COST MANAGEMENT BASICS
Cost Controlling
Agenda
2
• Cost Controlling Explanation• Decision Support• Data Required• Data Analysis• Requirements• Process Efficiency• Tools for Prioritization• Process Improvement• Dashboards• Control Budgeting
Cost Controlling Explanation
3
Cost Planning
Cost Controlling
Cost Analysis
Cost Accounting
Cost Management
Process
Full Cost Measurement– Accurate, timely and relevant data– Connecting operational output/performance
data to financial data– Allocate Overhead, Unfunded Costs,
Indirect Support
Cost Analysis– Variances– Trends and forecasting– Product, service or activity
cost by expense (labor, material, contracts, etc…)
– Understanding full costs of organizations, operations, products and services
Cost Planning– Operational managers
set cost targets and efficiency goals
– Plan cost based on outputs produced
Cost Management After Action Review–Commanders Lead:
1. How did you perform relative to your expectation?
2. What are you doing to improve?
Cost ManagementLeadership Driven Management
4
FM
OM
FM = Financial ManagementOM = Operational Management
Cost Controlling
• Cost Controlling means taking the “Best Value” and/or “Best Practice” actions to realign an organization to achieve the defined objectives
• Act based on Analysis• Adjust Targets• Update Resources• Enhance Efficiency• Execution of Trade-off
Decisions
Cost Planning
Cost Controlling
Cost Analysis
Cost Accounting
Cost Management
Process
5
Cost Controlling
• It is where the benefits of Cost Management are realized
• The step where leaders and decision-makers use the results of their cost analysis as decision support, implement the changes and enhancements that ultimately move us to a more efficient Army
6
Looking to the Future
As the Cost Module of GFEBS matures, Army leaders and decision-makers will have the information which will best facilitate the optimal use of scarce resources.
EFFECTIVENESS
7
Decision Support
8
Decision Support: What is it?
• Enables decision makers to make informed decisions that wisely and better utilize resources, and improve program and operational effectiveness.
• Objective and systematic way of collecting, examining, analyzing and reporting information to support decision-making• Conceptual way of thinking• Applies to all aspects of managing programs,
finances, and operations
9
What It Means To YOU!
Today there are challenges in all areas of the Department of the Army.
BUT!
There are also opportunities for those who are prepared.
10
What’s Different Today? The New Resource Environment
Focus on achieving and measuring results!
Organizations must demonstrate that they are getting results when preparing budgets and reporting
performance results
Congress is more interested in seeing results from public expenditures and meeting their expectations
Greater scrutiny is being applied to DoD programs as the defense budget continues to shrink
11
Focus Of Decision Making
Ask the Important Questions:• What should/needs to be done?• For whom?• Why is it important – what is the desired /
expected impact?• How should it be done?• By whom?• When?• At what cost?
12
Leading to Performance Management Decisions
Execute Goal/Objective
Programs Outcomes – Results
Customers Outputs – Products/Services Activities Inputs – Resources
Budget Key questions:
Is the resource being used having intended results/impact? Is the investment worth the results? How good is the management process?
13
How Is The Analysis Done?
A decision-maker should always know how an analysis is done in order to:
• Know how solid it is (i.e. Analytical Rigor and Completeness)
• Be comfortable with and be able to defend any decision made based on the analysis
14
Utilizing Decision Support
To be effective, analysts must:• Understand an organization’s business• Understand how analytic “need” relates to the
business• Apply sound, thorough analytical methods
specifically tied to the “need”• Provide useful information to support
decision-making
15
Basic Guidelines For Decision Support
16
• Ask questions; be willing to wonder• Define the problem/concern/question/need• Examine the evidence (i.e. data) • Analyze assumptions and biases• Be objective; avoid emotional reasoning• Don’t use either/or thinking; don’t over-
generalize• Consider other interpretations• Accept that there will be uncertainty/questions
Define Questions
• Critical starting point • Questions will drive the entire
analysis• Analysis must focus in on users’
needs. Some critical questions are:• The user’s business and their role
in it• What the user needs/wants to
know and why• How the results will be used for
decision-making• Thoroughness requires asking 6 key
questions = what, where, when, who, why, and how
17
Example: What Are The Real Questions?
