What is the Value of the Value Index?

Author
James (Jim) Rains is President of the Advanced Value Group, LLC (AVG). Formed in 2000, AVG
specializes in value engineering and synchronous process improvements (lean manufacturing) in the
factory and/or office environment. He believes in LeanVE. Training in target costing, which includes
Quality Function Deployment and Voice of the Customer is also a part of AVGs long list of services. Jim
has been recently trained by Yoshihiko Sato to conduct Japanese style competitive benchmarking teardown workshops. This workshop integrates the Design for Assembly methodology. Jim has conducted
numerous construction-oriented VE workshops throughout the Middle East. He has also worked in Korea,
China, Australia and many European countries. Jim is retired after more than thirty-one years with
General Motors. He has served on the SAVE International Board of Directors in several capacities,
including President and Chairman. Mr. Rains became a Certified Value Specialist in 1988 and is
currently a Life - CVS. He was elected into the SAVE International College of Fellows in 2002. He is
Chairman of the Board of the Lawrence D. Miles Value Foundation Board of Directors and serves on its
Executive Committee.
Jim has facilitated over 750 projects over a 32 year period. Just in the past ten years he has worked with
over 50 different top global companies. These projects conducted in 15 different countries obtain
significant results by adding value and profit for manufacturing businesses. In addition he has achieved
superb results for US government projects and international construction projects.

Abstract
The primary objective of function analysis is to find the functions/areas of the project that have the best
opportunity to improve value, or in other words which functions should be worked on in the creative phase.
The early VA/VE pioneers like Larry Miles and Carlos Fallon discussed the worth of functions. Later it
seems that the value index formula used today derived from their thoughts, with Don Parker for one,
contributing to its use. For many years people have tried to use the value index as a way to determine
those functions. The value index is defined as a ratio that expresses function cost to function worth.
Function cost is determined during the function analysis phase by allocating cost of the elements of a
project across the functions that each element performs. The result is the total cost of each function in
the project. Function worth is defined by SAVE as the lowest overall cost to perform the function without
regard to criteria or codes. The recommended ways to determine function worth will be discussed in this
paper, but it is the authors opinion that none of the recommended methods offer a real value to the VM
practitioner. In fact, in most cases it leads one to make an error in which functions should be a priority in
the creative phase.
Thus the purpose of this paper will be to:

present the facts on the value index,

understand function cost,
understand function worth,
present the authors method of determining the best functions to carry into the creative phase,
conclude that the value index should be a thing of the past and go away, as it really offers no
value to the practitioner.

Introduction
The main purpose of the Function Analysis Phase is to identify the areas that have the best
opportunity to improve value. Function allows the viewing of a product, process or service objectively
in terms of what it does, and must do, rather than in terms of what it currently is. Function allows people
of diverse technical backgrounds, the key decision makers, to communicate and understand each other

and the product, process or service simply and clearly in a common language void of technical jargon.
Thus regardless of ones technical background the people that participate together in a value study will
gain a common understanding of the project they are engaged in. This common understanding is a key
benefit of the Function Analysis Phase.
Function evaluation is the heart of Value Analysis. While the techniques of cost visibility identify high cost
areas, function evaluation techniques make clear, by relating cost to function, what part of high cost is
unnecessary.
Value Analysis is not a simple formula, but rather a skillful application of recognized techniques that
require initiative, creativity, new knowledge and past experience to get appropriate costs for needed
functions. It needs to be noted that the Techniques of Function Evaluation apply equally to products and
services, manufacturing processes and paperwork systems.
There are four main steps to the Function Analysis Phase:
Random Function Identification
Function Analysis System Technique (FAST) Diagram
Cost to Function Allocation
Calculate the Value Index
This paper will discuss the final step of the function analysis phase: the Value Index.

History of the Value Index

The history of the value index is not exactly clear. I believe this is true because like many new techniques
it sort of evolved from early value analysis pioneers. Perhaps its start was with Larry Miles, the Father of
Value Analysis. In Larrys book, Techniques of Value Analysis and Engineering (page 44), he states
Establishing a value of a function is one of the new techniques offered by the value analysis system. In
this context value means the lowest cost that would provide a function with the qualities and
specifications with which the customer wants it to operate. This value in dollars and cents then becomes
a guide and measure. It indicates the approximate cost that should be accepted for the function in
decision making. Further in Miles book (page 49) for each functions present cost, it seems his teams
estimated a required cost.
Later in Value Analysis Carlos Fallon wrote about value. After significant research he found the answer
was incredibly simple. On page 33, he states, The customer, who offers money in exchange for a
product, determines the exchange value of that product by the same amount of money he is willing to pay
for it.
The Index of Value is a term used in the table below from page 34 of Fallons book. I am not certain that
it is specific to function despite that the first column states calculating that the function is. In fact clearly
in the text that Fallon wrote about this chart refers to products. Later in Fallons book he mentions what
should a function cost, but there is no mention of the value index as we know it today.
I also find it interesting that it is not defined in his book on how to determine the worth. It just seems to be
an individual customer perception of personal worth. This makes it very difficult to make objective
conclusions without extensive customer data.

