Cost models help companies figure out the cost for certain activities and processes. Cost models can provide the understanding necessary to squeeze supplier margins to the bare minimum / optimum level. Cost models developed in collaboration with suppliers are the most effective.
A simple example is our activity based costing model for calculating machine hourly rates. Under this model we identify the factors that drive cost e.g.machine investment cost, floor area taken up by machine, personnel, consumables, utility costs, maintenance and sales, general and admin (SG&A) costs.
The use of cost models also allows for studies relating to ‘what if’ scenarios taking into account factors such as risk, new competitors, sales fluctuation and customer driven cost reduction targets.
An example of a complex cost model can be found at fast food chain McDonald’s – they have developed a sophisticated cost model to optimise chicken costs. The model captures expected mortality rates and weight gains to determine the optimum breed mix under various conditions such as humidity and space allocation. Such a model provides a competitive advantage for McDonalds.
We helped our carbon fibre manufacturer client to develop a cost model for calculating the cost for a product using a new technology.
The model also calculates the cost for making the product using the existing technology.
The model compares the existing technology cost against the new technology and helps the client to select the most cost effective option when bidding for new business.