• How effective is the property accountability contract. . .• Do resources used provide adequate accountability?• Are millions of dollars in lost property going down?
• . . . at reducing FLIPL reports?• Is the dollar value associated with the FLIPL reports
decreasing?• Are there fewer incidents for FLIPL reports to be
filed?• Is there less property missing?
18FLIPL: Financial Liability Investigation of Property Loss
Data Required
19
Identify Data Required
• Key question = What data do you need to answer the question?
• Data collected from:• Primary sources = you collect• Secondary sources = others collected
• Sources and quantity of data gathered depend on:• The questions needed to be answered• The availability of data• The time allowed for the analysis
• If data does not exist, revisit your questions
20
The Data Quality Axiom
All decisions are data driven.
The quality of the decision can be no better thanthe quality of the data supporting the decision!
21
Collect the Data
• Key questions in deciding how to collect data:• Where and how are you going to get the
data?• Will it enable you to answer the questions?
• Common data sources:• Records = cost reports, analyses• People = within and outside the
organization• Time available key to source and amount• Verification important
22
Data Analysis
23
Analyze The Data
• Analytic method = steps taken to understand, display, or interpret data
• Methodology dependent on question(s)• Methods numerous and varied
• Important to know purpose and function of each and when to use them
• Review results of analysis:• Did it address question(s)?• How sensitive is it to internal and external influences?
24
Analysis Axiom
The rigor of the analysis must reflect the risk and significance of the
potential impact of the decision!
25
Determining The Type Of Analysis
• Primary Data Analysis• Collect, assemble, and analyze data
• Secondary Data Analysis• Use data gathered and in some cases analyzed prior
to your own analysis• Evaluation Synthesis
• Use the combined results from two or more previous analysis
26
Report Analytic Results
• Important phase of process• Impact decision-making; bring about change
• Reporting methods (written vs. oral vs. video) have different advantages
• Goal = convince audience that the work done and the results reported are reasonable, appropriate, and actionable.
• Answering analytic objective, i.e. question, is the most critical goal
• Remember what drove the analysis – customer’s need / interest / role, and planned use of results
27
Revalidating Questions
28
DefineQuestions
IdentifyDataSources
CollectData
Conduct Analysis
ReportResults
• Regularly re-check and validate questions.• Questions may need to be modified, dropped, redefined or added.
Analysis Feedback Loop
Requirements
29
Determining Requirements
Problem/ Opportunity Statement
Critical Customer
Requirements & Efficiencies
Prioritize Requirements
S.M.A.R.T. Objective
30
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
Key Elements of a Problem/Opportunity Statement
• There is an inherent relationship between problem/opportunity and customer, output, and processes.
• The objective is to meet customer expectations consistently31
Problem/ Opportunity
How, Where, and When?Process
Who?Customer/End Users
Expectations
What/Extent?Output(s)
Products/Service Performance
Determining Requirements
Problem/ Opportunity Statement
Critical Customer
Requirements & Efficiencies
Prioritize Requirements
S.M.A.R.T. Objective
32
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
Defining “Who” is the Customer
• A primary customer is anyone who receives or uses the outputs (product/service) from our work activities (process)- the end user– They define Critical Customer Requirement (CCR)
and measure characteristics (Quality, Speed, Cost)
• Internal customers are referred to as business partners or “process partners/owners”– They define the Voice of the Business (VOB)
requirements to meet CCRs
33
Sample Categories of Customer Performance Metrics
Quality Reliability, Availability, Effectiveness, Completeness, Freedom from Rework or Defects
Cost Resources, Repair Costs, Purchase Price, Sustainment Cost, Training Cost, Doctrine Cost, Material Cost, Facility Cost, Depreciation, Productivity
Speed Lead Times, Delivery Times, Turnaround Times, Setup Times, Cycle Times, Delays, Throughput
Service and Safety
After-Purchase Reliability, Parts Availability, Service, Warranties, Maintainability, Product/Service Safety
Stewardship Business Risk Management, Regulatory and Legal Compliance, Ethical Business Conduct
34
Process Efficiency
35
Purpose of Process Efficiency
• To identify inefficient steps and activities across business processes
• To identify measures of efficiencies and cost drivers across an enterprise
• To define types of inefficiencies/process waste (cost drivers)
