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Total Cost Management

Presentation by Dinesh K. C. and Said Rahman III Semester, MBA

Introduction
Total Cost Management is a company-wide systematic and structured approach, which provides a holistic framework to control, reduce and eliminate costs, throughout the value chain. This process of managing the financial outcome of activities encompasses all operations, internal and external. For these reasons, TCM is one of the most powerful tools that corporations can wield in their quest for competitive advantage.

Introduction
The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget. Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risks.

Contd..
Total refers to TCM's comprehensive approach to managing the total resource investment during the life cycle of the enterprise's strategic assets. The enterprise can be any endeavor, business, government, group, individual, or other entity that owns, controls, or operates strategic assets.

Contd..
Simply stated, it is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product, or service. This is accomplished through the application of cost engineering and cost management principles, proven methodologies and the latest technology in support of the management process.

Cost Management Key Terms


PV - Planned Value, estimated value of the planned work EV Earned Value, estimated value of work done AC Actual Cost, what you paid BAC Budget at Completion, the budget for the total job EAC Estimate at Completion, what is the total job expected to cost? ETC Estimate to Complete, forecasted costs to complete job VAC Variance at Completion, how much over/under budget do we expect to be?

How Do We Manage Cost?


Three processes

Cost Estimating Cost Budgeting Cost Control

Cost Estimating

Cost Budgeting

Cost Control

Total Cost Management Why?


Customer decides Value (price) Investor decides Profits (return) Only thing in organizations control is Cost Therefore Cost Management becomes a Competitive tool for Value Maximization. [Offer more value at lesser price and still maintain profitability.]

Contd..
This necessitates an integrated approach for cost management. i.e. at strategic as well as at operational level. This approach is called Total Cost Management

Total Cost Management Concept


company-wide systematic and structured approach provides a holistic framework to control, reduce and eliminate costs , throughout the value chain process of managing the financial outcome of activities encompasses all operations, internal and external.

Total Cost Management typical questions

Total Cost Management Process


Identify Inefficiencies * In a competitive environment, inefficiency of one is becoming an opportunity for the other. Inefficiency is in terms of the non-value adding activity present in the system. To identify, to size and to eliminate inefficiencies, guiding principle are. it is better to be approximately right, than to be precisely wrong

Contd..
a structural change in the measurement systems is preferred than a temporal / apparent change

Cost Is Everything
It costs time It costs resources It costs money

EVERYTHING invested in assets and projects is a COST


That is why it is called TOTAL COST Management (TCM)

For Business, TCM is An Integrated Recipe for Managing Portfolios, Programs, and Projects in Alignment with Business Strategy!
Better Control

Top-to-Bottom Business Benefits


Profitable Asset Portfolios

Makes sure your resources go where theyll get the best IRR/EVA
Makes sure your projects are all integrated, aligned and coordinated Makes sure each project gives business the results that were planned for

Integrated/Aligned Programs

Controlled Projects

Contd..
As mentioned, the TCM process helps you manage your asset portfolios, your programs (or groups of related projects) and individual projects. The benefit of applying a TCM-based process is ultimately improved profitability (or whatever the strategic objective of your place of business isprofitability applies to most). Management of each project, program, and asset in your portfolio will be aligned and integrated because they are all tied back to the same business strategy and objectives.

TCM Starts With a Simple Concept


Plan-Do-Check-Assess (PDCA)
PLAN (plan activities)

ASSESS (evaluate measures, act upon variances)

PDCA Cycle

DO (perform activities)

CHECK (measure performance of activities)

TCM is at heart a quality management process. Each and every TCM process map is based on the PDCA quality management/continuous process improvement model (i.e., the Deming or Shewhart model). Before AACE published the TCM approach using PDCA in 1996, other project management models lacked a defining philosophy based on accepted quality management principles.

contd..
Other models have since tied back to this basis; it only makes senseit is the only real process model to have stood the test of time for more than half a century. If your company uses TQM, Six-Sigma, ISO9000, Business Process Reengineering (BPR), or just about any other management program with quality management roots, TCM will support its goals.

PDCA
The TCM process model is based upon the PDCA management or control cycle, which is also known as the Deming or Shewhart cycle. The PDCA cycle is a generally accepted, quality driven, continuous improvement management model. PDCA stands for plan, do, check, and assess, with the word check being generally synonymous with measure. The word assess is sometimes substituted with act as in to take corrective action.

Contd..
The PDCA cycle is the framework for TCM because: (1) it is time-proven and widely accepted as a valid management model; (2) it is quality driven; and (3) it is highly applicable to cost management processes, which are cyclical by nature.

The PDCA cycle in TCM includes the following steps:


Plan - plan asset solutions or project activities Do (i.e., execute) - initiate and perform the project or project activities in accordance with the plan Check (i.e., measure) - making measurements of asset, project, or activity performance Assess (i.e., act) - assessing performance variances from the plan and taking action to correct or improve performance to bring it in line with the plan or to improve the plan.

TCM Attributes
Continuous Improvement
PLAN (plan activities)

ASSESS (evaluate measures, act upon variances)

Every TCM process employs feedback and improvement!


DO (perform activities)

PDCA Cycle

Integrated Every TCM process has P,D,C & A steps that are All linked back to business strategy!

CHECK (measure performance of activities)

Benefits
A key benefit of using PDCA as the stem cell of TCM (i.e., all 27 TCM processes grow out of it) is that PDCA supports both Continuous Improvement and Control. With PDCA, you establish a plan with budgets, thresholds, etc.; kick the work off properly; then measure performance. Finally, you assess that performance against the plan (and ultimately strategic objectives) and make either corrective actions to stay on plan (control) or you improve the plan as needed to achieve objectives (improvement).

Benefits contd..
Another key benefit of TCM is that the processes are all integrated such that scope, cost, time, risk, value, and resources are each considered for their interrelationships. Each process map in TCM includes inputs and outputs from and to the other processes. Each assessment and planning step revisits the objectives, thereby keeping all processes aligned with business strategy.

TCM Covers the Entire Asset and Project Life Cycle

As a two-dimensional diagram, the PDCA loop looks like it returns you to the same point you started. However, it is a three-dimensional concept; you keep advancing and improving your plans as the asset or project life cycle progresses. In this illustration, the center bar represents the life cycle of an asset over time. The spiral represents the fact that PDCA is a never ending process for managing costs over that life cycle. We could show the same diagram with the project phases in the center bar (e.g., appraise, select, define, execute, closeout). The concept is the same.

Contd..

Conclusion
Total cost management should be approached as a process, not a program, developed and implemented by a full-time manager. Training and skills development need constant attention. You need to obtain management support early and keep results and issues visible to maintain that support. An important part of the process is to drive ownership to the local/operational level. Resourcing the process is important and you need commitment from the parties and dedicated financial support.

References
Lewis, Rose Mary and Spencer, Gary Rock. "Total Cost Management: A Case Study in Missed Opportunity." AACE International Transactions (2007): 03.103.6, 6p. Internet sources

Thank You..