In an email while preparing this paper, Don Parker writes, Fallon favored worth/cost so that the decimal
results could be compared with each other and the one closest to 1.0 would be the better value. Author
note: that this is not function worth and function cost as the current value index definition uses.
I advocated to change this around so that the value index would be cost/worth as shown on page 30, of
VE Theory published in 1977. By having an index of say - 1.88, I thought it easier for one to visualize and
say that there was a potential for 88% improvement in comparison to an index of 1.63 indicating potential
for a 63% improvement. The same indexes done Fallon's way would be 0.12 and 0.37 which is harder for
me to reflect on. I had specific discussions with both Miles and Fallon regarding this and they both fully
reviewed, edited, and approved the VE Theory text.
I agree with Don Parker and prefer the equation:
Function Cost
Value Index

Function Worth

Don also writes in, Value Engineering Theory (page 30). Remembering that cost and worth are related
to functions rather than items, the index serves to:
1. Assist in determining whether to proceed with the value study. The study should proceed only if
poor value, indicated when the value index is grater than one, exists. Good value is indicated
when the index is one.
2. Locate areas where cost/worth ratio is the greatest. Generally these areas will have the greatest
VE potential and are useful items for VE study.
3. Provide a factor for measuring the effectiveness of any VE efforts. Did the ratio approach unity
after the VE effort?
According to the SAVE International Value Methodology Standard and Body of Knowledge the current
definitions are:
VALUE INDEX: A ratio that expresses function cost function worth. This ratio used to determine the
opportunity for value improvement which is usually identified in the Function Analysis
Phase.
FUNCTION COST: The expenditure of resources to perform the function.
FUNCTION WORTH: The lowest overall cost to perform a function without regard to criteria or codes.
AUTHOR NOTE: This is radically different than the definition used by Miles.

Understand Function Cost

It is this technique that identifies where unnecessary cost exists within the study item. Note that not all
projects use cost function relationships, however this relationship is the most common. Other projects
can be function relationships to time, mass, weight or even a quality metric. Construction relationships to
function can be space, profit, revenue, cost per unit of measure or even a LEED metric. The common
numerator in all of these relationships is function.
A Cost-Function Worksheet is used to help develop this technique.
1. Start by listing all functions between the scope lines across the top of the form
2. List the parts or major sub-assemblies down the left-hand side of the form with the associated
incremental costs.
3. Check off which function or functions are impacted by each part or sub-assembly.
4. Determine how much of the cost of the part or sub-assembly belongs to each function.
5. Add all columns vertically to determine how much cost is allocated to each function.
These same steps are used regardless of the type of study. For example in a construction project the
detailed cost estimate is used in the same manner as a detailed parts list.
According to the 1984 SAVE Conference Proceedings, Thomas F. Cook, CVS wrote: Significant benefits
come from function cost allocation. They are:

1. Understanding: Until a team struggles through cost allocation decisions, it will have an imperfect
understanding of the functions involved.

2. Detailed Analysis: A team is forced to go into every nook and cranny of the design and force each
element of the product or process to justify its existance.

3. Overview: At the end of the function cost allocation, the team sees the overall view of where the
costs are by function.

4. Creativity: The teams subconscious mind is loaded with very usable data for later creativity and
is now prepared to determine value mis-match.
To not do cost function allocation in any VE study in my mind simply isnt VE. The learning and
understanding that happens across every team member significantly helps them in the creative phase,
where the ideas that eventually get implemented come from.

Understand Function Worth

How Do You Determine Function Worth? The best method is to develop an historical database with cost
detail by function. Many Japanese companies over the past 40 years have developed an historical
function cost database that is detailed and extensive. In fact many have developed cost algorithms that
are computerized and integrated with their CAD systems to assist designers to know what costs they are
creating when they create them. This method is by far the best way to determine the lowest possible cost
to perform the function. Other methods can be used, but none are as useful as the Japanese method:
Cost of an alternative
Costing software
Cost reference books

VE team member experience

Cost estimator experience/expertise
Target based on historical savings from past VE efforts
Based upon the budget
In most cases the Value Index should be determined at the system level or product level. Only when
extensive cost detail is available can the value index be used at functional levels. In this case only the
predominant cost drivers (functions) are used.

