international journal of

ELSEVIER

production economics
Int. J. Production Economics 36 (1994) 53-64

Applying

functional

cost analysis in a manufacturing

John Innesb, Falconer Mitchell

environment

Takeo Yoshikawa,*,

a Yokohama National University. 156 Tokiwadi, Hodogaya-ku. Yokohama 240, Japan b University of Dundee, UK Uniwrsify qf Edinburgh, UK

Abstract Value engineering is a technique initially developed in the West and widely employed by engineers to enhance product design. It has been further developed largely through the involvement, in Japan, of cost engineers. Most large Japanese manufacturers use it as an important element in their cost reduction and cost management policies. They employ it as a team activity to encourage the interaction and contribution of a range of disciplines. Accountants participate in these teams and provide a major input to the functional analysis of value engineering, and this has been termed functional cost analysis by the authors. This paper explores the nature and impact of functional cost analysis as it is used in value engineering. The first half of the paper is concerned with the more conventional application of functional cost analysis to individual products. This illustrates how and why the functions rather than the parts or resource inputs to a product can provide a valuable focus for costing activity. Functional cost analysis is examined within the context of different stages in the product life cycle and the application of cost management policies including competitive analysis, benchmarking and target costing. The second half of the paper examines an extension of the functional cost analysis approach from products to areas of manufacturing overhead costs and this includes drawing upon activity-based costing information. This involves the application of functional cost analysis methodology to business processes such as procurement, ordering, quality control and production scheduling. These are analysed and costed in terms of the functional service required by the customers of each business process. It thus provides a structured way of bringing visibility to many overhead areas in a manner which facilitates not only cost reduction but also incremental investment. Functional cost analysis allows cost information to be presented in a way which can reflect not only the technical capabilities of the firm but also the viewpoint of its customers. It also draws on the range of skills possessed by a variety of staff which can contribute to the cost management effort. These strengths have resulted in functional cost analysis becoming a highly effective and widely used technique for cost management.

1. Introduction Value

and definition or value analysis is a tech-

engineering

nique originally developed as a means of providing: * Corresponding

author.

in the West by engineers

A systematic interdisciplinary examination of factors affecting the cost of a product or service in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability (British Standard 3138).

This definition emphasises that value engineering (VE) itself is an interdisciplinary activity. The core

0925-5273/94/$07.00 0 1994 Elsevier Science B.V. AH rights reserved. SSDI 0925-5273(93)E0147-N

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T. Yoshikuwcr of ul.:Int. J. Production

Gonomic~s 36 11994) 53 64

relevance of cost information has inevitably created an important role for the management accountant. The accounting contribution to the VE process has been termed functional cost analysis by the authors and it is this aspect which provides the particular focus of this paper. The technique of VE originated in the 1960s in the USA. Among its first users were Univac-Sperry Rand, Ford tractors, General Electric and Chrysler [I]. However, it is not a technique which has achieved much prominence in the Western management accounting literature. For example, the two best-selling management accounting textbooks in North America and Europe are, respectively, those by Horngren and Foster [2] and Drury [3], and neither contains any detailed material on either VE or functional analysis. In contrast, in Japan functional cost analysis in the VE process has become one of the most important and widely used cost management techniques [4]. Hiromoto [S] and Monden and Sakurai [6] provide descriptions of its role in Japan as part of the process of achieving target costs. VE is a team activity. The team may have one member from each of various departments such as design, engineering, accounting, production, purchasing and marketing. To initiate and support this teamwork, most Japanese companies have a VE department with employees who work full-time on selecting the topics for analysis and on organising the secondment of the team members. This team activity encourages the interaction and contribution of a range of disciplines. Functional cost analysis uses the functions of a product as the basis for a structured approach to cost management. For example, the major function of a pen is to make a mark or the major function of a staple remover is to remove a staple. These functions represent a view of the service potential of the product to the customer in contrast to the parts which provide a physical representation of the existing product. The major advantage of thinking in terms of functions rather than parts is this more abstract approach. For example, if you take the existing parts as a starting point for product redesign, the chances are that you will finish with a new product which is only a slightly modified version of the original product. In contrast, if you

