklift/hour 40.27 Baht/hour

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approval. Such feedback loops are implemented based

on the Deming Cycle. By implementing the Sustainable

Development Model of Value Engineering, sustainable

value engineering could be obtained.

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