• Refine problem/opportunity statement
36
Definition of Efficient Process Steps
• An activity in a process that is essential to deliver a service/product to the customer– Must be performed to meet customer needs– Adds form or feature to the services/product
• Those tasks which the customer would be willing to pay for if he/she knew what we’re doing
• Tasks should be optimized
37
Determining Requirements
Problem/ Opportunity Statement
Critical Customer
Requirements & Efficiencies
Prioritize Requirements
S.M.A.R.T. Objective
38
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
Common Tools to Prioritize
• Once you have defined CCRs, TIMWOOD, and customer issues, then various graphical tools can be used to prioritize the selection criteria and solve problems and take advantage of opportunity, as follows:– Kano Model: Are the issues related with performance/quality
requirements?– Pay-off Matrix: What is the impact of CCR/TIMWOOD issues on the
organization’s requirements? – Run Charts: Is the CCR/TIMWOOD issue showing significant step
changes over time or a steady performance?– Pareto’s Law: Are 80% of the customer issues described by 20% of the
CCR/TIMWOOD?– Histograms: Are customer issues showing significant variation?– SIPOC Process Map: What is the extent of the problem?
• These tools help characterize and quantify the extent of the problem/opportunity in terms of magnitude (quantity) or trends (changes in magnitude)
39
Pareto Chart
• A simple graphical display of problems (or other data), in columns in descending order to show the relative size of each category
• Used when you need to improve communication by presenting data which is difficult to express in words or as raw data.
• Highlights and prioritizes multiple problems in a process. • Identifies and quantifies the few vital priorities.
40Step 6 Step 7 Step 5 Step 2 Step 3 Step 4 Step 1 Step 8
00.5
11.5
22.5
33.5
44.5
0.010.020.030.040.050.060.070.080.090.0100.0
Defects
S.M.A.R.T. Objectives
Problem/ Opportunity Statement
Critical Customer
Requirements & Efficiencies
Prioritize Requirements
S.M.A.R.T. Objective
41
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
Define S.M.A.R.T. Objective
• S.M.A.R.T. objectives ensure that there are measureable outcomes
• The objective should be evaluated to ensure that it aligns with the mission and strategic goals of the organization
• When defining initiative goals, they need to be verifiable through formal measurement
42
The objective of the effort is to improve, reduce, or increase some aspect of a process, procedure, or program.
Process Improvement
43
Process-What is it?
• A series of steps or actions that lead to a desired result or output
• A set of common tasks that creates a product or service for a customer
• Processes are largely affected by one or more of the following factors:a) people operating the process b) materials used as inputs (Ex: information)c) machines/equipment used d) methods (Ex: documentation)e) work environment
It is vital to understand how these factors interact and affect processesStep 1 Step 2 Step 3
44
Process Improvement
• A systematic approach to help organization’s optimize their underlying processes through the closing of process or system performance gap
• Streamlining and cycle time reduction • Identification and elimination of causes below
specifications quality, process variation, and non-value-adding activities.
45
Mathematical Foundation of Lean:Little’s Law
The Avg Lead Timeof Any Process =
The Number of “Things” in Process
The Avg Completion Rate
Example:
• The Procurement Department Processes (12) Orders per Hour
• There is a Backlog of (89) unprocessed orders• A 90th order is put into the queue• How long must the 90th order wait to be processed?
7.5 Hours = 90 Orders in Process
12 Orders per hour
Order
Lean is a set of tools to reduce the number of “Things” in process without reducing the completion rate
46
Everything We Do Follows a Process
• Everything that is involved with getting a product or service to our customer is part of the overall process or “value stream”
• Looking at the value stream, we determine what portions of what we do “add value” for the customer and what portions are non-value-added
• We need to look at the performance of the whole system when getting services or products to the customer, instead of focusing too much on optimizing portions of the overall process
• Every process has some level of variation – Variation is evil!
47
The output (Y) is the direct result of the inputs (x1, x2, …) and how they are processed
By improving process and inputs, the end productwill be improved
Y = f(x)
How Processes Work
48
49
LSS Starts With the Voice of the Customer
• Who are the customers?• What are their needs?• Do our services or products:
– Answer the Voice of the Customer?– At a price he/she is willing to fund?
