Lecture 5-Cost management

Introduction of cost management

1. Value equation
Value=(quality×service)/(cost×cycle time)
2. Cost management
Advantages of cost management
3. Strategy cost management (vs. Traditional cost management)
4. Cost management in strategic procurement
 Planning and forecasting
 Strategic sourcing
 Negotiation
5. Cost management through product life cycle
 Ideation
 Production
 Manufacturing
 After sales service
 Product end-of-life
6. Kraljics matrix
Leverage items
Strategics items
Noncritical items
Bottleneck items

Price/Cost analysis techniques

1. Cost based pricing models
 Cost markup pricing model
 Unit selling price=unite cost of product+( markup%×unit cost of production )
 Margin pricing model
 Profit margin=selling price-cost of goods sold
 Unit selling price=unit cost of product/(1-margin%)
 Rate-of-return pricing model
 Unit selling price=unite cost of product +per unit ROI
2. Reverse price analysis
3. Long run cost theory
 Economies of scale
 Learning effect
 Economies of scale vs. Learning effect
 SRAC curves along the LRAC curve
 U-shaped LRAC curve
4. Activity-based costing(ABC)(vs, traditional costing)
 Common activities
 Associated costs
 Cost driver
Step 1: Identify costly activities required to complete products and assign overhead costs
 to the activities identified
Step 2: Identify the cost driver for each activity
Step 3: Calculate a predetermined overhead rate for each activity.
Step 4: Allocate overhead cost to product
5. Cost to serve
 Cost optimization
 Best practices
 Price waterfall analysis
6. Total Cost of Ownership (TCO) Analysis
 The Iceberg Principle
 Opportunity Cost
 6-Step TCO Analysis
 Define the Procurement
 Determine Cost Elements
 Determine the Metrics
 Gather Data and Quantify Costs
Develop Cost Timeline
 Bring Costs to Present Value
 Factors to Consider in TCO Analysis
7. Break-even Analysis
 Insights from Break-even Analysis

Collaborative Cost Management (CCM)

1. Target Pricing / Costin
3 Premises
 Orienting products to customer affordability or market-driven pricing
 Treating product cost as an independent variable during the definition of a
product’s requirements
 Proactively working to achieve the target cost during product and process
development
2. Target Costing vs Cost Based Pricing
3. Cost-savings Sharing
Cost Plus Incentive Fee Contracts