The essence of cost management is utilizing business resources so that they deliver their highest possible value.
This requires several data driven activities.
- Understanding accurately the real cost structure of the organization
- Focusing on the drivers of cost
- Managing costs by making them visible and integrating their control into daily work processes
Understanding
Understanding cost requires data integration. For example, to understand product cost in a manufacturing organization
requires integrating labor and machine costs from a manufacturing application with an allocation of general and administrative overheads
from the financial system. The manufacturing and financials may be within a single ERP system but they are usually distinct functional areas that
are managed by different groups within the organization.
We often encounter integration opportunities with secondary systems. In the manufacturing example - perhaps an intermediate product is produced in the
main plant and then shipped to a remote distribution site where final customization activities take place that are tracked by a separate
application. In order to make smart decisions about the overall manufacturing cost you need integrated data that includes the
customize to order costs.
Often we find that understanding also requires the ability to summarize the integrated data via hierarchies that may not exist in the source
systems. This requires enhancing the data to summarize it or categorize it in new ways. We can add new hierarchies
(e.g. Product Group to Produce Line to Product) or levels within hierarchies (e.g. rolling up the cost of the Intermediate product
separately from the cost of the final custom product.) We don't give up any existing categorization or hierarchies - we just add more.
Having the data rolled up or summarized to levels that match the responsibilities of different management levels in the organization
makes the data much more actionable. A manager in charge of the Western U.S. region may benefit from seeing all the different elements
of cost summarized by region regardless of where the data originates.
Focusing
Focusing on the real drivers of cost is also critical in order to have effective cost management.
Drivers are the actionable metrics that drive either cost or revenue or both.
Workforce planning provides a good example. The real driver of people cost is at the highest level - should we fill a position or not? Once that
decision is made there is a smaller decision about the level of the position that will further determine cost. Is this an executive position? An
internship? Something in between? So the real decision level for a line manager is whether to fill the position and what level that position
should be. The benefit costs for that position are generally not under the control of the line manager. Effective focusing for cost management
makes the position and level information visible to the line manager while summarizing the benefit costs.
Making these drivers visible to the right members of the organization is essential. A good business intelligence system allows each person
visibility on the drivers that they can affect.
Managing
In order to make sure that costs are continously managed it helps greatly to have a planning system. The planning system
concentrates the focus of the organization on the cost drivers that can be actively managed.
We've built a wide range of custom applications that allow our clients to better manage cost.
- Workforce planning and labor cost capture for a large unionized transportation provider
- Sales, volume and margin planning for multi-location retail
- Scheduling and staffing for a health care provider group
- Trade Spending reporting for a consumer products manufacturer
We've also had great success in deploying IBM Cognos Enterprise Planning and TM1 applications to allow our clients to build their own
cost (and revenue) models and then integrating that plan data with actual cost rollups to allow costs to be actively managed in near realtime.