Term
Cost Savings
1) Cost Savings |
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Definition
Reduction or avoidance in the costs incurred by an organization |
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Term
Cost control programs
1) Cost Savings
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Definition
Provide a systematic forum for reducing the total costs of acquiring and using a product or service. Cost control should not be achieved at the expense of quality |
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Term
Cost avoidance/containment
1) Cost Savings
1) Cost Savings
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Definition
It is an effort to prevent or reduce supplier price increases and ancillary charges through the use of value analysis, negotiations, and other techniques. It typically includes a detailed plan to hold costs and purchased prices within a certain target limits over a specific period. |
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Term
Cost Control Principal Objective
1) Cost Savings
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Definition
To take advantage of changes in technology, environment and on-the-job experience to control costs |
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Term
Cost Reduction
1) Cost Savings
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Definition
An effort to decrease the costs associated with acquiring and using a particular product or service. Cost reductions may be obtained by selecting alternative materials, processes, services, sources and purchasing methods. |
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Term
A)In a cost-reduction program, standards are of great importance because:
2) Issues to be considered when establishing a cost management program |
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Definition
1) Help to reduce costs by eliminating unnecessary variations in products and services
2) Standardiztion of equipment increases the use of that equipment, reduces spare parts inventories and reduces maintenance downtime |
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Term
B) Coordination with other departments
2) Issues to be considered when establishing a cost management program
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Definition
Enables a supply management professional to better understand the needs of internal customers, in order to provide the right kind of service while reducing costs. |
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Term
C) Time requirements
2) Issues to be considered when establishing a cost management program
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Definition
When choosing a cost-reduction approach, the supply management professional must consider the time required to make an improvement |
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Term
D) Effect on quality and service
2) Issues to be considered when establishing a cost management program
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Definition
| Guidelines must be put in place to ensure that the most effective technique is selected, so that cost control is not practiced without regard to the needs of internal customers. |
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Term
E) Effect on operations
2) Issues to be considered when establishing a cost management program
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Definition
Decisions reached by cross-functional groups (value analysis team and operations personnel), usually find more ready acceptance by line managers and employees, and tend to be implemented faster. |
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Term
F) Calculating cost avoidance/ reduction
2) Issues to be considered when establishing a cost management program |
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Definition
In evaluating the performance of any cost-reduction program, it is important not to lose sight of cost avoidance benefits as well as direct cost savings |
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Term
G) Market testing
2) Issues to be considered when establishing a cost management program |
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Definition
| It is important to invite feedback from internal customers and sometimes even end-customemrs to discover market changes that may result from cost-control efforts |
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Term
H) Top management support
2) Issues to be considered when establishing a cost management program |
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Definition
| Cost control programs require willing participation and cooperation from many departments or functions in order to ensure close coordination necessary in such programs. |
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Term
I) Design Flexibility
2) Issues to be considered when establishing a cost management program
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Definition
Cost reductions can be achieved through the establishment of designs that have multiple applications, as well as those that can be easily adapted to other uses. Example: choosing standardized components in new designs or redesigns |
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Term
J) Product Longevity
2) Issues to be considered when establishing a cost management program |
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Definition
Careful consideration must be given to the potential useful life of a product as an element for cost control |
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Term
K) Consumption Management
2) Issues to be considered when establishing a cost management program |
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Definition
| It refers to the control of the use of energy by products and processes. Energy costs can be a significant expense therefore supply management professionals should be aware of the energy requirements of materials and processes, be familiar with possible substitutions and understand consumption tradeoffs. |
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Term
Value Analysis
3) Value Analysis/value engineering processes |
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Definition
A systematic and objective evaluation of the value of a good or service, focusing on an analysis of function relative to the cost of manufacturing or providing the item or service |
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Term
Value Analysis & Value Engineering
3) Value Analysis/value engineering processes
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Definition
-Value analysis relates to a management process that focuses on existing products and systems with a view toward reducing the overall cost of the production and sale of the product
- Value engineering is value analysis conducted at the design engineering stage of the product development process, the goal is to achieve the lowest cost without loss of performance, quality and reliability. |
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Term
A) Process
3) Value Analysis/value engineering processes
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Definition
In value analysis, every part or process is critically examined with a view toward finding a better alternative by eliminating, simplifying, or combining parts, processes or services.
"Progressive supply management professionals do not buy parts, they buy functions" |
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Term
B) Techniques
3) Value Analysis/value engineering processes
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Definition
Controlling the cost of materials and services is key i nthis process. Suppliers can also be involved in value analysis because they bring important resources to the process, |
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Term
C) Organizational Requirements
3) Value Analysis/value engineering processes |
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Definition
The success of a value analysis program depends on the organizational framework and the extent of top management support. Top management support and participation are of crucial importance en establishing creadibility of the value analysis process. |
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Term
D) Function in relation to cost and quality
3) Value Analysis/value engineering processes |
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Definition
Some products may be over engineered and be more expensive than necessary. Some may have higher quality than necessary and thus be unnecessarily expensive.
Value analysis aims to uncover these and other weaknesses in products and parts through critical examinaiton of all aspects of design, production, serviceability and performance. |
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Term
Cost Modeling
4) Cost modeling |
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Definition
Focuses on the cost structure of a product or a supplier |
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Term
Why cost modeling is important?
4) Cost modeling |
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Definition
| Understanding supplier and product costs can help supply management professionals develop an appreciation of the important cost drivers, which provides a starting point for cooperative relationships to reduce total supply chain costs, it also provides a basis for negotiations. |
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Term
When cost information is not readily available from suppliers....
