When it comes to running a successful venture, one of the most important things to do is ensuring that you add value to all your activities. Whether you are organizing a charity sale or starting a service business, you want to ensure that whatever you offer is actually worth your customer’s investment.
Many people know about the concept of value addition but have a misguided understanding of what counts as a value-added activity. Below is a comprehensive guide that should come in handy in this case.
What is Value?
The value is defined as what the customer is willing to pay for. If the customer is not willing to pay extra for an activity, then that activity is not adding value to the product or service.
Customers recognize value by paying a premium, being loyal customers or preferring a particular product over similar products from competitors.
What exactly are value-added activities?
For an activity to be considered genuinely value-added, it needs to have these three key features.
1. Modification/ Transformation
This means that the final product, whether tangible or not, is different from what you started with. The value-added activities are the activities that will take the product or service towards its completion.
In a manufacturing organization, the value-added activities are those that transform the product from raw material to its finished form for which the customer is willing to pay.
It is, of course, essential to strike a balance between modification and budget monitoring. That way, you do not end up spending too much money or even time changing something that needed only slight adjustments.
2. Value for money
You want the clients to feel like what they are paying matches the quality they are receiving. So it is not enough to modify your product; you need to make it good enough to spend money on.
The value-added activities are those activities for which the client is willing to pay.
3. First time’s the charm
Finally, value addition means getting things done right on the first try. This means that neither you nor your customer has to incur any further costs to make it perfect.
That way, any rework done to make a product or service acceptable to the client is not a value-added activity.
What are non-value-added activities?
Any activity that does not meet the above three conditions for value-added activities is non-value-added.
Examples to help put things in perspective; value-added or not?
1. Repair activities
Repairs are only done on faulty products. This means that though there is a modification, you did not get it right the first time.
In assembly processes, you take components that were already high quality and functional, and you put them together to form something new. There is a modification, value for money, and if the components are in good condition, there will be no need for repairs.
If you produce more than you need or can sell, then it doesn’t matter how good the quality is. You will have to deal with the logistic nightmares storage and excess inventory. There is also the risk of deterioration and wastage.
4. Service provision
Say you go to a restaurant and order a cup of coffee. It is converted from the raw ingredients and served as something you would pay money for.
Here is where businesses do more than is necessary to modify a product. For example, adding features which client does need or even recognize. It is an unnecessary waste with no real value-added, and the customer won’t even notice the difference.
Inspection is a non-value-added activity. Since organizations have to inspect to provide confidence to their clients, in that case, inspection should not be a standalone activity. It should be built into the process so that you do not need to spend extra effort on it.
Non-value-added but essential
In addition to these two categories (value-added and non-value-added), there is a third category of activities, and that is "non-value-added but essential". These are also called:
- Necessary non-value-adding activities
- Business Value Adding Activities
These activities are non-value adding activities from the customer's perspective but are required to perform a business. Examples of such activities include:
- Government regulations
- Documentation requirements
- Mandatory audit requirements
In a nutshell, value-added services aim to save time, save money, minimize effort and produce high quality. Apply the LEAN tool, and you should notice a difference in your business in no time.