• And how do we know?!
It is common for organizations to ASSUME they know what their customers want based on either “they always wanted it that
way” or “it’s the way I would want it.”
SIPOC
Computer Acquisition ProcessSuppliers Inputs Process Outputs Customers
1 2
3
4
Input Metrics Process Metrics Output Metrics
Quality
Speed
Cost
50
Swim Lane
Client IT Contact
Client HR
Admin
Client Mgr
Places information
into HR database
Sends Email to NT Admin
Sends exit date to IT, telecom & facilities
Re-verifies with manager on employee’s exit status
ITS NT Admin
Email Vendor
Utilize e-mail vendor’s web tool to submit delete
request to vendor
Sends Email to Admin
Generates IT ticket & forwards to NT
Admin
Delete account
Mark request as completed on
admin web site
Create ticket if request coming
directly from client
Avg.Delay2 days
Avg. Delay2 days
Avg.Delay1 day
Avg.Delay1 day
Avg.Delay
4 days
Notify HR of employee exit date
Form require
approval?
no
Secure approval (s)
Yes
Green (CVA); Amber (NVA-R); Red (NVA)
Admin closes ticket and
manager notified
Avg. Delay2 days
115
Trend Chart
1.52
2.53
3.54
4.55
OSH
A R
ate
Actual Target52
– Simple display of trends with observations over specified periods of time– To monitor a process to see whether the long range average is changing– To focus attention on truly vital changes in the process– To identify meaningful trends or shifts in the average
Control Chart
Observation
Indiv
idual V
alu
e
2442171901631361098255281
40
35
30
25
20
_X=29.13
UCL=37.70
LCL=20.56
Observation
Movin
g R
ange
2442171901631361098255281
10.0
7.5
5.0
2.5
0.0
__MR=3.22
UCL=10.53
LCL=0
I-MR Chart of Delivery Time
– Statistical technique for analyzing the variation of a process– To determine whether process is in control– To know when to adjust a process– To know the difference between assignable and chance variation
Control limits are determined by the data119
54
Process Capability
36322824201612
LSL Target USL
Process Data
Sample N 266StDev(Within) 2.87033StDev(Overall) 2.69154
LSL 10Target 20USL 30Sample Mean 29.1203
Potential (Within) Capability
CCpk 1.16Overall Capability
Pp 1.24PPL 2.37PPU 0.11Ppk
Cp
0.11Cpm 0.35
1.16CPL 2.22CPU 0.10Cpk 0.10
Observed PerformancePPM < LSL 0.00PPM > USL 281954.89PPM Total 281954.89
Exp. Within PerformancePPM < LSL 0.00PPM > USL 379619.67PPM Total 379619.67
Exp. Overall PerformancePPM < LSL 0.00PPM > USL 371895.18PPM Total 371895.18
WithinOverall
Process Capability of Delivery Time
Specification limits are decided by the customer
– Compares process performance against requirements– Ability to measure how well the output from the process meets
requirements
Cause & Effect Diagram
Too much reliance on Pallet jacks
Delays in processing
(Y) Effect: CWT = 3 days
(too long)
Facilities & Equipment
Manpower
Mother NatureUnforeseen Circumstances
Materials
Methods Measurements
Lack of Controls for FIFO / LIFO
Lack of multiple lanes
Segregation of pallets
Unplanned Deliveries
Multiple deliveries showing up same time
Too Long (Time)
Lack of Knowledge
“Dedicated” to Task
Number of printer stations
Lack of Computers
Wrong Location
Time Based upon completing entire pallet
(Competing for Same Space)
Location
1
2
Utilization of experience
3
Lack of parallel processing
Multiple Processing tables
Limited scanners
Manual movement of parts
Lack of single flow measurement
Manual labor moving around numerous boxes
Lack of single flow
4
Lack of heat or Air Conditioning
55
▶ Measure of process improvement▶ Represents output relative to input▶ Only through productivity increases
can our standard of living improve
Productivity
Productivity =Units produced
Input used
56
Productivity Calculations
Productivity =Units produced
Labor-hours used
= = 4 units/labor-hour1,000250
Labor Productivity
One resource input single-factor productivity
57
Multi-Factor Productivity
OutputLabor + Material + Energy +
Capital + Miscellaneous
Productivity =
• Also known as total factor productivity• Output and inputs are often expressed in
dollars
