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Firm infrastructure
Human resource management
Technology development
Procurement
Inbound
logistics Operations Outbound
logistics Marketing
and sales Service
Figure 42.1 Overhead depicted in the value chain
The big picture
Overhead value analysis (OVA) is a technique used to find opportunities to reduce overhead costs. The model focuses on the reduction and optimisation of indirect activities and services in organisations. An OVA makes improvement opportunities explicit, and compares the costs of indirect activities with the output of the primary processes, for which it uses Porter’s value chain model (p. 70).
When to use it
An OVA can be used to reorganise and eliminate excess overhead activities. In practice, however, management uses it as both a preventive measure and a last resort. The intended result is not necessarily limited to lowering costs; many organ-isations simply want to increase awareness of the service demands of the (internal) customer. It is clear that an overhead value analysis has a significant impact on the indirect activities of the people involved.
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How to use it
There are six basic steps for an overhead value analysis:
1 The first step is to create a foundation including a definition of the required output, the required activities and an assessment of the end product.
2 The second step is to make an orderly listing of activities and costs. This step includes estimating the costs of input / resources, the costs of activities and the allocation of the cost to products, generally with the help of activity-based costing (ABC; see p. 87).
3 In step three, a customer evaluation of the service and output is required.
Relevant aspects are: necessity (i.e. critical, desired or nice-to-have), quality, quantity and cost. Customers are asked for both an assessment of the current output and an indication of the improvements that need to be made.
Both interviews and questionnaires are used in the customer evaluation.
4 In step four, the OVA team must identify cost-saving opportunities based on the possible improvements identified. This forces the organisation to make a statement with regard to priorities for output and required activities.
Deteriorating financial results and a lack of organisational versatility were the early signs that the client, a manufacturer of military and advanced remote control tech-nology, needed to reassess its indirect organisational functions. An OVA team set out to identify overhead activities and made an initial orderly list of all activities and costs. Next, it was decided to engage in a full OVA project to restructure the organ-isation and drastically reduce the number of indirect functions. The result was a transformation from a functional organisation to a market-driven business unit structure: departments delivered value to their internal customers, and many tasks that had formerly been divided into primary and secondary functions were decen-tralised. The change process enjoyed wide support in the organisation, as all parties involved felt that they were participating in their own ‘re-invention’.
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5 Step five is to prioritise opportunities with the aid of the four elements used earlier in the customer evaluation:
l Necessity: is value added?
l Is quality of output sufficient?
l Is quantity of output sufficient?
l Can it be done at reasonable cost?
The identification and prioritisation of opportunities overlaps with the question of whether or not to eliminate, change, automate, integrate and / or outsource certain activities. This is very much a pragmatic process executed by management in conjunction with experts and managers of the overhead departments.
6 Finally, as a project in itself, the final step is to implement the set of changes discussed and decided upon in the previous five steps.
The success factors of an OVA project are:
l The organisational objectives are known.
l The organisational structure is in place.
l The scope of OVA is determined.
l No other projects are interfered with, or otherwise disrupt the OVA.
l There is sufficient support throughout the organisation.
Final analysis
The results of an OVA analysis are often represented as statistics, whereas most of the data gathering is, in fact, qualitative. Since the required data are obtained from employees whose jobs may be put up for debate, it may be helpful to use a bench-mark to verify the data provided. Other potential pitfalls of OVA are:
l insufficient data and information;
l insufficient support for results and arguments;
l insufficient support for implementation.
Both management and analysts should make the process as easy as possible for the people (employees) involved. Getting everybody involved to the point where plans are regarded as being self-made is a major contribution to the potential success of OVA. OVA is often used in combination with activity-based costing (see p. 87).
References
Davis, M.E. and Falcon, W. D. (1964) Value Analysis, Value Engineering: The impli-cations for managers. New York: American Management Association.
Mowen, M.M. and Hanson, D.R. (2006) Management Accounting: The cornerstone for management decisions. Mason, OH: Thomson South-Western.
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The big picture
Quick response manufacturing (QRM), was developed by Rayan Suri (1998). QRM means responding to customers’ needs by rapidly designing and manufacturing products tailored to those needs. QRM focuses on continuously reducing the lead-times of all activities in a company, resulting in improved quality, lower cost and quick response.
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