begin with the functions of the existing product you are more likely to find completely different, and more cost effective, ways of achieving these functions. Indeed, the functional cost analysis approach can often lead to the invention of new products. Historically, Western costing systems have concentrated on the product as the cost objective. Indeed, Johnson and Kaplan [7] have suggested that very often the predominant purpose of Western cost management systems is the valuation of inventory for external financial reports. Moreover, product cost information has conventionally been presented in terms of resource inputs, namely direct material, direct labour and overhead. This type of information concentrating on the total resources used may not be the most appropriate type of information for cost management. Cost management involves not only the identification of cost reduction possibilities but also the possibilities for increasing costs where the extra investment will enhance profit. The individual functions of a product are an alternative cost object and their use in functional cost analysis can aid cost management for profit improvement not only by identifying opportunities for cost reduction but also by leading those involved to discover beneficial new features for a product.

2. Application

to products

Functional cost analysis can be used throughout the different stages in the life cycle of a product. For example, functional cost analysis can be applied to an existing product to redesign it to achieve a particular objective such as reducing the cost of the product by 25% without affecting its quality. The example discussed in this section illustrates functional cost analysis applied to an existing product. However, functional cost analysis is an even more powerful tool when it is applied at the planning and design stages for a new product. Bellis-Jones [8, p. 1043 suggests that approximately 85% of future unit product costs are determined by the end of the testing phase. Indeed, Japanese companies have concentrated on the application of functional analysis at the preproduction stages where the benefits gained tend to be the greatest.

T. Yoshikawa

et al.llnt.

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Economics

36 11994)

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55

The various steps in the application of functional cost analysis are (linking with VE) basically the same at whatever stage in the product life cycle it is used. These are:

(1) Choose the field for analysis. (2) Define the objective including
(3) (4) (5) (6) (7)

(8) (9) (10)

the target cost. Select team members. Gather information. Define the functions of the object. Draw a functional family tree. Evaluate the functions in terms of (a) existing cost of each function and (b) value of each function to the customer. Suggest alternatives and compare these with the target cost. Decide on alternative. Review the actual results.

The first step of choosing the field for analysis (such as product or component or service or overhead area) is particularly critical and this is where the full-time VE employees play an important role. The criteria used to select a particular product or component includes very heavy or very bulky or very complex combined with the total cost involved. After choosing the object for analysis, the full-time VE employees also set the objective of the analysis. For example, the objective could be to reduce the weight of the product by 25% without affecting its existing quality, while also reducing the cost of the product by 30%. Cost and management accountants should be involved in helping to set the cost objective and this is generally done within a target cost framework. The idea of applying target costing to products has been used for many years (see, for example, [9, lo]), but its popularity has grown in the last decade. In contrast, to much of conventional management accounting with its internal emphasis, target costing emphasises the external approach by working back from an expected future market price to an internal target cost. This process of establishing the target cost will involve competitive analysis (i.e. analysis of competitors costs, products and possible future plans) and establishing various benchmarks in relation to competitors. However, the Japanese use of target costing is a topic in its own right and further details can be found in

[ll, 121. The important point for functional cost analysis is that a major aim of the analysis will be to help meet a target cost objective. For example, let us assume that the product is a propelling ballpoint pen and the target cost objective is $2.39 with an existing cost of $3.10 for this pen. The third step for the full-time VE employees is to choose the members of each team. If you have more than one team doing the same VE exercise, it introduces an important element of competition because at the end of the exercise each team will present their results to several top managers. Each team usually consists of five or six members drawn from different departments within the company. However, it is also quite common for employees in both subcontractor and customer companies to be invited to participate in the VE teams. It has been found that this is a good way to deepen relationships both with subcontractors and customers. Once the teams have been selected, they begin the fourth step of gathering information about the product including technical specifications, cost and marketing data. The technical specifications would include information about the detailed design of the existing product and full manufacturing information including details of suppliers, subcontractors, materials, manufacturing process and scrap. The market data would include information about competitors products. The fifth step involves defining the functions of the product and most people find this very difficult. The basic problem is that they think in terms of the existing parts rather than the functions of a product. A helpful guideline is that you can describe each function with a verb and a noun. For example, some of the functions for a staple remover might be remove staple, hold staple, open staple, detach staple, gather staple and prevent rust. Having determined the functions of the product, the sixth step is to draw a functional family tree. An example of a functional family tree for a propelling ballpoint pen is given in Fig. 1. The primary function is make mark with two secondary functions of put colour, guide tip, and prevent loss. The function of put colour itself has further subsidiary functions. An indirect function denoted by the dotted line in Fig. 1 is prevent loss. As you move to the right-hand side of the functional family tree, the

56

Fig. I. Propelling

ballpoint

pen functional

family tree.

