Functional Cost Modeling

There are two pieces to a Functional Cost Model.  The first is the Functional Model of the product or process.  The second is a comprehensive cost analysis which includes material, labor, allocated expenses, allocated assets, production processing and supporting processes, outsourcing, shipping, installation, service, warranty, and end of life.  After these two components have been created blending them together yields the Functional Cost Model.

The Functional Model
A functional model comprises the Prime Function, Tier 1, Tier 2, and in some cases Tier 3 sub-functions.  The Prime function for a product, or a service, describes in 10 to 15 words or less just what the product or the service is supposed to do.  Once that “What” for the prime function has been nailed down then the question becomes “How” is the “What” achieved.
The Tier 1 functions provide how statements required to achieve the prime function.  Then the Tier 1 functions become the “What” has to be achieved and the Tier 2 functions provide the how statements.  This “What” “How” relationship continues until the functional tree is completed.



For processes the functional tree usually gets to the third tier where the process steps are reached.  For products the tiers may go beyond the third tier, or as far as needed until the BOM elements, production process steps, systems, installation processes, or servicing processes are reached.  The BOM elements can be a system, sub-system, or an individual component.

Comprehensive Cost Analysis
If a process is being analyzed each step in the process requires a complete cost breakdown from the customer demand for the service to final delivery of services and any remedial activities.
If a product is being analyzed the data includes all of the costs from product conception to end of product life.  The complete supply chain must be considered.  All outsourced activities must be considered.

Functional Cost Model
The final step in Functional Cost Modeling is gluing the Functional Model and the Comprehensive Cost Analysis together.  Costs are assigned to the Functional Model at the appropriate level whether BOM, process, system, sub-system, or other activity.
Once the functional cost model is complete, roll up the costs, look for the high cost functions, and then attack the high cost functions for possible ways to reduce the costs.  The functional requirements for a product or a service are driven by the voice of the customer.  How we choose to deliver those functions is where the creativity comes into play with the design and thus the cost.
The functional cost model is the basis for the Product Cost Reduction Process and Process Design for Six Sigma.