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COST MANAGEMENT BASICS

COST MANAGEMENT BASICS. Cost Controlling. Cost Controlling Explanation Decision Support Data Required Data Analysis Requirements Process Efficiency Tools for Prioritization Process Improvement Dashboards Control Budgeting. Agenda. Cost Controlling Explanation.

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COST MANAGEMENT BASICS

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  1. COST MANAGEMENT BASICS Cost Controlling

  2. Cost Controlling Explanation • Decision Support • Data Required • Data Analysis • Requirements • Process Efficiency • Tools for Prioritization • Process Improvement • Dashboards • Control Budgeting Agenda

  3. Cost Controlling Explanation

  4. Full Cost Measurement • Accurate, timely and relevant data • Connecting operational output/performance data to financial data • Allocate Overhead, Unfunded Costs, Indirect Support • Cost Planning • Operational managers set cost targets and efficiency goals • Plan cost based on outputs produced Cost Accounting Cost Planning Cost Analysis Cost Management Process • 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 Controlling • Cost Management • After Action Review • Commanders Lead: • How did you perform relative to your expectation? • What are you doing to improve? Cost ManagementLeadership Driven Management FM OM FM= Financial Management OM = Operational Management

  5. Cost Accounting Cost Planning Cost Analysis Cost Management Process Cost Controlling 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

  6. 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

  7. 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

  8. Decision Support

  9. 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

  10. 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.

  11. 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

  12. 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?

  13. 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?

  14. 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

  15. 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

  16. Basic Guidelines For Decision Support • 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

  17. 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

  18. 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? FLIPL: Financial Liability Investigation of Property Loss

  19. Data Required

  20. 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

  21. The Data Quality Axiom All decisions are data driven. The quality of the decision can be no better than the quality of the data supporting the decision!

  22. 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

  23. Data Analysis

  24. 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?

  25. Analysis Axiom The rigor of the analysis must reflect the risk and significance of the potential impact of the decision!

  26. 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

  27. 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

  28. Revalidating Questions • Regularly re-check and validate questions. • Questions may need to be modified, dropped, redefined or added. Analysis Feedback Loop Define Questions Identify Data Sources Collect Data Conduct Analysis Report Results

  29. Requirements

  30. Determining Requirements S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound

  31. Key Elements of a Problem/Opportunity Statement Problem/ Opportunity • There is an inherent relationship between problem/opportunity and customer, output, and processes. • The objective is to meet customer expectations consistently Who? Customer/ End Users Expectations What/Extent? Output(s) Products/Service Performance How, Where, and When? Process

  32. Determining Requirements S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound

  33. 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

  34. Sample Categories of Customer Performance Metrics

  35. Process Efficiency

  36. 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

  37. 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

  38. Determining Requirements S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound

  39. 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)

  40. 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.

  41. S.M.A.R.T. Objectives S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound

  42. Define S.M.A.R.T. Objective The objective of the effort is to improve, reduce, or increase some aspect of a process, procedure, or program. • 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

  43. Process Improvement

  44. 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 processes

  45. 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.

  46. Mathematical Foundation of Lean: Little’s Law The Number of “Things” in Process The Avg Lead Time of Any 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? Order 90 Orders in Process 7.5 Hours = 12 Orders per hour Lean is a set of tools to reduce the number of “Things” in process without reducing the completion rate

  47. 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!

  48. How Processes Work Y= f(x) The output (Y) is the direct result of the inputs (x1, x2, …) and how they are processed By improving process and inputs, the end product will be improved

  49. LSS Starts With the Voice of the Customer • Whoare 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.”

  50. SIPOC Computer Acquisition Process S I P O C nputs uppliers rocess utputs ustomers 3 1 2 4 Input Metrics Process Metrics Output Metrics Quality Speed Cost

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