4) Cost modeling |
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Definition
Supply management professionals can construct quantitative cost models from information about the product or service. For example, labor costs can be established by benchmarking similar products or services for which costs have previously been established. |
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Term
Cost models may also include:
4) Cost modeling |
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Definition
Quantitative techniques such as regression analysis or graphic techniques such as scatter plot diagrams. |
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Term
Importance of quantitative techniques used in cost models
4) Cost modeling |
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Definition
| Quantitative techniques allow supply mangement professionals to understand relationships between key variables, such as volume and raw material content, in order to investigate other possible relationships or to predict prices and costs. |
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Term
Standard cost setting
5) Standard cost setting |
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Definition
Standard costs may be defined in terms of manufactured items or in units of service. Regardless of the area, standard costs are carefully predetermined. |
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Term
Standard costs in manufacturing
5) Standard cost setting |
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Definition
In manufacturing, standard costs are the predetermined or planned costs of manufacturing a single unit or a certain number of product units during a specific period in the immediate future. These are planned costs of the product under current or future expected operating conditions. |
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Term
Standard costs in services
5) Standard cost setting |
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Definition
| For services, standard costs are the predetermined costs of providing a single unit of service or a certain number of service untis during a specific period in the immediate future. These are planned costs of providing the service under current or future expected operating conditions. |
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Term
Benefits of standard costs to management
5) Standard cost setting |
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Definition
Standards costs provide a basis for developing budgets, controlling costs and measuring efficiencies. Standard costs are also used in cost reduction, evaluating bids and negotiation contracts |
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Term
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Definition
| Modern MRP and ERP systems offer product cost roll-up features. Each cost activity is calculated independently, typically in different work centers, and "rolled up" to establish standard costs for the product and, eventually, the selling price. |
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Term
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Definition
Margin is the ratio of operating income to sales. It expresses the portion of sales that is available to cover administrative costs, interest, taxes and profit. Suppliers need adequate margins to ensure long-term profitability |
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Term
8) Contribution to profit |
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Definition
| (sometimes referred to as contribution to margin) is sales revenue for a product minus variable costs. Contribution to profit represents the increase in profit achieved by selling one incremental unit. It may be used in the calculation of breakeven volumes |
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Term
Breakeven volumes
8) Contribution to profit |
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Definition
Total fixed costs divided by unit contribution equals breakeven volume |
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Term
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Definition
| Poor quality is expensive. Studies have shown that the total costs of poor quality can range from 30 percent to 40 percent of the total costs of the product. |
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Term
The 4 main cost categories to measure and quantify the total costs of quality are:
9) Cost of quality |
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Definition
- Prevention Costs
- Appraisal Costs
- Internal Failure Costs
- External Failure Costs
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Term
Prevention Costs
9) Cost of quality
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Definition
Costs of activities that attempt to reduce or eliminate future defects, such as certifying suppliers. |
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Term
Appraisal Costs
9) Cost of quality |
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Definition
Costs associated with activities designed to ensure product or service conformance. Examples: inspection and testing |
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Term
Internal Failure Costs
9) Cost of quality |
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Definition
Costs incurred within an organization's operating system as a result of poor quality, including scrap, rework and supplier returns. |
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Term
External Failure Costs
9) Cost of quality |
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Definition
Costs incurred when poor-quality goods or services are passed on to customers. These costs can be the most significant of all four types and include warranty costs, costs of losing sales and customers |
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Term
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Definition
| Inventory carrying costs, also called inventory holding costs, are the costs associated with having inventory available, including the opportunity cost of invented funds, storage and handling costs, taxes, insurance, shrinkage and obsolensece-risk costs. |
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Term
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Definition
Some intangible costs incurred in the event of a disruption in supply are: loss of customers or market share, loss of investor confidence and lower share prices, interruption of cash flow and erosion of business image. Contingengy planning can help to avoid supply interruptions. |
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Term
12) Total Cost of Ownership |
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Definition
| TCO is the combination of the purchase or acquisition price of a good or service and additional costs incurred before or after product or service delivery |
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Term
TCO as a cost reduction tool
12) Total Cost of Ownership |
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Definition
| To use cost of ownership as a cost reduction tool, it is necessary to identify and analyze the cost drivers to look for any avoidable costs. TCO is a comprehensive systems approach to analyzing purchases, processes and supply chain-related decisions. |
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Term
13) Other forms of cost management |
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Definition
- Improved form, fit, and function
- Easier use
- Administrative savings
- Improved quality
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Term
A) Improved form, fit and function
13) Other forms of cost management |
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Definition
| Form, fit, and function is an overall quality-related term, common in purchase agreements that encompasses the physical attributes of a thing (form), its desired output or performance(function) and its fitness ( appropriateness for the application or use to which it is to be put) |
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Term
B) Easier use
13) Other forms of cost management |
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Definition
| Easier use of parts results in savings in assembly time and after-sales service. Such improved parts reduce the chances for error in fabrication, assembly , and servicing. Besides, customers appreciate the easier use of products that consequently enhances the organization's reputation in the marketplace. |
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Term
C) Administrative Savings
13) Other forms of cost management |
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Definition
Efforts to increase administrative efficiency through the use of technology, forms standardization and control, process improvement and training can help reduce the impact of administrative costs. |
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Term
D) Improved Quality
13) Other forms of cost management |
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Definition
| The quality of an end product or service depends largely upon the quality of the componetns, the parts or the resources that go into it. Improvement in end-product quality tends to increase customer goodwill and can be expected to improve the organization's market share. |
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