Multiple resource inputs multi-factor productivity
58
59
The Measurement Problem• Organizations by nature have many
– Elements and functions– Diverse activities– Varied resources
• There are a variety of opportunities for– Inefficiency– Ineffectiveness– Redundancy (overlaps)– Gaps in operations
Dashboards
60
61
Dashboards Definition• “Dashboards” are a compilation of standardized performance measures. These measurements are designed to:
– Facilitate achieving objectives– Provide feedback– Enable learning
• Dashboard measurements should accomplish each of the above at all levels of the organization• Dashboards should be clearly defined, simple to produce, and easily understood by users• Dashboards are the tactical tool used by lean implementations to measure and track project performance
Order Managmement Cycle Time
0
5
10
15
20
25
30
35
40
45
J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec
OM Cycle TimeOM CT Goal
On-Time Delivery
57%58%59%60%61%62%63%64%65%66%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OTD
(%)
OTD
Overhead Labor Productivity(Applications Closed / Payroll
Hours)
45%50%55%60%65%
OLP
(%)
Labor ProductivityLabor Prod GoalLinear (Labor Productivity)
Unbilled Accounts
$140.00
$145.00
$150.00
$155.00
$160.00
$165.00
$170.00
Jan Feb Mar Apr May Jun
DSO
42
4446
485052
DSO
(000
s)
DSO
18.5
19
19.5
20
20.5
Jan Feb Mar
Rework CostsRework Costs Goal
Rolled Throughput Yield
0%
50%
100%
RTY
(%)
RTY RTY Goal Linear (RTY)
Owner:J. Stubbs
Gross Revenue
0
1
2
3
4
5M
illio
ns o
f Dol
lars
RevenueRevenue Goal
Dashboard – Example
137
63
Dashboards Support Corporate Goals
• Minimal and balanced • The objective in a dashboard is to use the smallest number of metrics that still provides a balanced picture of process, site and/or organizational performance.
• For example: just measuring and driving towards lower WIP may starve the process and destroy productivity
• Objective – Metrics chosen for dashboards should be objective, rather than subjective• An objective metric is one that is well defined and yields the same value regardless of who is conducting the measurement.
• For example: mission effectiveness can be subjective unless a clearly defined, quantifiable approach is used to measure it
Budgeting Controls
64
Budgeting for Control
• Budgets are often used to assign responsibilities by allocating resources to managers
• Budgeted amounts can be used as goals to motivate• Budgeted amounts can be used as targets by which performance
is evaluated and rewarded
65
Participative Budgeting
• Participative Budgeting is a concensus process• With Participative Budgeting the person ultimately being held
responsible for meeting the target makes the initial budget forecast
• Motivation to achieve the target is higher
66
How Budgeting Helps Resolve Organizational Problems
Budgeting Systems
Links knowledge with responsibility to make
planning decisions
Measures and rewards performance for
control
Distributes Responsibilities
An administrative device to resolve
organizational problems
67
Short-Term vs. Long-Term Budgets
1.Selecting overall objectives2.Choosing markets3. Selecting products to produce4. Determining price/quality mix5. Choosing technologies
Strategic PlanningLong-term Budgets
(more than one year)Forecasts of large asset acquisitions
Financing plansResearch and development plans
Short-term Budgets (1 year or less)
Quantities to produceQuantities to sell
Supplies acquisitions
68
Line-Item Budgets
• Budgets that authorize the manager to spend only up to the specified amount on each line item
• Managers cannot spend savings from one line-item on another line-item
• The manager does not have the responsibility to substitute resources among line items as circumstances change
• Impose more control on Managers• Prevalent in government organizations
69
Static budgets do not vary with volume and are used when a manager has control over
volume or the consequences thereof
Static versus Flexible Budgets
