The cumulative savings since inception of the Maritime Administration's Value Engineering Program in 1957 has totaled more than $13-million as of fiscal year ending June 30, 1968. This saving is greater than the commercial ship contract award price of certain types of cargo ships. The program has provided a 'free' cargo ship since its start. Of that total, $1.5-million were saved in fiscal year 1968 alone. During this year, subsidized ship contract awards were limited to 12 ships. The ratio of savings to cost is almost $30 to $1 in this period. The national average of savings is better than 10 to 1 or ten dollars of savings realized for every dollar spent on value engineering.
The term 'value engineering' (V.E.) is relatively new, although its concept by many other names is somewhat older. It is generally believed to have been started in its present form at General Electric Co. about 1940.
Value Engineering is a technique for eliminating unnecessary costs. It is an organized cost reduction effort. It utilizes specially developed analytic techniques to achieve the necessary function at the lowest overall cost, consistent with requirements for performance, reliability and acceptance. Its major objective is a desired function at a predetermined level of reliability at a minimum cost.
There are many different ways of doing value engineering and the Maritime Administration has concentrated, with some success, on the principle that elimination of unnecessary apparatus would be to the government's and owner's greatest advantage and thus provide more for the dollar. The advantage generally would be three fold—(1) saving the original cost of procurement and installation, (2) omission of maintenance costs on the equipment eliminated, and (3) savings in weight.
MarAd's value engineering program can hardly be mentioned without some credit being given to the Department of Defense, especially the former Bureau of Ships' program. This group pioneered value engineering as it is presently known in the federal government. The success of the Navy program in reducing shipbuilding costs led to establishing MarAd's modest program in 1957. This program, with the single goal of reducing subsidized shipbuilding costs, paralleled the Navy's with respect to the 50 percent incentive to the originating shipyard, for each of its value engineering proposals accepted. The remaining 50 percent was split equally between the owner or operating company, and MarAd. This liberal incentive was considered most important in promoting participation by the shipbuilders to submit new reduced cost suggestions which could be used on subsequent contracts and the bonus recovered many, many times.
The General Accounting Office was highly critical of MarAd's earlier V.E. program and reported to Congress with strong recommendation that the program must be made mandatory to become more effective. This criticism was instrumental in development of the current value engineering contracts language. The contracts now reflect two mandatory requirements: (1) mandatory V.E. letters must be adequately covered in all specifications for ships built with subsidy aid, (2) shipyard value engineering proposals, when approved by the Maritime Subsidy Board, must be either accepted by the owner or he must pay a penalty. This penalty is 25 percent of the value of the shipyard proposal submitted and it is divided equally between the shipyard and MarAd.
A comparison of the effectiveness of the four successive MarAd programs is given in Table 1, and includes value engineering items covered in the contract specifications review. It can be seen that as the contract requirements become more compelling or mandatory for consideration of value engineering, the savings have sharply increased.
The impact of the latest program, reflecting the strongest mandatory contract requirements, cannot be fully assessed at this time due to the status of construction of ships under the first contract of this type. However, although the first keel has not been laid, savings, when compared with earlier contracts, are sharply upward. Included in type 4 contract savings shown in Table 1 are the shipyard's accepted value engineering proposals aggregating more than $141,000 per ship.
The MarAd Value Engineering Branch is involved in many different ways to reduce shipbuilding costs, such as:
1. A critical pre-contract review of all plans and specifications of all applicants for construction subsidy aid prior to release for bidding. One recent pre-contract review resulted in savings estimated to be more than $300,000 per ship on a two-ship contract.
2. A sustained post contract review of each contract which contributes to further cost reductions. Suggestions to the owner on one contract resulted in adjudicated reduced cost change orders of more than $50,000 per ship on a five-ship contract.
3. A constant screening and analyses of value engineering proposals developed by the contracting shipyards. In a recent two-month period, one shipyard obtained approval of value engineering projects aggregating more than $86,000 per ship on a contract for three ships. Another shipyard has received approval on value engineering projects totaling more than $141,000 per ship on a contract for eleven ships.
4. A continued effort in seeking clarification and/or changes in existing regulations that appear to add unnecessarily to costs.
5. Active participation in the Shipbuilders Council of America Value Engineering Committee and cooperation with that group in seeking lower shipbuilding costs and the solutions to other mutual problems.
6. A close scrutiny of specifications to identify high-cost systems and installations, and attempts to simplify construction and reduce costs in these areas.
The Value Engineering Branch has investigated more than 500 projects which resulted in the issuance of 112 Value Engineering Informational Letters. These letters are developed and distributed from time to time as new techniques, materials, or methods are developed that tend to reduce shipbuilding costs or simplify construction.
These letters represent only a few of the many items that have been investigated during the value engineering program. Many other change items, such as one of a kind that would apply to only one contract or have other limited application, have not been developed into V.E. Letters.
What kind of ship was obtained by obtaining the savings listed? Was it cheapened beyond being useful or was its maintenance and operation critically affected?
Critics of successful value engineering programs often contend that such changes 'cheapen' a product and lowers its performance capabilities. As a result of such criticism the Department of Defense made a check on the effectiveness of their value engineering program. It has been proven conclusively and to the satisfaction of the Department of Defense that there is no degradation of performance, reliability or quality requirements in their value engineering programs.
The record is not bad: neither is it good. But, what savings have been accomplished are insignificant when compared to the potential that exists for value engineering in the marine industry today.
The potential for technical improvement and cost reduction is as great as the willingness to abandon the fixed practices of the past. New techniques and methods of building ships and components must be sought. More specifically, the costly outmoded items retained by tradition must be eliminated. Let us change our existing habits and attitudes by overcoming the marine-equipment complex. Get rid of the unnecessary features found in ships that are not duplicated in similar commercial installations.
Industry ashore, with large value engineering programs, has made remarkable strides in reducing costs. Therefore, let us take whatever action is needed to use, where feasible, commercial or land-based industry standards, techniques, regulations and equipment for ships equipment and construction. With few exceptions, there are enough such standards in being without the necessity of special marine standards.
Also consider the unnecessary redundancy of equipment and apparatus aboard ship. How many of these duplicate equipments are really necessary? Similar equipment ashore runs for years without interruption, and without the benefit of operating experts at hand capable of making repairs.
Table 1—Effectiveness of Value Engineering Programs (Average Savings Per Ship; Increased Savings Over #1; Over #2; Over #3): 1. Contract without Value Engineering Provisions — $39,800 2. Contract with voluntary Value Engineering Provisions — $54,600; 37 1/2% 3. Contract with permissive Value Engineering Provisions — $78,000; 96%; 42% 4. Contract (current) with Mandatory Value Engineering Provisions — $235,000; 490%; 230%; 197%
*Mr. Nichols, chief of the Value Engineering Branch, Maritime Administration, recently presented the paper condensed here before the Northern California Section of The Society of Naval Architects and Marine Engineers.