Processes and tools for Cost Management are abundant and diverse. When explaining to someone what I do, and the cost management toolkit I employ, people will ask me what is different with my toolkit… and I can usually hear them think “We already have all sorts of cost management tools and processes in place here… Please don’t tell me I need more!” Well, the reality is that cost management is a broad issue that cuts across all areas of an organization and that gets more or less emphasis (based on market conditions) at virtually all phases of an asset lifecycle. We tend to only know of a few cost management processes or tools based on the area or function we operate in, so I wanted to look at the big picture and provide an inventory of the various cost management processes and tools out there. Hopefully this will be an eye opener for you as much as it was for me!
Here at Anklesaria, we tend to focus on helping companies manage their supply chain costs. This makes sense to us because the cost of purchased goods and services usually makes up 50 percent or more of the cost of sales of a typical manufacturing business (this proportion is a bit less for a service business but still significant). The Procurement or Supply Management organization should therefore be perceived as a significant contributor to the company’s cost management approach.
Because of the cross-functional nature of supply chain management and the push for competitiveness on cost in virtually all industries, we often interact with existing value improving practices that are driven from outside of the Procurement or Supply Management organization (which is often the customer who hires us in the first place). Oftentimes, I find that the Procurement or Supply Management team I work with is not familiar or well-equipped enough with these processes and tools, in order to add value to the conversation of value improvement with their non-Procurement stakeholders.
So here we go…
Starting from the top of my tile diagram above, I find it useful to differentiate between cost management that is performed during the development of an asset and cost management that is performed (whether it produces goods or services). Some cost management processes and tools can actually work well in both phases - they may not differ much in principle between the phases -, however I notice that the pace, scope and rigor of their implementation is quite different, and the persons employing them tend to specialize in only one of the two phases.
The development of an asset is normally labelled as a “Project” and well-established project management practices nowadays include cost management as a discipline, or thread, that expresses itself throughout the project’s lifecycle. Dedicated and specialized Cost Engineers are assigned to perform cost management exercises or employ value improving practices. The objective is generally to place the business asset being built on a path that will achieve the lowest lifecycle cost, as illustrated by the diagram below.
While well-intended in practice, there is a limit to how far the “lowest life-cycle cost” objective can be achieved, simply because various options that may play out in the future while the asset is producing are yet unknown. I also notice that the larger the project, value and duration-wise, the more likely this “lowest life-cycle cost” intent disappears, as project budget and schedule pressures become the primary drivers and the long-term view is traded for these shorter-term objectives.
The cost management processes and tools employed during the development of an asset, which may include creating, modifying, maintaining, or decommissioning an asset, are usually part of the project controls, or cost engineering activities of the project. The standard concepts and tools are:
The typical cost management processes and tools employed during the operating life of an asset, some of which are part of a strategic asset management process, are:
I am sure you have identified a few processes and tools that pique your interest and I wish you good further reading as you dive into more details. Cheers!
Note: Let me know in the comments section below if I have missed anything and I will update this article as I receive feedback. Note that, as a rule, the hyperlinks to definitions I provide in this article only point to Wikipedia articles. This allows for the article to remain relevant over time.
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