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CHAPTER 11 Strategic Cost Management - Coggle Diagram
CHAPTER 11
Strategic Cost
Management
A Structured Approach to Cost Reductiontext
Value analysis
Process improvements
Standardization
Improvements in efficiency using technology
Price Analysis
Pricing Strategy of the Seller
Using the Producer Price Index to Manage Price
Producer Price Index (PPI)
Market Structure
Monopoly
Oligopoly
Perfect competition
Economic Conditions
Conditions favorable to supplier
Conditions favorable to buyer
Market-Driven Pricing Models
Price volume
Market-share model
Market skimming model
Revenue pricing model
Promotional pricing model
Competition pricing model
Cash discounts
Cost Analysis Techniques
Cost-Based Pricing Models
Cost markup pricing model
Margin pricing model = Cost ÷ (1 – margin rate) = unit selling price
Rate-of-return pricing model
Product Specifications
Custom design and tooling increases product costs
Standardized components helps reduce product costs
Estimating Supplier Costs Using Reverse Price Analysis
Cost Analysis
Direct function of the quality and
availability of information
Techniques
Reverse Price Analysis
Also known as “should cost” analysis
Break down cost into basic components
Reverse Price Analysis
Opportunities for Cost Reduction
Plant utilization
Process capability
Learning-curve effect
Supplier’s workforce
Management capability
Supply management efficiency
Insights from Break-Even Analysis
Assumptions of Break-Even Analysis
Break-Even
Net income (or loss) = P(X) - VC(X) - FC
P = average purchase price
X = units produced
VC = variable cost/unit of production
FC = fixed cost of production
Net income = $0 at break-even point
Building a Should-Cost Model
Cost = Price – Profit
Net sales = Gross sales – Returns and discounts
Cost of goods sold = Material + Direct labor + Factory overhead
Gross profit = Net sales – cost of goods sold
Steps to a Should-Cost Model
Conceptual design
Refine and derive elements of the cost model
Design and construction of the model
Identify data sources for the model
Total Cost of Ownership
Building a Total Cost of Ownership Model
Map process and develop TCO categories
Determine cost elements for each category
Determine how each cost element is to be measured (metrics)
Gather data and quantify costs
Develop a cost timeline
Bring costs to present value
The Importance of Opportunity Costs
Lost sales
Lost productivity
Downtime
Example of a TCO Model
Total Cost of Ownership (TCO)
Purchase price : Invoice amount paid to supplier
Acquisition costs : Acquisition costs
Usage costs : Conversion and support costs
End-of-life costs : Net of amounts received/spent at salvage
Collaborative to Cost Management
Target Pricing Defined
Used early in new product development
Sales price – Profit = Allowable cost
Gap in cost becomes cost reduction goal
Cost-Savings Sharing Pricing Defined
Sharing of continuous improvement benefits with supplier
Financial incentives to supplier to pursue cost reduction
Prerequisites for Successful Target and Cost-Based Pricing
Agreement on supplier’s full costs
Built upon high degree of : Trust, Information sharing, Joint problem solving
Need to manage risks associated with target pricing
When to Use Collaborative Cost Management Approaches
Not appropriate for all items
Complex, customized items
Supplier contributes high levels of value-added
An Example of Target Pricing and Cost-Savings Sharing
Good Practice Example: A Computer Manufacturer Brings in the Voice of the Customer and the Voice of the Factory
The Value Equation = ( Quality + Technology + Service + Cycle Time ) / Price
Strategic Cost Management Processes
Value analysis/Value engineering
On-site supplier development
Cross-enterprise cost improvement
Joint brainstorming
Supplier suggestion programs
Supply chain compression
Strategic Cost Framework
Generics
Total delivered cost
Automate to reduce purchasing involvement
Unique products
Cost analysis and reverse price analysis
Standardize requirements
Commodities
Leverage preferred suppliers
Price analysis using market forces
Critical Products
Cost analysis
Collaborative cost-reduction efforts focused on total costs