Chapter 11: Strategic Cost
Management
Structured approach
to cost reduction
Price analysis
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Total cost
of ownership
Cost Analysis Techniques
The Honda Business
Modelfor Suppliers
100% understanding of all components
of product cost
Lean supplier development concurrent
engineering
Flawless new product launch
and Communications
Price analysis
Cost analysis
Total cost analysis
Process of comparing supplier prices against external price benchmarks without knowledge of supplier costs
Applies price/cost equation across multiple processes that span two or more organizations across a supply chain
Process of analyzing each individual cost
element that add up to final price
Cost Management
Approaches
Historical Cost
Reduction Approaches
Detail
Value analysis
Process improvements
Standardization
Improvements in efficiency using
technology
Strategic Cost
Management Processes
Managing Life
Cycle Costs
Idea/Concept Generation -> Design and Development-> Prototype, Pilot, Launch -> Ongoing Production -> Product End-of-Life
Strategic
Cost Framework
Market-Based Pricing
Monopoly
Oligopoly
Perfect competition
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§ Single supplier market
§ Unique product with no substitutes
§ Large barriers to entry
A few large suppliers
Many small suppliers
Price is solely a function of supply and
demand
Minimal barriers to entry
Economic Conditions
Market-Driven Pricing Models
Price Volume Model
Market-Share Model
Detail
Price volume model
§ Market-share model
§ Market skimming model
§ Revenue pricing model
§ Promotional pricing model
§ Competition pricing model
§ Cash discounts
Maximizing profit
Leveraging volume across units can yield savings in tooling, setup, and operating efficiencies
Long run profitability depends on level of market share obtained
Lower margins initially to increase market share
Eventually spreads out indirect costs over greater volume
Market Skimming Model
Prices set for high profit margins on each unit
May be used through “backdoor”
Need to carefully analyze price to ensure validity through greater benefits of product
Revenue Pricing Model: Obtain sufficient current revenue in market downturns
Promotional Pricing Model
Prices set to enhance overall product line profitability, not individual products within line
Need to utilize total cost of ownership (TCO) analysis
Competition Pricing Model: Focuses on reacting to actual or
anticipated competitor pricing
Cash Discounts
Incentives to buyer who pay invoices promptly
Usually worthwhile to take advantage of cash discounts
Relatively high return
Producer Price Index (PPI)
Appropriate for market-based products
PPI tracks material price movements on quarter-to-quarter basis
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Cost-based pricing models
§ Product specifications
§ Estimating supplier costs using reverse
price analysis
§ Break-even analysis
Building a Should-Cost Model 
Total Cost of Ownership (TCO
Detail
§ Purchase price: Invoice amount paid to supplier
§ Acquisition costs: Costs of bringing product to buyer
§ Usage costs: Conversion and support costs
§ End-of-life costs: Net of amounts received/spent at salvage
Opportunity Costs
Build 
Cost of next best alternative
Factors to be Considered in TCO
Detail
§ Use for evaluating larger purchases
§ Obtain senior management buy-in
§ Work in a team
§ Focus on big costs first
§ Obtain realistic estimate of life cycle
§ Use as a decision making tool
§ Consider all relevant costs in global sourcing throughout supply chain