UNIT 5 - Cost Management in Supply Chains Flashcards
What is cost accounting?
Accountants collect info from business activities and resources consumed, and then allocate them to organization units in order to analyse them. This traditional approach has to be complemented by pro-active approaches for a true management of costs.
What is Costs management?
represents the pro-active, long-term oriented influencing of costs. It focuses on three interrelated aspects:
- Managing cost levels: How high are costs and how can they be reduced?
- Managing cost behaviour How do costs change if the activity level changes?
- Managing cost structure: What is the mix between direct and indirect costs?
Collaborative cost management
Total cost of ownership are directly influenced by partners (not only on purchase price). Trough collaboration, SC partners can decrease total cost across all partners and consequently improve SC competitiveness:
- Focus on processes: Agree on shared standards, resources and define interfaces to make processes more efficient.
- Focus on customer: Avoid steps and product features that benefits one partner, but are not valued by final customer.
- Focus on TCO: Consider cost in later phases of the product’s life cycle.
Fundamental role of collaborative cost management for several core tasks in the SC
- Supplier evaluation and selection of supply whose business processes allow a cost-efficient market offer.
- Pricing and offer calculation in order to guarantee competitive final product.
- Product design: partners need to identify opportunities for cost optimization at an early stage in the product life cycle.
- Product mix selection (drop/add) depends on SC partner’s ability to reach or keep cost under control.
SC cost management tools
- Development phase: Meeting customer’s expectations in terms of costs and benefits
- > Supply chain target costing.
- Market phase: Offer must be continuously optimized in terms of costs and benefits across the supply chain. -> Process-based costing in SC
- Service phase: Offer must be priced considering all following cost and revenues in the SC -> Life Cycle Costing in the SC
SC cost management tools:
1. SC target costing
Determining a cost target that is based on customer’s willingness to pay: Factors willed to pay –> Traditional costing accounting.
The product benefit is a different product characteristic that contribute to total benefit.
This helps to identify overvalued, importance, level of benefit of each characteristic.
A potential cost gap can be best identified by benefit contributions and drifting (useless) costs.
SC cost management tools:
2. Activity- and Process-based costing:
a. Activity-based costing (ABC) focuses on activities as fundamental cost object (the input does not cause costs, only the activity using inputs does it).
Example: indirect labor -> maintain machines-> €/maintenance hour -> Cost object (Direct cost)
b. Process-based costing in SCs: Coordination cost that arise when managing transaction between SC partner organizations -> SC-specific costs!
PBC allows better cost allocation, more cost tracing; also, it provides a basis for process-based performance measures, and tools of cost management that identify inefficient activities.
SC cost management tools:
3. Life cycle costing (LCC):
Consideration of decisions that have cost and revenue effects across several periods. (From initial Development to end of its useful life).
Different periods are incurred by different SC partners.
E.g. R&D-Market research -> Production-Machines, plants -> End of Life-Waste-collection by the customer/user.
Collaborative cost management initiatives across SC partners work best if there is:
- Trust: able to share info.
- Strategic focus and volume: Long-term partnership and permit occasional dealings.
- Info: exchange of cost info to identify cost optimum (“open book accounting”).
- Cooperation mechanisms: compensate each other for efforts of cost reductions.