Table 1 Parts, functions Part no.

and costs Function Transitive verb Noun cost ($)

Name of parts

Tip Barrel Cartridge Top Ink cap Spring Stopper Clip Screw

8
9 10

Flow Hold Store Store Put Pull in/out Pull in/out Fix Prevent Attach

Ink Pen Ink Ink Colour Tip Tip Spring Loss Clip

0.80 1.20 0.30 0.20 0.15 0.12 0.10 0.08 0.13 0.02 3.10

Note: This is an illustrative example. The costs are notional and have been selected by the authors purely for the purpose of this article.

such as fix spring become less abstract and more directly related to the parts of the existing product. A major advantage of the functional family tree is to try to arrange the functions of the product in a logical fashion. A useful check of the functional family tree is to ask the question how reading from left to right and the question why reading from right to left. For example, how do you make a mark by putting colour and guiding tip and why do you put colour namely to make mark.
functions

With reference t the functional family tree, the seventh step is to evaluate the functions. During the previous steps the management accountant has been operating very much as one of the team members but has an important individual role to play in calculating the existing cost of each function. Table 1 gives an example of how the functions of the propelling ballpoint pen identified in Fig. 1 can be related to the parts of the existing product and costed. In Table 1 the existing cost of the pen is $3.10 but in step two the target cost for the pen was set at $2.39. The target cost of $2.39 can be assigned to each function on the basis of the customers perceived value of each function. Ideally, the customers would be asked what they would be willing to pay for each function (such as prevent stains), but in practice usually each member of the team plays the role of the customer and values each function. The team then discusses the individual results and agrees on a final value for each function from the customers viewpoint. Table 2 gives an example of how the actual cost for each function can be compared with its target cost based on the customers viewpoint. The major advantage of this approach is that the team is forced to consider the market and customers and does not concentrate only on internal information such as internal costs. This comparison of the actual costs and the target cost of each function in Table 2 is a useful starting point for the eighth step of suggesting alternatives. Table 2 gives guidance on the functions where the team should concentrate its efforts. For example, the flow ink, store ink and pull in/out tip functions all have

T. Yoshikawa et al.lIn~. J. Production Economics 36 (1994) 5364 Table 2 Costs and values of functions Functions Actual cost ($) (a) Relative value to the customer W) (b) Assignment of target cost based on customers relative function value (W (c) = $2.39 x(b) Value

57

ratio (c) (d) = w

Flow ink Guide tip Store ink Put colour Pull in/out tip Fix spring Prevent loss Attach clip

0.80 1.20 0.50 0.15 0.22 0.08 0.13 0.02 3.10

25 50 12 6 1 1 4 1 100

0.60 1.20 0.29 0.14 0.02 0.02 0.10 0.02 2.39

0.75 1.00 0.58 0.93 0.09 0.25 0.77 1.00

These figures are rounded

an actual cost which is at least 20 cents greater than the target cost. Another method of analysing the data is to calculate a value ratio for each function which is the assigned target cost divided by the actual cost. Where the value ratio is less than one, this means that the functions actual cost is greater than its target cost. One weakness of the value ratio is that it may be low (such as 0.25 for fix spring), but the absolute amount involved (such as 8 cents for fix spring) is relatively small and offers little scope for significant cost reduction. This step of generating alternatives is basically a brain-storming session where no suggestion is discarded in the first instance. Experience has shown that what at first might seem to be an absurd suggestion may turn out to be the best suggestion. In addition to making suggestions, the management accountant has an important role to play in costing the various alternatives which the team decides to consider. Cost tables assist the management accountant in costing suggestions such as using new materials, eliminating or combining certain functions and using a new manufacturing process. They provide answers to what if questions. Japanese companies have used cost tables for several decades (see, for example, [13]). They are computer databases with very detailed information

Fig. 2. Disposable

ballpoint

pen functional

family tree.

