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Abstract

This chapter is excerpted from ‘Better Business Decisions Using Cost Modeling: Second Edition'. Information is power in supply chain operations, negotiations, continuous improvement programs, process improvement, and indeed in all aspects of managing an operation. Accurate and timely information can result in better decisions that translate into the improvement of bottom-line results. The development and effective use of cost modeling as a method to understand the cost of products, services, and processes can help drive improvements in the quality and timeliness of decision making. In the supply chain community, an understanding of the actual cost structures of processes, products and services, whether with new or nonpartner suppliers, can facilitate fact-based discussions that are more likely to result in agreements that are competitively priced and with fair margins. Further, accurate cost models that are cooperatively developed between supply chain partners can form the basis for joint efforts to reduce non-value-added costs and provide additional focus toward operational improvement. While many organizations feel confident that they have an understanding of the cost structure for products and services produced internally, cost modeling often uncovers areas where significant cost improvement can be obtained. Cost-of-quality is a particular type of internal cost model that analyzes the true costs associated with the production of less than perfect products and services. The development of a cost-of-quality model can provide insight into how products or services of higher quality can be produced at lower cost. This book provides the business professional a concise guide to the creation and effective use of both internal and external cost models. Development of internal cost models is discussed with illustrations showing how they can be deployed to assist in new product development, pricing decisions, make-or-buy decisions, and the identification of opportunities for internal process improvement projects. The creation and use of external cost models are discussed, providing insight into how their use can drive collaborative improvement efforts among supply chain partners, better prepare for price negotiations, and keep negotiations focused on facts rather than emotions all while allowing for future discussions with preferred suppliers to focus on more strategic and operational improvement initiatives, and less on pricing. A number of detailed examples are provided to illustrate how cost models are constructed and to demonstrate how they have been effectively deployed.

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Abstract

This chapter is excerpted from ‘Better Business Decisions Using Cost Modeling: Second Edition'. Information is power in supply chain operations, negotiations, continuous improvement programs, process improvement, and indeed in all aspects of managing an operation. Accurate and timely information can result in better decisions that translate into the improvement of bottom-line results. The development and effective use of cost modeling as a method to understand the cost of products, services, and processes can help drive improvements in the quality and timeliness of decision making. In the supply chain community, an understanding of the actual cost structures of processes, products and services, whether with new or nonpartner suppliers, can facilitate fact-based discussions that are more likely to result in agreements that are competitively priced and with fair margins. Further, accurate cost models that are cooperatively developed between supply chain partners can form the basis for joint efforts to reduce non-value-added costs and provide additional focus toward operational improvement. While many organizations feel confident that they have an understanding of the cost structure for products and services produced internally, cost modeling often uncovers areas where significant cost improvement can be obtained. Cost-of-quality is a particular type of internal cost model that analyzes the true costs associated with the production of less than perfect products and services. The development of a cost-of-quality model can provide insight into how products or services of higher quality can be produced at lower cost. This book provides the business professional a concise guide to the creation and effective use of both internal and external cost models. Development of internal cost models is discussed with illustrations showing how they can be deployed to assist in new product development, pricing decisions, make-or-buy decisions, and the identification of opportunities for internal process improvement projects. The creation and use of external cost models are discussed, providing insight into how their use can drive collaborative improvement efforts among supply chain partners, better prepare for price negotiations, and keep negotiations focused on facts rather than emotions all while allowing for future discussions with preferred suppliers to focus on more strategic and operational improvement initiatives, and less on pricing. A number of detailed examples are provided to illustrate how cost models are constructed and to demonstrate how they have been effectively deployed.

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