n287e - advanced financial management cost management strategies
TRANSCRIPT
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N287E - Advanced Financial Management
Cost Management Strategies
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Cost ManagementPublic vs. Private Sector
• Public Sector– Custodians of Public
Funds– Must Provide Open
Access to Business Opportunities
– Must Establish Cost Reasonableness for each Decision
– Value Propositions can only be evaluated using Cost Per Quality Point Analysis
• Private Sector– Primary Fiduciary
Responsibility is to Shareholders
– Cost Management is Focused on Bottom Line
– Strategic Alliances and Supply Chain Management
– Value Propositions evaluated using Best Value Analysis
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Cost Consequence Accountability
• Public Sector– Delegations of
Authority– Discretion Limited by
Policy– Balancing Mandates
Against Available Funding
– Deficit Spending
• Private Sector– Corporate Business
Plan– Risk and Incentives
often Drive Policy– Performance is Driven
by the Bottom Line– Risk and Profitability
Drive Spending
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Cost Containment Strategies
• Limit Access to Sources
• Pre-Authorization vs. Post-Audit
• Ensure Accurate Contract Administration
• Process Re-Engineering
• Mutual Gains Incentives (Partnerships)
• Risk Mgmt vs. Risk Defense/Aversion
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Leveraged Purchasing
• Commit Total Spend in Exchange for Deep Long-Term Discounts (Commitments Contract)
• Seek Standardization
• Adjust Requirements to Create a Market
• Integrate Order-Delivery-Payment Systems
• Jointly Attack Other Cost Drivers
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Impacts of Integrated Financial Systems
• Upside-– Minimize Multiple Databases– Apples to Apples– Eliminate the “Back Room”
• Downside-– Pushes “Central Functions” to Frontline– Need to Re-engineer Processes– If you can’t ask for it right, you can’t get it.
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E-Commerce Issues
• Cost
• Back-Filling the Requisition Function
• Matching Rules, Tolerances, & Returns
• The Need for EDI
• Content Management
• Keeping Up with Innovation
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Return on Capital Employed
Net Income Capital Employed
Revenue Total Expenses
Cost of Goods Sold Other Expenses
Overhead Materials+
+
_
=
=
=
Fixed AssetsWorking Capital
Accounts
ReceivableInventory
Accounts Payable
=
+ _
=
=+
Return on Capital Employed
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Return on Capital Employed10%
Net IncomeCapital Employed
$10M
Revenue$15M
Total Expenses$14M
Cost of Goods Sold$9M
Other Expenses$5M
Overhead$2M
Materials$7M
+
+
_
=
=
=
Fixed Assets$9M
Working Capital$1M
Accounts
Receivable$3M
Inventory $2M
Accounts Payable
$4M
=
+ _
=
=+
To IncreaseBy $1M
Either Increase By $1M
Or DecreaseBy $1M
Return on Capital Employed
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Return on Capital Employed10%
Net IncomeCapital Employed
$10M
Revenue$15M
Total Expenses$14M
Cost of Goods Sold$9M
Other Expenses$5M
Overhead$2M
Materials$7M
+
+
_
=
=
=
Fixed Assets$9M
Working Capital$1M
Accounts
Receivable$3M
Inventory $2M
Accounts Payable
$4M
=
+ _
=
=+
To IncreaseBy $1M
Either Increase By $1M
Or DecreaseBy $1M
Return on Capital Employed
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Return on Capital Employed10%
Net IncomeCapital Employed
$10M
Revenue$15M
Total Expenses$14M
Cost of Goods Sold$9M
Other Expenses$5M
Overhead$2M
Materials$7M
+
+
_
=
=
=
Fixed Assets$9M
Working Capital$1M
Accounts
Receivable$3M
Inventory $2M
Accounts Payable
$4M
=
+ _
=
=+
To IncreaseBy $1M
Either Increase By $1M
Or DecreaseBy $1M
Return on Capital Employed
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Labor$700,000
Materials$2,300,000
Overhead$800,000
Inventories
$500,000
Accounts Receivable$300,000
Cash$300,000
Sales$5,000,000
Cost of Goods Sold
$3,800,000
Other Costs$800,000
Plus
MinusNet Income
$400,000
Sales$5,000,000
Profit Margin
8%Divided By
Return OnInvestment
10%
Current Assets$1,100,000
Fixed Assets$2,900,000
Plus
Sales$5,000,000
Total Assets$4,000,000
Divided By
Asset Turnover
Rate1.25
Multiply
Op
era
tin
g C
os
t E
lem
en
tsA
ss
ets
ROCE Example
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Labor$700,000
Materials
-5%$2,185,000
Overhead$800,000
Inventories
– 5%$475,000
Accounts Receivable$300,000
Cash$300,000
Sales$5,000,000
Cost of Goods Sold
$3,685,000
Other Costs$800,000
Plus
Minus Net Income
$515,000
Sales$5,000,000
Profit Margin
10.3%Divided By
Return OnInvestment
13%
Current Assets
$1,075,000
Fixed Assets$2,900,000
Plus
Sales$5,000,000
Total Assets
$3,975,000
Divided ByAsset
Turnover Rate
1.26
Multiply
Op
erat
ing
Co
st E
lem
ents
Ass
ets
Impact from 5% Price Reduction
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Strategic Sourcing…
• A systematic process to reduce the total cost of purchased products and services by fully leveraging the University’s combined purchasing power, without compromising quality or service.