including not only details of a companys own internal costs but also the costs of using different types of materials or production technology. Further details of Japanese cost tables can be found in [14]. Having generated various alternatives, costed these and compared the results with the target cost for the pen of $2.39, the team will take the ninth step of choosing their alternative. Fig. 2 gives an example of a chosen alternative where the propelling ballpoint pen in fact becomes a different product, namely a disposable pen without the propelling element. Functions such as pull in/out tip, fix spring and attach clip have been eliminated and the functions of prevent stains and prevent loss have been combined. It is important to check that

Table 3 Parts, functions Part no.

and costs Function Transitive Verb Noun cost (8

Name of parts

1
2 3 4 5 6

Tip Barrel Cartridge Top Ink Cap

Flow Hold Store Store Put Prevent

Ink Pen Ink Ink Colour Stain Loss

0.50 1.00 0.20 0.10 0.12 0.08 -_ 2.00

this concentration on the individual functions of the product has not affected adversely the overall integrity of the product. Before taking their final decision, the VE team must take into consideration factors such as customers reactions and environmental considerations in addition to technical and costing data. The final decision is very much a business decision. Table 3 illustrates the effects of the final decision on both the number of parts and the cost of the new pen. Table 3 shows that the number of parts has fallen from ten to six in the new product and the cost has fallen from $3.10 to $2.00. In other words, the target cost of $2.39 has been more than met. To ensure that no overoptimistic claims are made by the VE teams and also for feedback purposes to improve future analyses, a postcompletion review or audit is conducted within a year after the changes have been implemented to check the actual results against the forecast results of the analysis. Further information about functional cost analysis is given in [IS]. Functional cost analysis is a technique which can be applied during various stages of a products life cycle, although it is a particularly beneficial technique during the planning and design stages for a new product where its basic objective of profit improvement can be most effectively achieved. A major advantage of this technique is that the team approach brings together individuals who can use and combine their different skills in relation to a specific product. Hopefully. this might mean a competitive advantage in terms of a better

product (including perhaps new features) more closely geared to customers needs. A second advantage of functional cost analysis is that it integrates in the cost management exercise both the view of customers and the market context in terms of a target cost based on a market price. Another important benefit is the more abstract approach required by considering the functions rather than the parts of a product. Moreover, in benchmarking it can also be helpful to analyse competitors products in terms of their functions and, where possible, the estimated cost of these functions. When estimating the cost of functions. activitybased costing can play a role in helping to cost the overhead elements. Cost driver rates can be used to link overhead costs to individual functions. However, activity-based cost information can be used not only in the functional cost analysis of products but also in applying the technique to overhead areas. The second part of this paper describes this development and also how activity-based costing information can be used to improve the functional cost analysis of manufacturing overheads.

3. Application

to overheads

Activity-based costing has proved useful not only in product costing but also in the cost management of overheads (see, for example, [16, 171). One popular approach is to categorise activities as value-added or non-value-added (see, for example, [ 181). The basic question is whether or not an activity adds value to the product from the customers point of view. Brimson [19, p. 641 suggests that most companies have between 20% and 40% of total cost consumed in performing non-valueadded -wasteful - activities. The basic objective is to eliminate or to at least minimise non-value-added activities such as rework or expediting. Another popular approach is to categorise activities as core or support or diversionary. Bellis-Jones [S] argues that core activities provide a service to customers either inside or outside the organisation and are usually associated with a special expertise which forms part of the competitive advantage of the organisation. For example, a core activity for travelling salesmen is the negotiation of sales with

