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Transcript of Chapter 11 Cost Management ©McGraw-Hill Education. All rights reserved.
©McGraw-Hill Education. All rights reserved.
Chapter 11Cost Management
Key Questions Addressed in Chapter 11
• How can cost management and negotiation tools help identify opportunities and assure value?
• How can we determine – the supplier’s costs? – deliverer’s cost? – our own use costs? – disposal costs?
Strategic Cost Management
• An externally focused process of analyzing costs in terms of the overall value chain– A continuous improvement process– Measure and improve specific cost elements– Tools and techniques to sustain cost savings year over year– Strategic partnering to achieve competitive advantage– An opportunity for strong supply leadership to develop a cost
culture rather than a price culture with multiple internal stakeholders and suppliers
ABC or Pareto Analysisand Cost Management
• Assign items to A (high-dollar), B (medium-dollar), or C (low-dollar) category
• A items = greatest percent of annual spend • Cost management approach for A items:
– More time and managerial attention– Understand supplier’s cost structure – Identify opportunities for supplier or joint buyer-
supplier initiative to eliminate, reduce, or avoid costs in any cost elements (materials, services, labor, and overhead)
©McGraw-Hill Education. All rights reserved. 5
Portfolio Analysis
non-criticalitems
bottleneckitems
strategicitems
leverageitems
Value
Ris
k
Low
High
High
Low
©McGraw-Hill Education. All rights reserved. 6
Major Categories for the Components of Total Cost of Ownership
Pretransaction Components• Identifying need• Investigating sources• Qualifying sources• Adding supplier to internal
systems• Educating:
–Supplier ins firm’s operations
–Firm in supplier’s operations
Transaction Components● Price● Order
placement/preparation● Delivery/transportation● Tariffs/duties● Billing/payment● Inspection● Return of parts● Follow-up and correction
Posttransaction Components● Line fallout● Defective finished goods
rejected before sale● Field failures● Repair/replacement in field● Customer
goodwill/reputation of firm● Cost of repair parts● Cost of maintenance and
repairs
Total Cost of Ownership
Source: Lisa Ellram, “Total Cost of Ownership: Elements and Implementation,” International Journal of Purchasingand Materials Management, Winter 1993.
©McGraw-Hill Education. All rights reserved. 7
Target Costing Example
Future Market Price – Desired Profit = Target Cost
Current Price
Par
t/S
yste
m P
rice
Verified By Cost Standards
Target Cost
Desired Profit
CurrentCost
ComponentTarget Costs
A
B
CPurchased Component Part Level Costs
Internal Costs
>
Current Profit
Model-to-
ModelChange
Adjust for Spec. Differences
Value Expression
• Value can be expressed as:
VALUE = Function Cost
– Function = a noun-verb combination (e.g., holds liquid)
Activity Based Costing
• Tries to turn indirect costs into direct costs by tracking the cost drivers behind indirect costs
• Manufacturing overhead is divided into:– costs that change in response to unit-level activities– batch-level activities– product-level activities– the remainder are true fixed costs and are allocated
according to traditional cost accounting
Negotiation
• The most sophisticated and most expensive means of price determination
• A difficult art requiring judgment and tact• An attempt to find an agreement that allows
both parties to realize their objectives• Requires the buyer and supplier, through
discussion, to arrive at a common understanding on the essentials of an issue