Strategic Cost Management Notes

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Strategic Cost Management
Chapter 11
The Honda Business Model
for Suppliers
Six-year plan
100% understanding of all components of product cost
Lean supplier development concurrent engineering
Flawless new product launch
Communications
The Value Equation Definitions
Price analysis
Process of comparing supplier prices against external price benchmarks Cost analysis
Process of analyzing each individual cost element that makes up final price Total cost analysis
Applies value equation across multiple processes
Cost Management Approaches
Historical Cost Reduction Approaches
Value analysis/value engineering
Process improvements
Standardization
Improvements in efficiency using technology
Strategic Cost Management Processes
Value analysis/Value engineering
Team-based
Cross-enterprise
On-site supplier development
Process to accomplish supplier continuous improvement
Strategic Cost Management Processes
Cross-enterprise cost improvement
Joint effort
Costs identified
Cost drivers determined
Strategies to improve execution
Results review
Joint brainstorming
Establish list of value-add projects and execute
Strategic Cost Management Processes
Supplier suggestion programs
Motivate
Act on
Reward
Overall process
Supply chain compression
Reducing number of levels
Supplier consortiums
Managing Life Cycle Costs
Strategic Cost Framework
Generics
Competitive market with many potential suppliers
Emphasize total delivered price
No need for detailed cost analysis
Users order direct through supplier catalogs, p-cards, or e-procurement Strategic Cost Framework
Commodities
High-value products or services
Competitive market situation
Traditional bidding approaches
Identify competitive pricing through price analysis
Standardized products
Strategic Cost Framework
Unique products
Few available suppliers
Relatively low value
Utilize reverse price analysis to determine whether price is “too high” Try to move to generics quadrant over time
Strategic Cost Framework
Critical products
Requires majority of buyer’s focus
Relatively few suppliers
Higher-value items
Explore opportunities for:
VA/VE
Cost savings sharing
Collaborative efforts to identify cost drivers
Supplier integration early in product development cycle
Price vs. Cost vs. Total Cost Analyses
Price analysis
Commodities and generics quadrants
Cost analysis
Unique and critical products quadrants
Total cost analysis
All quadrants
Market-Based Pricing
Market Structure Analysis
Number of competitors in industry
Relative similarity (or lack thereof) of competitive products Any existing barriers to entry for new competitors
Market Structure Types
Monopoly
Single supplier market
Unique product with no substitutes
Large barriers to entry
Oligopoly
A few large suppliers
Pricing strategies of one supplier influence others in industry Market Structure Types
Perfect competition
Many small suppliers
Price is solely function of supply and demand
Minimal barriers to entry
Economic Conditions
Conditions favorable to supplier
High level of capacity utilization
Tight supply
Strong demand
Conditions favorable to buyer
Low level of capacity utilization
High level of supply
Weak demand
Analyzing Supplier Pricing
Does supplier have long-term or short-term pricing strategy? Is supplier price leader or price follower?
Is supplier attempting to establish entry barriers?
Is supplier using cost-based or market-based approach?
Elements of Price and Cost Drivers
Market-Driven Pricing Models
Price volume model
Market-share model
Market skimming model
Revenue pricing model
Promotional pricing model
Competition pricing model
Cash discounts
Price Volume Model
Maximizing profit
Lowering price results in more units sold
Greater volume will spread indirect cost over more units
Quantity price breaks
Leveraging volume across units can yield savings in tooling, setup, and operating...
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