T. Yoshikawja et al.lInt. J. Production

Economics 36 (1994) 5354

59

customers. Their support activities are those required to make the core activity possible, such as the salesmen driving to the premises of a customer. Diversionary activities are caused by deficiencies in the system and must be eliminated or at least minimised. These include the salesmen listening to customer complaints about the products received from previous sales. Both the value-added or non-value-added and the core or support or diversionary approaches tend to focus cost management efforts on the nonvalue-added and the diversionary activities. There is a tendency to ignore the opportunities for improved cost management in the value-added and core activities. Furthermore, the cost management efforts tend to concentrate on cost reduction rather than on profit improvement by identifying overhead areas where extra expenditure should be incurred to increase profits. This part of the paper discusses how functional cost analysis is being applied to manufacturing overheads and how, with its wider view of business processes, it could complement the value-added or core approaches to overhead cost management. It should be pointed out that, although companies apply functional analysis to their overheads, in the following discussion we have assumed the availability of activity-based cost information to illustrate how it could complement such an approach. Japanese companies apply their functional analysis approach to business processes such as production scheduling. The cost objective changes from a product sold to external customers to a service usually provided to internal customers, namely managers in other departments within the company. As with products, the major aim is not just to reduce the cost of the overhead service but also to improve the service provided to internal managers and, therefore, to benefit ultimately external customers. The criteria used to select the overhead area for functional cost analysis include increasing staff, the growth of bureaucratic or complex procedures and steep rises in cost. The team members for the functional cost analysis exercise are again interdisciplinary and include not only a member from the overhead area but also at least one representative from the internal customers of the overhead

service. Just as it was helpful to explain functional cost analysis of products with the simple example of the pen, so applying functional cost analysis to overheads will be illustrated with a basic example of the purchasing of direct materials. In this example the purchasing of direct materials includes the assessment of material requirements, the search for suppliers and through the process to the delivery of materials to the production line and the final payment to a supplier. In other words, it is a business process which involves several departments such as production planning, purchasing, stores and accounts payable. To distinguish this business process from the purchasing department itself, it will be called the procurement process. The objective set by the full-time VE department is assumed to be the reduction of the cost of the procurement process by 25% (from &3 million to &2.25 million), while at the same time improving the service provided to internal customers. Such stringent targets are a common starting point for this type of work. After gathering the necessary information about the nature of the procurement process, its costs and manufacturing material requirements, the functions can be defined. The primary function may be provide materials with secondary functions such as meet schedule, control cost and assure quality. At this stage it is very important to avoid listing the activities involved in the procurement process. Such activities in the overhead area are equivalent to the parts of a physical product. The functions should be defined at as abstract or general a level as possible so that team members for the functional cost analysis exercise are given a framework which does not constrain them to simply tinkering with the existing procurement process. When the functions of the procurement process have been defined, the next step is to draw the procurement functional family tree. Fig. 3 contains the functional family tree for this illustrative example. Fig. 3 shows both the primary or basic function and also three further sublevels of function (for example, assure quality, meet specifications and ensure colour) are apparent. Just as the physical product application related the functions to the existing parts of the product, so the functions of the

60

T. Yoshikawa

et al.lInt. J. Production
3rd level functions

Economics

36 (1994) 53-64

Fig. 3. Procurement

functional

family tree.

procurement process can be related to its existing activities. Table 4 summarises the links between the various family tree functions and the activities which comprise the procurement process. However, Table 4 also includes the costs of the activities involved in the procurement process and therefore the existing cost of meeting the various functions. It provides a useful starting point to begin the cost management analysis. For example, the analysis at the foot of Table 4 reveals each functions percentage of the total cost (such as F3 assure quality is 40% of the total cost), the number of activities involved in each function (for example, 12 activities are involved in FZ1 match cost target) and each functions percentage of the total number of activities (for example, F 1 meet schedule involves 65% of the total number of activities). This type of analysis is very much

a starting point because it represents only an internal perspective on the procurement process. To supplement it, the views of the customers of the procurement process must also be incorporated into the analysis. As with the physical product, in addition to evaluating the costs of the functions, it is critical to evaluate the customers perceptions of the value of each function. With most overheads such as procuring materials, the customers for the service are within the company and, therefore, it is relatively easy to ask the customers (for example, production staff) how they value each function. In the physical product example, the target cost was assigned to each function on the basis of the customers weighting. This procurement example illustrates an alternative approach where the customer weightings are used in percentage terms without being turned into monetary amounts. This allows them to be matched against the relative cost percentages for the functions determined from the costing work outlined above. Table 5 shows that the internal customers have weighted equally the three first-level functions of meet schedule, control cost and assure quality. However, with the second-level functions the internal customers have weighted match cost target three times as heavily as fix cost. As with the physical product the internal customers weightings for each function (I,) can be compared with the relative costs of each function (C,) and can be expressed as the value ratio V, divided by Cr. Where this value ratio is less than one it means that the relative costs of that function exceed its relative value to the customer. This provides a signal to investigate these functions - particularly where their absolute costs are significant. Table 5 shows that the value ratios for both F 1 meet schedule and F3 assure quality are less than one. Furthermore, the lower-level functions reveal that the reasons for this appear to lie with functions F 12 provide-on-time and F 3 1 meet specifications. As the function of provide-on-time represents 22% of the total cost and that of meet specifications 34% of the total cost, these functions would be targeted for close examination. However, the type of analysis derived from Table 5 is very much a starting point in the process.

