vrijdag 26 november 2010

Should Cost Modeling Philosophy

Note: in this article SCM refers to Should Cost Modeling (and not to Supply Chain Management)

The subjects I write about on this blog will be about Supply Chain Management, Procurement and other related topics. In my previous article I wrote something about the cost-perspective on procurement. Part of the article was about Should Cost Modeling. In this article I will elaborate somewhat on Should Cost Modeling. It Is a broad and varied but sometimes unclear topic, therefore. I’m planning to right regularly on topics of Should Cost Modeling on this blog like the different methods which can be used, practical examples of Should Cost Modeling or how a Should Cost price can be used. These topics may not appear in a logical sequence, it just depends on how much time I have to write, and which topic I’d like to write about at that moment. Therefore I’ve decided to start with the topic about ‘my philosophy’ on should cost modeling, which can be used as an overview in which the expected detailed articles can be placed.

To go straight to the point, figure 1 represents schematically my SCM-philosophy. Further on each aspect of the schematic representations is briefly clarified.

Figure 1: SCM-philosophy model

In figure 2 you see the first part of the model depicted in figure 1. It is called 'data sources'. It is the information/data-pool. The information required for the should cost model is gathered here. There are no restrictions in the types and amount of information you will use. Of course you should consider whether the benefits of certain information will outweigh the costs to extract that information.

Figure 2: Data sources
Next (figure 3) you see the second part of the model in which the methods are depicted.  The methods are the 'tools' which can be used to extract information from the pool of information mentioned above. The links represented between the methods mean that several tools can be used at the same time, in combination, sequential and in a complementing way. The methods self will be discussed in a later article(s).

Figure 3: Methods

Is taking just one method (or using one tool) in figure 3 not useful or valuable? No…this is not the case, because sometimes triangulating, using multiple sources etcetera, is simply not an option and then you can only rely on one method.
It is dependent on many factors like:
-          Which information is present?
-          What is the cost of new information
-          Which resources do I have available? (time, money, personnel)
-          What is the end-purpose? Cooperation with supplier? Negotiating?
-          Etc.
This article discusses just the superficial philosophy, but as will become clear in later articles, there are many considerations to make when applying a should cost model.

In figure 4 the supplier's quotation is depicted, this is the 'object of investigation’: What is the quotation of the product? How does the production process looks like? Where is value added? Which costs are present and why?

Figure 4: Supplier's quotation

In the last step, depicted in figure 5, you actually combine all information gathered in the left half of the figure and compare it with the information gathered in the right half of the figure 3. Are those costs reasonable? Why do other suppliers have higher/lower costs? Where are opportunities for reduction? Etc.

Figure 5: Should cost modeling

In figure 5 two two-sided arrow are depicted, because it is not a neat sequential process, it is a process of back and forth between the supplier and the ‘information pool’. It is finished when you think it’s finished, or better: when you are satisfied with the results.

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