Basics of Value Stream Costing

March 9th, 2009

Value stream costing is a process of identifying and establishing costs for all the process steps required to provide value to the customer. It is a function of determining how much value is created by each process step. The mapping technique can be as simple as tracking all the steps associated with customer value using paper and pencil. Value stream mapping is a key element of lean thinking as in an effort to focus on and provide customer value. The mapping step is an effort to identify waste by walking through all of the process steps. It also attempts to determine how much value and cost is associated with each process step.

Activities that create form, features, and function of value to the customer are considered to be value added. All other steps are considered to be non-value added. These are the steps we would attempt to eliminate from the process or at least minimize the effort in order to reduce costs. The mapping and costing analysis should start at the customer and work all the way back through the business to its initiation.

Understanding value stream activities is a pretty easy process. From a practical stand point, costing the various value streams backwards from the customer to their source is more revealing than what is provided by traditional cost accounting systems. Activity based analysis and costing is a tool that can be used to help in analyzing value stream activities. The techniques used by this methodology can often be helpful in identifying activities and tasks. Also, the Pareto concept of 20/80 can be effectively applied to value stream mapping and costing since improving 20 percent of the processes will usually generate 80 per¬cent of the potential cost reductions and improvement in cycle time. Value stream mapping should be applied and evaluated through the eyes of the customer. Those value stream activities that provide the greatest profit impact should be addressed on a priority basis.

While this won’t make you an expert in conducting and applying value stream analysis and costing, it will provide an understanding of the basic concepts and how they are used. It is a great tool that is used in conjunction with lean accounting and lean work flow.