T. Yoshikau,a et al./Int. J. Production Economics 36 (1994) 53154 Table 4 The composition Activities

61

of first- and second-level

function Basic function Fll

costs First-level functions Second-level functions

Fl 50 50 50 40

F2 40 30 40 20 160 120 60 80 20

F3 110 110 180 90

F,,

FI, 50 50 50 30

F,I 40 30 30 10 140 90 40 60 10

F 22

F 31 110 80 100 70

F 32

Assessment of material requirements Potential supplier search Potential supplier vetting Approval procedures new supplier Gathering price data Negotiating price ~ existing suppliers Negotiating price potential suppliers Setting and monitoring budgets Requisitioning and ordering Stock control procedures Receiving goods Incoming inspection Goods returned Storage Delivery to line Supplier expediting - quality Supplier expediting - delivery Making payment Maintaining documentation General management

200 190 270 150 160 120 60 80 290 80 100 290 120 130 90 250 90 80 130 120 3ooo

10

200 80 100 120 130 90

70

10 30 80

190 50 20 120

10 10 20 30 20 20 IO

60

290 130 90 250 90 30 50 1080 36 13 65 80 50 30 730 24 12 60 50 40

1190

290

220 90 20 40 410 14 8 40 10 10 670 22 11 55 80 30 20 580 19 12 60 20 10 150 5 9 45 40 30 1000 34 9 45

% of total cost Number of activities % of total activities For simplicity,

involved

100 20 100 have been excluded.

40 9 45

third-level

functions

All figures used are fictitious

It is important to be open-minded and to examine as many alternatives as possible. An element of brain-storming is also necessary to consider radical change involving additional new functions, the elimination and combination of existing functions. A variety of new ways of achieving the basic fimction of provide materials should be identified. Again, the management accountant plays an important role in estimating the cost of different alternatives and this is where the activity-based costs will be helpful with cost driver rate information being used to derive the cost estimates. The alternative chosen in this illustrative example was a fundamental change involving the development of longer-term relationships with fewer material suppliers and the delivery of materials directly to the production line. The longer-

term relationships with suppliers meant that the company relied on the suppliers quality after careful initial vetting. The revised functional family tree was simplified and is shown in Table 6 and Fig. 4. Table 6 and Fig. 4 show that the basic and firstlevel functions have not changed but the secondand third-level functions have been simplified by placing much more reliance on a few carefully chosen suppliers. Table 6 and Fig. 4 illustrate how the activities relate to the five functions in the new proposal. The functional cost analysis has eliminated eight activities, namely gathering price data, stock control, incoming inspection, goods returned, storage, delivery to line, supplier expediting - quality - and supplier expediting - delivery. Some of these activities such as delivery to line have been taken over

Table 5 Costs and weighting Function

of functions % customer weighting (V,) 33 33 33 100 16.5 16.5 33 25 33 8 Value ratio

% cost (Cf)

(V,Cf)
0.92 1.38 0.83

F,
F, F.3 Subtotal
F II F

36 24 40 100 14
22

1.18 0.75 Fig. 4. Modified procurement functional family tree.

Slll;ltotal
F 21

36 19 24 5

1.32
I .60

SZLotal F

F 31 F,, Subtotal

34 6 40

25 8 33

0.14 1.33

by suppliers. However, although the suppliers incurred some extra costs, these were more than compensated by the benefits of larger orders and longer-term contracts. Indeed, the prices for the materials may actually fall as a result of such
Table 6 Modified Activities

changes. An additional activity was added to the procurement process and that was the running of joint courses with the suppliers in total quality control and functional cost analysis on the material or component supplied. Such joint courses and the longer-term contracts with fewer suppliers mean that better relationships are developed with these suppliers leading to fewer controls and administrative procedures. This new activity of running joint courses involving suppliers costs El 60 000 per year but, despite this, the cost of the procurement process has fallen from &3 million to El.66 million. This

procurement

functional

family tree Function Cost fOOos 200 80 20 250 100 Comment

Assessment of material requirements Negotiating price -- existing suppliers Setting/monitoring budgets Requisitioning and ordering Receiving goods Making payment Maintain documentation General management Running of joint courses in TQC and FCA Potential supplier search Potential Approval Negotiate supplier vetting procedures -. new suppliers price - potential suppliers