• Up to 41 Business Units
10 Campuses
5 Medical Centers
3 National Laboratories
23 California State Universities
What is strategic sourcing?
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Total Cost ApproachAchieve Best Value
Tip of the IcebergPurchase Price
Total CostTotal Cost• Transaction / Admin Cost
• Delivery, Freight, Handling, Set-Up
• Implementation Cost
• Communication/Marketing
• Training
• Cost of Non-Conformance (Quality)
• Maintenance, Warranty, Parts
• Yield, Useful Life, Consumables
• Inventory, Shelf-life, Waste
• Disposal, Scrap
• Risk, Liability
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Strategic Sourcing is a process rather than a series of activities
Focus on tasks
Function isolated
Reactive
Insular, static
Unit price based
Adversarial supplier relationship
Win/lose
Corrective Measures
Undefined standards
Lowest price - price driven
Focus on process performance
Alignment with stakeholders
Proactive
Total cost framework
Diverse sourcing strategies
Create collaboration, trust
Suppliers as a key resource
Preventive measures
Fit for purpose
Value driven (e.g. lowest cost per quality point)
Traditional Purchasing Strategic Sourcing
Strategic Sourcing Process
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Strategic Sourcing Methodology
Launch Sourcing
Team
DevelopSpend
Analysis
DetermineUC
Requirements
DevelopCategoryStrategy
ConductMarket
Analysis
Implement Solution and begin SRM
NegotiateAgreements
Evaluate &Select
Suppliers
• Project Plan and Scope determined
• Resource Commitment Obtained (people, dollars, etc..)
• Kick-Off Meeting Conducted
• Team members identified
• Stakeholder Requirement sessions conducted
• Existing contracts summary produced
• Requirements weighting sessions conducted
• UC requirements published
• Sourcing strategy developed and communicated
• User adoption strategy and implementation plan developed
• Initial cost/benefit analysis developed
• Negotiation strategy document developed
• Meetings/Negotiations with finalists
• Agreements signed
• Analyze total spend by Category and Location and determine percent that is “sourceable”
• Document historical purchases
• Develop current TCO for each Location
• “Quick Hits” identified
• Complete pre-bid industry analysis
• RFI developed / distributed (if needed)
• Supplier responses to RFI evaluated
• Final market analysis published
• RFP developed / distributed
• RFP responses evaluated and scored
• “Short list” of finalists selected
• Implementation team assigned
• Implementation plan finalized
• Implementation completed
• Ongoing SRM plan created and implemented
This must be a joint effort between purchasing departments across the UC system and our internal stakeholders
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Strategic Sourcing Opportunity
• University of California – $7.0 Billion paid invoices– $2.5 Billion construction– $4.5 Billion of opportunities
• $100 Million Commodities– Office Equipment and Supplies– Laboratory Supplies– IT Hardware / Software
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Strategic Sourcing Goals
• Maintain or increase product and service quality• Leverage UC buying power through strategic
alliances • Create more efficient procurement processes• Educate the UC community• Determine the appropriate product distribution
system• Demonstrate significant on-going cost savings• Meet our service and community standards
(Sustainability, Small/Disadvantaged businesses, etc.)
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Channeling
• VWR Implementation YTD January to July 2005
Campus YTD 2005 YTD 2004 ∆%Berkeley $ 581,295 $ 418,962 38.7%Los Angeles $1,628,382 $1,088,067 49.7%San Diego $ 993,908 $ 723,884 37.3%
Average Growth: 41.9%
San Francisco $ 891,566 $ 783,345 13.8%
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Automate Payment
• UCSF processes ~ ½ million vouchers– Federal Express: 27,815– Arrowhead: 6,256– Verizon: 8,983
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Labor$700,000
Materials$2,300,000
Overhead$800,000
Inventories
$500,000
Accounts Receivable$300,000
Cash$300,000
Sales$5,000,000
Cost of Goods Sold
$3,800,000
Other Costs$800,000
Plus
MinusNet Income
$400,000
Sales$5,000,000
Profit Margin
8%Divided By
Return OnInvestment
10%
Current Assets$1,100,000
Fixed Assets$2,900,000
Plus
Sales$5,000,000
Total Assets$4,000,000
Divided By
Asset Turnover
Rate1.25
Multiply
Op
era
tin
g C
os
t E
lem
en
tsA
ss
ets
ROCE Example