1. Cost Modelling.pptx about life cycle costs

Cost modelling

1. Cost Modelling SOFTWARE ENGINEERING 1

2. Cost Modelling Cost modelling is the practice of understanding the cost structure of the products purchased or manufactured for the purpose of optimizing a design or supply chain. The cost modelling process is focused on supporting three business areas: target costing, procurement, and competitive analysis. Whirlpool Corporation defines cost modelling as:  A process that mimics the costs of the production source. It identifies the cost drivers and serves as a basis for new product calculations and competitive comparisons.

3. Cost Modelling Target costing is a process to manage and optimize the value delivered to the customer. The target costing process relies on quick and accurate cost estimates to be able to optimize the new product design. The cost modelling process identifies cost drivers and facilitates informed development decisions. Procurement uses cost models as a cost verification and negotiation tool. The cost model gives them a breakdown of the costs to understand the competitiveness of the supply base and improve negotiations. Competitive analysis is a process that uses cost modelling to accurately and quickly estimate the costs of competitive assemblies and make decisions for new products and existing product improvements.

4. Cost Modelling There are three types of cost models, each with increasing levels of maturity : the parametric model, the industry model, and the supplier specific model. Some commodities can be adequately modelled using the least mature model (parametric), while other commodities require the use of the most mature model (supplier specific).

5. Cost Modelling – Parametric Models Parametric Models The simplest way to estimate the cost of a part is to develop parametric models. Parametric models are cost relationships built off cost-driven parameters . The length of a bolt or wire or the number of outputs on a water valve are some cost-driven attributes or parameters. One common practice is to weigh a plastic part and calculate the material cost and then double the calculated value for a final cost. That is represented in the following equation.  Weight * Material Cost * 2 This method might be acceptable for a rough estimation and might even accurately represent the price for the common plastic part in some industries, but it does not work for high-volume manufacturing. The generalized model simply does not accurately represent the supply base realities.

6. Cost Modelling – Industry Cost Models Industry Cost Models The next level of cost modelling is the industry model. This is a model that uses publicly available data to develop cost elements . This model identifies the general cost structure of a business or industrial sector . The data comes from financial publications, industrial publications, industry websites, government economic studies, or financial analysis.  Industry studies are offered for sale, but they are geared toward the financial system and do not give a glimpse into the manufacturing costs as they are mainly hidden in the cost of goods sold. An example of a publically available study is the financial analysis offered by Dun and Bradstreet for an individual company or industry. These studies can be useful to identify the general financial structure and can be a starting point for your individual industry model, but more detail must be added. 

7. Cost Modelling – Supply Chain Cost Models Supply Chain Cost Models The most time consuming cost model is the supply chain model due to the development time required and the time needed to properly implement. The supply chain model builds off of the industry and parametric models to help identify the cost drivers as a starting point , but breaks down the elements into as much detail as needed to quantify the significant cost variables. For example, the depreciation is a significant cost variable in the overhead cost element. A supply chain cost model will calculate the depreciation on each machine in the process. 

8. Cost Modelling – Supply Chain Cost Models Obtaining information from suppliers can be challenging at times. Many are not able to share data due to corporate policies. One should come prepared for the discussions with preliminary calculations and industry metrics. When buyers come to the table with calculations that estimate the cost of suppliers’ processes, then the suppliers often are able to share.  The supply chain model utilizes knowledge of industry best practices to make sure the model represents the best manufacturing processes and not just the current supply base. Experts in the field should be used to keep track of trends and new technologies. The supply base needs to be challenged to keep up with these trends. Industry websites and publications help to keep up to date with changes. Cost modelling helps to assure cost competitiveness with any new trend. 

9. Life Cycle Cost Analysis Life cycle cost analysis (LCCA) is an approach used to assess the total cost of owning a facility or running a project. LCCA considers all the costs associated with obtaining, owning, and disposing of an investment. Life cycle cost analysis is ideal for estimating the overall cost of a project’s alternatives. It is also used to choose the right design to ensure that the chosen alternative will offer a lower overall ownership cost that is consistent with function and quality. For example, LCCA helps to determine which of the two alternatives will raise the initial cost but will reduce the operating cost. However, LCCA should not be used for the purpose of budget allocation.

10. Cost of Quality Cost of quality (COQ) is defined as a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.

11. Cost of Poor Quality Cost of poor quality (COPQ) is defined as the costs associated with providing poor quality products or services. There are three categories: Appraisal costs are costs incurred to determine the degree of conformance to quality requirements. Internal failure costs are costs associated with defects found before the customer receives the product or service. External failure costs are costs associated with defects found after the customer receives the product or service. Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal and external failure costs.

12. Appraisal Costs Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They could include: Verification: Checking of incoming material, process setup, and products against agreed specifications Quality audits: Confirmation that the quality system is functioning correctly Supplier rating: Assessment and approval of suppliers of products and services

13. Failure Costs Internal failure costs Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer. They could include: Waste: Performance of unnecessary work or holding of stock as a result of errors, poor organization, or communication Scrap: Defective product or material that cannot be repaired, used, or sold Rework or rectification: Correction of defective material or errors Failure analysis: Activity required to establish the causes of internal product or service failure

14. Failure Costs External failure costs External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include: Repairs and servicing: Of both returned products and those in the field Warranty claims: Failed products that are replaced or services that are re-performed under a guarantee Complaints: All work and costs associated with handling and servicing customers’ complaints Returns: Handling and investigation of rejected or recalled products, including transport costs

15. Prevention Costs Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the  quality management system . They are planned and incurred before actual operation, and they could include: Product or service requirements: Establishment of specifications for incoming materials, processes, finished products, and services Quality planning : Creation of plans for quality, reliability, operations, production, and inspection Quality assurance : Creation and maintenance of the quality system Training: Development, preparation, and maintenance of programs