FI. Fz> F, Fz F2 F, F,
F2

Easier due to more mutual understanding More certainty due to long-term supplier relationships More frequent ordering hut less bureaucratic More frequent deliveries but less bureaucratic and direct to the production line Simplification Simplification New investment Reduced due to increased ing suppliers As above

F,, F2, F3 F,. F,, F,

Ft. F,. F,

1:

FS F5 FS p,

100 160 160 200 I50 60 1660

stability

of relationship

with exist-

A cost reduction of 45% number of activities

and a reduction

of 35%

in the

a Note the absence

of inspection,

storage

and handling

activities

T. Yoshikawa

e! al.lInt. .I. Production

Economics 36 (1994) 5344

63

is a cost reduction of 45% and it is mirrored in the number of activities falling from 20 to 13, with eight activities being eliminated and one being added. Table 6 and Fig. 4 explain in more detail what has happened to the cost of the 12 activities which remained from Table 4 and Fig. 4. Four of these remain unchanged, namely assessment of material requirements, making payment, approval procedures - new suppliers ~ and negotiating price potential suppliers. The cost of another activity receiving goods has remained unchanged, but this is because of two compensating effects, namely increased costs from more frequent deliveries but reduced costs from less bureaucracy and deliveries being made directly to the production line. Table 6 and Fig. 4 give an explanation of why the costs have fallen for the remaining seven activities. As with the physical product, the results of the functional cost analysis of the procurement process would also be reviewed in the broadest sense. This review would cover not only the cost saving but would also check factors such as ensuring that suppliers deliveries have been on time and up to the required quality standard. It is of no benefit to make savings on the procurement process if further costs are incurred elsewhere. This is where the focus on the internal customers ensures that the service provided by the procurement process has actually improved.

duction possibilities, it also highlights creative investment opportunities which will increase the profit which the company derives from the product. Functional cost analysis does require a significant effort from accountants to support the VE team with prompt estimates and revisions of the cost of various functions. Information has to be produced quickly and while, in Japan, cost tables are a means of providing this service, it is also possible that activity-based costing can make an important contribution. Functional cost analysis is not just a technique applied to physical products. It can be applied to internal overhead services or business processes demonstrating the flexibility and utility of this approach to cost management. This paper has also illustrated how functional cost analysis of a business process can be integrated with an activitybased costing system. Functional cost analysis encompasses all elements of cost and addresses cost management in a structured manner which relates the consumption of resources to customer expectations. The consideration of the costs of functions, the team approach, the customers viewpoint (including target costing) and the use of cost tables to assess alternatives are the main strengths of functional cost analysis which make it a powerful technique for cost management.

5. Acknowledgements 4. Conclusions Functional cost analysis focuses on the management accountants contribution to the provision of information to facilitate the VE of both products and overhead services. Changing the cost objective from physical parts to the more abstract functions which profile the service potential of products provides a structured approach which supports a wide-ranging market-oriented analysis. The interdisciplinary approach ensures that all the expertise at the companys disposal is included in this analysis. Above all, it is an approach which allows cost management to be undertaken in a constructive and positive way. Although functional cost analysis does encourage the identification and exploitation of cost reWe wish to acknowledge the Canon Foundation in Europe which awarded visiting fellowships to Falconer Mitchell (1990) and John Innes (1992) and so facilitated the international collaboration necessary to write this article. This paper consolidates and advances previous research by the authors published in J. Cost Mgmt., 1989, pp. 14-19 and also forthcoming.

6. References
Creasy, R., 1973. Functional Analysis System Technique Manual. Society of American Value Engineers, Irving. 123 Horngren, CT. and Foster, G., 1991. Cost Accounting: A Managerial Emphasis. Prentice-Hall, Englewood ClitTs, NJ. [l]

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