How the Author Determines the Best Opportunity to Improve Value

To state exactly what I believe: calculating function worth and thus the value index is a waste of time and
often leads a team in the wrong direction. First let me show you an example from Don Parkers book,
Management Application of Value Engineering. On page 92 the following chart is displayed to show the
time allocation, function worth and value index calculations.

The text in the book stated that the team worked on the two highest value index functions; Find Records
and Admit Patient. While I am not sure exactly how the team determined the function worth, I do know
they neglected the highest cost function which is Store Data. This function also had the highest
variance between the time allocated to that function and the estimated time for the function worth.
The table below shows the time differences.

Thus I feel by only looking at the value index as a method of determining which functions should receive
attention during the creative phase is a big mistake. There may be functions that need to be improved
regardless of their cost or value index.
To help explain my method I need to show an example of a costed FAST diagram of a high tech
instrument cluster that is used in an instrument panel (dash board) of a new vehicle. Note that the costs
have been converted to percentages to disguise the manufacturers real costs.

Based on the team objectives that almost always includes cost reduction, performance issues, quality
issues and customer issues it was decided to select the following functions for the creative phase.
Improve appearance 16.6%
Join shapes 6.3%
Transmit power/signals 8.1%
Control operation 6.1%
Transmit/Direct light 6.4%
Indicate position 9.7%
Thus just these six functions (out of a total of 38) totaled 53.2% of the total cost. It must be stated that
since other functions are caused by or happen the same time as some of these functions and there are
several lower order functions that will be impacted by how these functions are performed, the real
impacted cost is much higher. It took less than 5 minutes for me to decide with the team which functions
to focus on in the creative phase. The team results from the study were tremendous. Since the company
that did the study was just in the early design development phases they were competing with other
suppliers to gain this business. With the results of the study the automotive supplier was able to offer the
customer a more competitive quote that eventually earned them the new business. The summary of the
results were:

What is the Value of the Value Index?

I truly believe the calculation of the value index is a waste of time. I make this bold statement for the
following reasons:
1. The SAVE definition of function worth really makes the calculation useless. To determine the
lowest possible way to perform the function and not care about its feasibility is really not practical.
The time spent to look at lower cost alternatives should be spent in the creative phase of the job
plan, not in the function analysis phase.
2. I have yet to see an adequate method to determine function worth. Yes, I know there are some
Japanese companies that have maintained a detailed cost database by processes, parts and by
function, which is great, but the fact is that except for perhaps a maximum of two dozen
companies in the world, such a cost database does not exist.
3. Whenever, I see people present papers that calculate the value index (although there are few), I
always ask how did they arrive at the function worth figure. I have yet to hear a reasonable
answer.
4. The method that I use to decide which functions offer the best opportunity to improve value takes
a maximum of five minutes when looking at the costed FAST diagram. By knowing the teams
objectives that are established in the information phase, we know which functions need to be
worked on to improve the numerator of the value equation. (Value equals function divided by
cost.) I will direct a team to be creative on those functions regardless of their cost. Then of
course, I look for the high cost functions.
5. By strategically picking functions to brainstorm, like critical path functions, the ideas developed for
a critical path function will also relate to most if not all of the functions that are caused by or
happens at the same time as those functions.
It seems I was never taught the value index in the many Module Is that I attended as an employee of
General Motors back in the early 1980s. Now I only teach the value index because it is included within
the SAVE certification exam. If it was not in the exam, I would not teach it.

References
Management Application of Value Engineering, Donald E. Parker, Miles Value Foundation, Page 92
Value Engineering Theory and Practice in Industry, Thomas R. King, 2000, Miles Value Foundation,
General reference
Value Analysis, Carlos Fallon, 1986, Miles Value Foundation, Pages 33 - 34
Value Engineering Theory, Donald E. Parker, 1977, Miles Value Foundation, Page 30
Techniques of Value analysis and Engineering, Lawrence D. Miles, 1989, Miles Value Foundation, Pages
44 and 49.
Module I Workshop Workbook, James Rains, Pages 30,44,45.
Welcome to Value Analysis and Value Engineering Thomas F. Cook ,1984 SAVE Conference
Proceedings