Value Analysis

Definition of Value Analysis. The buying manager conducts value analysis, which aims mainly at maintaining the optimum level of quality and at achieving price efficiency. Value analysis is a planned effort which studies in minute detail the total value of merchandise. For an effective performance of any company value analysis is indispensable, so that the companies can attain economic growth. This is because a company's survival depends much on the extent of its ability to increase the sales of its products or services.

How does a value analysis work? First, a company has to identify the factors that affect the production and sale of its product. The factors may relate to the nature of the merchandise (e.g., whether it is a service or a product), the location of the manufacturing plant or the physical condition of the suppliers. Next, a company has to analyze the effects of these factors on the prices of the raw materials. After identifying the factors which affect the price of the raw materials, the company needs to determine the amount of money it needs to spend on the raw materials, on the cost of manufacturing the product and finally on the profits.

Evaluating the factors for calculating the prices of raw materials involves some important notions such as elasticity of demand, differentiation, cost variation, price elasticity and price discrimination. There are four main concepts which are used in evaluating the variables that affect the costs of good production by a company: supply chain, variability, cost and quality. Supply chain is the process by which raw materials are acquired by a company and converted into finished goods or services; supply variability refers to changes in the cost of producing a good by a company because of variations in the price of raw materials and labor. Cost and quality are used here to describe the variables that affect the price of good produced by a company.

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