Page 69 - Design for Six Sigma for Service (Six SIGMA Operational Methods)

50 Chapter Three

be converted to dollars. We can say that all these definitions converge to the
denominator that is a measure of cost. The numerators converge to a
measure of functions, or performances. Therefore in value engineering,
value is measured primarily as a function-to-cost ratio. A product with better
functionality and lower cost gives a higher value.

In value engineering, if a product or method can accomplish a given
function with the lowest cost compared with all competitors, then this
product or method is called the best value. Clearly, a higher function-to-
cost ratio is important for increasing value in the eyes of customers.
However, in this author’s opinion, the function-to-cost ratio alone is not
sufficient to provide an adequate measure for customer value for the
following two reasons:
1. It is a convention that people also like to measure value in dollars. In value
engineering, sometimes the best value of a function is also defined as the
lowest cost to accomplish that function, that is, in dollars. But this def-
inition is not consistent with the definition that value is function divided
by cost. (Does this imply that function has the unit of dollars squared?)
2. There are many cases where two products have exactly the same
function, but people are willing to pay different prices for them. For
example, the Toyota Corolla is actually exactly the same car as the
GEO Prizm, but people are willing to pay $300 more to buy a Toyota
Corolla. As another example, the same item in a neighborhood con-
venience store will usually sell at a significantly higher price than that
in a large discount chain store. So the function-to-cost ratio alone
cannot explain the value in the eyes of customers adequately.

Sherden (1994) and Gale (1994) provided a broader definition for customer
value. In their view, the customer value is defined as perceived benefit
(benefits) minus perceived cost (liabilities), specifically,
Value = benefits – liabilities
The benefits include

1. Functional benefits
a. Product functions, functional performance levels,
b. Economic benefits, revenues (for investment services)
c. Reliability and durability
2. Psychological benefits
a. Prestige and emotional factors, such as brand name reputation
b. Perceived dependability (for example, people prefer a known-
brand product to an unknown-brand product)