Traditional costing methods are deep rooted within the organizations which leverage it to determine a product pricing strategy. The traditional approaches have time and again proved to be highly inaccurate, expensive and a time consuming process. It is about time that the organizations adopt the modern cost modeling and budgeting approaches. Cost modeling analysis involves identifying the material, production and labor costs along with the profit margin in order to estimate the manufacturing cost of a product or service. It helps the organization to take strategic decisions based on accurate actionable insights. The modern cost modeling tools and techniques promise high level of precision, accuracy and quality. Cost modeling strategies accounts for the gaps in processes, capacity utilization and geographical differences and other factors pertaining to manufacturing of the product.
Cost modeling enables the management to identify the cost drivers and cost components thereby providing insights to make strategic procurement decisions. These cost drivers help the chief procurement officers to devise strategies and business plans that drive profitability optimizing the organizational efficiency. Similarly, driver-based planning is a management’s approach that helps determine the key business drivers to forecast and develop strategies for future and identify the variables that affect the organizations success. The objective of driver based planning is to lay emphasis on strategic planning based on success drivers through a mathematical model by using various advanced data modeling and cost modeling tools.
Driver-Based Planning and Cost Modeling – What, Why and How
Both driver-based planning as well as cost modeling base their forecasts on operational and cost drivers respectively. Operational drivers include product units, customers, number of transactions, number of deliveries, etc. while cost drivers include direct costs and indirect costs of material, production and labor as well as sales and administration costs. Both use mathematical and statistical models to determine the drivers and thereby facilitates in budget planning, budget allocation and forecasting.
Using a combination of cost modeling and driver-based planning helps the management in reducing errors, saving time and driving profitability of the business. This integrated approach not only helps in determining the operational drivers and cost drivers of various business activities but also helps in modeling financial data so as to forecast sales, profit margins, enables spend management and determine the future capital requirements for the organization. This empowers the management and category purchase managers to devise effective budgeting strategies and enable better decision making based on accurate forecasts and cost models.
Cost modeling combined with a driver based planning approach induces flexibility, increases usability and utilizes the knowledge available at different levels in the organization. Cost modeling and driver based planning is the new secret sauce for the organization to succeed, drive profitability and gain a sustainable competitive advantage in the market. At SpendEdge, we offer real time accurate insights that help organizations to identify the factors that drive the topline growth, analyze each cost element, determine the components of a supplier’s product pricing strategy and assist the organizations to source from the best supplier at the best price.
For more information on cost modeling, cost modeling tools, predictive modeling, cost estimating software, cost analysis, cost reduction, and cost management
