Cost Driver Optimisation In Activity-based Costing

1. Introduction In an effort to be more competitive, aerospace companies have to embrace a more integrated and concurrent approach to their operational processes. The aim is to meet the key requirements of being more cost effective, lean and agile while delivering consistently high quality performance in their operational practices. This requirement is further set against the backdrop of changeable global events, fluctuating markets, and technological progress in both the commercial and military spheres. Therefore, cost engineering issues are becoming increasingly dominant in Product Lifecycle Management (PLM) and as a consequence, the role of procurement is recognized as evermore influential due to its impact on acquisition cost. In an effort to address some of the above challenges through practical means, the research presented investigates the development of a methodology and associated tooling for the estimating of supply chain cost management (Pugh et al, 2010a; Pugh et al, 2010b). The main aim is to provide an agile approach to cost estimating that can draw on the in-house engineering experience of an aerospace company, their procurement knowledge, product specification and their knowledge of the procurement market. This is integrated into a methodology that is generic and can therefore assimilate whatever information and relevant knowledge is available in a manner that can be utilized in an agile manner, i.e. dealing with large amounts of historic information in order to provide a agile estimating capability that is based on all of the information (past, present and projected) relating to the acquisition of new supply, parts, and assemblies. The following presents the methodology developed and a number of large case studies undertaken with Bombardier Aerospace Belfast to validate the accuracy and relevancy of the derived tools. 2. Aerospace procurement context The importance of the procurement function is highlighted by the fact that it is common today for aerospace Original Equipment Manufacturers (OEM) to externally procure as much as 80% of their programmes externally [Flemming, (2003); Dubois, (2003)]]. Momme (2002) even states that in general any typical industrial company spends 50-85% of its turnover on purchased goods, including raw materials, components and semi-manufactures. This continues to be an increasing trend whereby industrial firms exploit outsourcing for those products and activities deemed to be; (1) performed better by other organizations therefore offering value improvement opportunities or (2) outside the company’s core business [Dulmin, (2003)]. Yoon & Naadimuthu (1994) state that the strategic decision to ‘make or buy’ can often be the major determinant of profitability, making a significant contribution to the financial health of a company. A recent report from AT Kearney (2004) states that industrial leaders are creating value and gaining competitive advantage through the use of supply markets by focusing on four key areas: 1) Innovation and growth; 2) Value Chain Optimization; 3) Advanced cost-management; (4) Risk management and supply continuity. From the areas offering opportunity for value creation, the wider focus of this current research is that of facilitating improved cost-management for sourcing applications given the ‘practical-industrial’ constraint of not always having the required degree of cost and financial breakdown data desired (Curran, 2010; Curran et al, 2010c). It is clear that the enhanced significance of the supply chain has made procurement a strategic function [Dubois (2003)] and cost management (Pugh et al, 2010a; Pugh et al, 2010b) and assessment a critical activity for aerospace companies [Ellram, (1996)]. Monozka and Morgan (2002) proposes that increased attention to cost management is a critical factor to the operational control and sustained improvement of the procurement function as it provides a quantifiable basis upon which to assess related activities. Fleming (2003) states that the objective when sourcing is to; “negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance”. The term ‘cost’ from the AICPA Inventory [Humphreys (1991)] is; “the amount, measured in money or cash expended, property transferred, capital stock issued, services performed, or liability incurred, in consideration of goods or services received”. Cost and price are often used interchangeably as parts can be made internally or be externally sourced from the extended supply chain, as shown in Figure 1 [Chen, (2004]; consisting of the internal and external supply chains as depicted. In this sense, the price of the external supplier is equivalent to the cost of internal production, being integrated into some product that is delivered to a customer. Parts that are externally sourced from world-class suppliers operating within a competitive market place often do not exhibit such a discrepancy between the actual manufacturing cost and supplier’s selling price; the latter including a fair and reasonable mark-up, as illustrated by Scanlan (2004) in Figure 2. When however orders are placed with suppliers who operate towards the left hand side shown in the Figure for low-efficiency and an uncompetitive market, then a potentially excessive mark-up is likely. It is in the interest of the buyer to understand actual manufacturing cost as well as to have to the ability to assess the quality of potential suppliers before entering into business with them. Figure 3 highlights that unit price is influenced by a number of issues such as; (1) procurement strategy and requirements, (2) the technical requirements which directly influence manufacturing cost, (3) the actual cost basis on which the company operates, and (4) the external forces that determine an acceptable market price. All this is required to actively interface in the activity of negotiation: aimed at identifying mutually satisfactory terms for contract specification and price determination with potential suppliers. Specialist parts for which a buyer is dependent and has little internal knowledge of in terms of design and manufacture tend to result in supplier leverage and a potentially significant difference between cost and price. For standard parts a small difference between unit cost and price is expected. Understanding the costs involved in the production of a part with other specified requirements enables a procurement buyer to physically negotiate and determine price and contract particulars with potential suppliers; based upon a platform of informed judgment.

An Agile Cost Estimating Methodology for Aerospace Procurement Operations: Genetic Causal Cost CENTRE-ing InTechOpen, Published on: 2011-09-12. Authors: R. Curran.

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Welcome to our glossary of Supply Chain terms. Confused by supply chain and logistics jargon. This glossary is designed to offer common definitions of many of the.

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This article was first published in Executive Outlook of March 2001 and updated in 2010 by Joost W. Van der Laan, Retaileconomics. Summary.