Cost Drivers Learning Event, 2 nd November 2005 Costing - The Future! A Research Overview By Rob Pease

Cost Drivers Learning Event, 2 nd November 2005 Aims Project Background The Need for change in manufacturing cost systems Addressing the Inadequacy

Cost Drivers Learning Event, 2 nd November 2005 Vision for Manufacturing! Global World: acceptance of high speed communication. A world of : Agility, Pseudo Companies, Data Warehouses and Reverse Auctions. Paradigm Shift Traditional vision: Continue in same form with strategy for competition based solely on CI and Kaizen etc.

Cost Drivers Learning Event, 2 nd November 2005 Cost System Development A Four Stage Model 1. Broken 2. External 3. Specialised 4. Integrated

Cost Drivers Learning Event, 2 nd November 2005 Some Questions Why do we allow so much obvious waste? Why don’t we successfully undertake TPM? Why don’t we always see benefits of CI activities?

Cost Drivers Learning Event, 2 nd November 2005 Reason THE COST SYSTEM IS INADEQUATE!

Cost Drivers Learning Event, 2 nd November 2005 Example 1 of Cost Issue: Lost Flexibility Lost know-how Lost I/P Lost Skill base Cost of machinery Cost of manpower Cost of consumables Compare: Tool Room vs. Buy In!

Cost Drivers Learning Event, 2 nd November 2005 Example 2 of Cost Issue: Cut Advertising Budget by 30% Delay R&D Projects Stop Employee Travel Compare: Cost Cutting! Lost Sales Impact?

Cost Drivers Learning Event, 2 nd November 2005 Changing Market Place Price = Cost + Profit Profit = Price - Cost

Cost Drivers Learning Event, 2 nd November 2005 Non-value add but required (include sustaining costs?) Value adding core of activities Market-Defined Price Barrier Profit Waste Profit Squeeze Adapted from C.J.McNair - Taking the Profit Potential

Cost Drivers Learning Event, 2 nd November 2005 Product Profitability - Whale Curve Effect Products Total Profit Margin (%) Cumulative Profit (%)

Cost Drivers Learning Event, 2 nd November 2005 Information Cost and Value vs.Time Value of information Cost of maintaining and gathering information Time £ + 0

Cost Drivers Learning Event, 2 nd November 2005 The Pen Manufacturer Plant 1 Throughput 1 million per year Product : –Blue Pens (1000K) Plant 2 Throughput 1 million per year Product : –Blue Pens (100K) –Black Pens (60K) –Red Pens (12K) –1000 variants of Speciality Pens (100K to 500)

Cost Drivers Learning Event, 2 nd November 2005 Overhead Scheduling Expediting Set-Ups Consider: Plant 1 vs. Plant 2 Inspections Material Movement B.O.M’s to Maintain

Cost Drivers Learning Event, 2 nd November 2005 Cost Distortion Overhead Allocation By Unit level bases: Assume all products consume the same labour, material and machine hours Blue Pens will be allocated the same overhead as lilac (low volume) pens! Direct Labour Hours Machine Hours Material unit Costs

Cost Drivers Learning Event, 2 nd November 2005 Examples of Cost Management Tools Target Costing Constraint costing Lean costing

Cost Drivers Learning Event, 2 nd November 2005 Lean Costing Product B Total 24 mins Product A Total 12 mins

Cost Drivers Learning Event, 2 nd November 2005 Conclusion The Business environment is changing at an accelerating pace The future holds challenges to the way we do Business There are new methodologies for cost Management Those who fully understand their costs have the best chance of success