A recent article over on CPO Agenda on Skills for the Future that summarized the findings from a recent workshop that debated the skills the future would require identified better finance skills as keys to future purchasing success. Since the article simply rambled off a list of terms with no definition, I decided I’d define the basics for you.
Cost Breakdown: is the process of breaking a cost down into its components.
Cost breakdowns are the basis of Total Landed Cost and Total Cost of Ownership calculations. For example, the cost breakdown of a transformer would be steel, labor & overhead, copper, oil, transportation, miscellaneous components, and supplier profit margin. The total landed cost would be the unit cost, the taxes, the export tariffs, the import duties, and the transportation and in-transit storage costs. The total cost of ownership would also include inventory costs, utilization costs, and waste / defective unit return costs.
Life-Cycle Cost Analysis: (also known as Whole Life Cost) refers to the total cost of ownership over the life of on asset. It starts with the costs incurred in the planning and design phases, includes production related costs such as new machinery or equipment, raw material costs, labor and overhead costs during production, distribution, maintenance, and eventual disposal. From a life-cycle cost perspective, the cost per unit is just one cost among many.
Cost Engineering: is an area of engineering practice concerned with the application of scientific techniques to cost estimating and cost control. It will use advanced statistics and cost models to try and accurately estimate the total cost of a product before it is built and to identify methods to control costs that could increase beyond acceptable bounds.
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In my last post, we discussed how transformation is necessary for high procurement performance and gave you some advice on how to get started. But transformation is not easy, and there are many pitfalls you can encounter along the way. In this post, we’ll addres some of those.
As a supply chain leader, you are probably in the midst of a process to redesign your supply chain to be more fault tolerant, more secure, and more safe to avoid the fiascos that your brethren (Huntington Meat Packing, Mattel, Toyota) have recently faced in the media. If you want the transformation to go smoothly, and be effective, you better avoid these six mistakes that can derail your company’s attempts to change its supply chain, as described in a recent HBR article on Accelerating Corporate Transformations. (Subscription Required)
- Cautious Management Culture
There’s a time and a place for incremental improvement. That time and place is not during a supply chain transformation project. During times of “incremental improvement”, executives tend to be too preoccupied with daily operations and too busy to get involved in redesigning the entire business. During a transformation, the entire management team needs to be charged, focussed on the goal, and involved in making it happen as a team.
- Business-as-Usual Management Process
A transformation can’t be pigeon-holed into established systems and processes and meeting times. It has to be its own system, it’s own process, and its own, all-hands-on-deck, meeting — run alongside the existing systems, processes, and meetings until you’re ready for a transition. People may feel that they don’t have quite enough time, but that’s normal, and often good. Put a little pressure on and stick to the schedule, otherwise a three-month initial phase can quickly become a six-month, nine-month, or longer phase as people keep delaying it because they’re too busy with current processes, systems, and meetings, which aren’t working and need to be replaced as soon as possible.
- Initiative Gridlock
Sometimes you have to kill an old initiative for a new one to fly. As the article points out, executive leaders may lack the insight and courage to discard efforts that have come up short and, to avoid admitting failure, pile new initiatives on top of the ones that are struggling — and the result is gridlock. Success is best achieved when action agendas are restricted to only three or four companywide initiatives, each targeted to two or three carefully selected areas of focus and tied to clear outcome metrics. That way workers aren’t overloaded and can focus on achieving clear, non-conflicting, goals.
- Recalcitrant Executives
Many executives … choose to avoid conflict and hope that the “clarity” and “efficacy” of their grand plan will quickly win people over. Problem is, what’s clear to them isn’t always clear to their counterparts or their direct reports. And if you don’t take the time to win over a “deep denier”, resentment, and a need to undermine your efforts, can build and eventually bring your project to a dead stop. You have to be willing to confront, debate, and fight-for your project. You might not be able to change everyone’s views, but if you can convince them you’re serious and that your initiative is well researched and thought out, and earn their respect, you greatly improve the chances that the dissenters don’t stand in your way.
- Disengaged Employees
Employees, who do most of the actual work, are the key to your transformation. It’s critically important to involve them in the transformation process as early as possible. This should include sessions that inform them of the upcoming transformation before it starts as well as training and Q&A sessions as early as possible in project launch. Roll-out to the entire organization should be as rapid as possible.
- Loss of Focus During Execution
If you don’t continually champion the transformation initiative as the day-to-day grind again takes centre stage, you might find that old habits gradually sneak back in, that leaders switch back to command-and-control mode, or that attention is turned to other “important” activities. As a leader, you have to follow the project through to the end to ensure success.
Basically, as the article points out, transformation launches must be bold and rapid to succeed. Even if the project can’t be done in less than a year or two, it still needs to get into gear quickly, and hit its early milestones as soon as possible, so that the team can see the early indicators of the improvements that will come their way. This will get their full support early on. And as the byline points out, to be successful, don’t lose your nerve!
I highly recommend you check out the full article. It has some great advice on avoiding each of these speed brakes that can bring your transformation to a grinding halt.
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