n287e - advanced financial management
TRANSCRIPT
N287E - Advanced Financial Management
Cost Management Strategies
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
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
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
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
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.
E-Commerce Issues
• Cost• Back-Filling the Requisition Function• Matching Rules, Tolerances, & Returns• The Need for EDI• Content Management• Keeping Up with Innovation
Return on Capital Employed
Net Income Capital Employed
Revenue Total Expenses
Cost of Goods Sold Other Expenses
Overhead Materials+
+
_
=
=
=
Fixed AssetsWorking Capital
Accounts
Receivable Inventory Accounts Payable
=
+ _
=
=+
Return on Capital Employed
Return on Capital Employed10%
Net Income Capital 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
Return on Capital Employed10%
Net Income Capital 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
Return on Capital Employed10%
Net Income Capital 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
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 ByAsset
Turnover Rate1.25
Multiply
Ope
ratin
g C
ost E
lem
ents
Ass
ets
ROCE Example
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 Margin10.3%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 Rate1.26
Multiply
Ope
ratin
g C
ost E
lem
ents
Ass
ets
Impact from 5% Price Reduction
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 Units10 Campuses 5 Medical Centers 3 National Laboratories23 California State Universities
What is strategic sourcing?
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
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
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
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
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.)
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%
Automate Payment
• UCSF processes ~ ½ million vouchers– Federal Express: 27,815– Arrowhead: 6,256– Verizon: 8,983
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 ByAsset
Turnover Rate1.25
Multiply
Ope
ratin
g C
ost E
lem
ents
Ass
ets
ROCE Example