Flexible budgets are adjusted for changes in volume and are used mainly in manufacturing where the manager does not have control over
volume
70
Incremental Budgets
• Rolling the Budget from a previous time frame to be the Base of the next Budget (priori Budget or Actuals from Prior Budget time frame as base)
• Incremental expenditures are then added to meet a new objective
• Inefficient base budgets are not eliminated• Incremental Budgets are most frequently used• Easiest to generate • Best when in a stable environment with little large scale
fluctuations in organizational objectives and outputs
71
Zero-Base Budgets
• Starting from Zero to develop the Budget each Budget cycle
• ZBB motivates managers to maximize firm value by identifying and eliminating those expenditures whose total costs exceed total benefits
• Incremental expenditures are deleted when their costs exceed their incremental benefits
• Inefficient base budgets are eliminated• ZBB is used infrequently• Most useful when new top-level management come from
outside a firm• Costly to conduct
72
Performance-Based Budgets
• PBB links the programmatic Budget request to the expected performance results
• Improves knowledge of agency operations• Cuts waste and enhances cost savings • Performance Plans required by GPRA 1993 to move
Government entities to be more output and outcome focused; better stewards of the taxpayer's dollars
• Incorporation of the Planned output/Outcomes drives to the Budget requested
• Requires an understanding of the conversion of inputs to outputs (Cost Management)
• Difficult to do since more Government entities are not Cost focused
73
Budget Method Comparison
Base budget is the previous budget
Only incremental changes from the previous budget are examined in detail
Incremental Budgets
Each line-item is
set at zero each year
Every line-item must be justified and renewed each year
Zero-Base Budgets
74
Each line-item is associated with a Output/Outcome
Every line-item must be justified and renewed each year based on new Performance objective
Performance - Base Budgets
Conclusion
75
76
CAPSTONE CASE
• FORSCOM INC is a four person company finishing its first year of operations. The company started with a good idea and the desire to own the F150 Platinum edition.
• The company has one sales manager and three hourly employees that provides ~10,000 service actions/year.
• Travel is necessary for business development.
Plan & Actuals
77
• What are the variances? Are they good, bad, ugly?
• What is the unit cost of service?
Plan Year 1 Actuals
Quantities Cost Quantities Cost
Sales Manager 1 $ 100,000 1 $ 100,000
Hourly Personnel 3 $ 300,000 3 $ 360,000
Equipment 2 $ 110,000 1 $ 80,000
Travel 10 $ 20,000 12 $ 21,000
Total $ 530,000 $ 561,000
Units 10000 11000
78
• Which costs are fixed and variable?• Determine the target budget (should’ve been)
and new variances.
Plan Year 1 Actuals
Quantities Cost Quantities Cost Variance
Manager 1 $ 100,000 1 $ 100,000 $ -
Hourly Personnel 3 $ 300,000 3 $ 360,000 $ 60,000
Equipment 2 $ 110,000 1 $ 80,000 $ (30,000)
Travel 10 $ 20,000 12 $ 21,000 $ 1,000
Total $ 530,000 $ 561,000 $ 31,000
Units 10000 11000
Cost/unit $ $
79
Plan Year 1 Actuals Flex Budget
Qty Cost Qty Cost Variance Qty Cost Variance
Manager 1 $ 100,000 1 $ 100,000 $ -
1 $ 100,000 $ - Hourly Personnel 3 $ 300,000 3 $ 360,000 $ 60,000 3 $ 330,000 $ 30,000
Equipment 2 $ 110,000 1 $ 80,000 $(30,000) 1 $ 110,000 $ (30,000)
Travel 10 $ 20,000 12 $ 21,000 $ 1,000 12 $ 20,000 $ 1,000
Total $ 530,000 $ 561,000 $ 31,000 $ 560,000 $ 1,000
Units 10000 11000 11000
• Output is estimated to increase to 13,500 for next year.
• Determine a new plan for the next two years.
Performance measures
• In order to further grow the business, the company needs to mature its planning processes.
• Determine your performance measures and future targets.– Sales price of each unit was $55.– Orders are dependent upon business development
trips and sales price.
80
YEAR 1 2 3 4 5 6 7 8 9 10 11 12
TRAVEL 1700 1900 2100 2300 2000 1900 1700 1600 1500 1600 1400 1300