B-1 Cost Finance pg 83-88

a.       Budgeting’s relationship to the strategic and operational plans

b.      Steps in budgeting

a.       Review goal and objective alignment

b.      Define needed resources

c.       Estimate the dollar value or resources

d.      Present the budget/obtain the appropriation

e.      Variance analysis

c.       Purposes for a budget

a.       Control of expenditures

b.      Pre-approved funding

c.       Monitoring of expenditures

d.      Development of standard costs

d.      Types of budgets

a.       Zero based budget

b.      Cash flow budget

c.       Line item budget

d.      Program/project budget

e.      Capital budget

f.        Flexible budget

1.       Budgeting’s relationship to the strategic and operational plans

a.       A budget is a financial plan that covers a specified period (usually a year)

b.      Budget Identifies the financial resources allocated to products, services, departments or divisions of an organization

1.       Budgeting’s relationship to the strategic and operational plans

a.       Budgets are tools for allocating funds to accomplish the objectives of organization

b.      Budget indicates planned future actions and the funding levels required for their completion

Budgets must offer some means by which management can determine whether planned

1.       Budgeting’s relationship to the strategic and operational plans

a.       Budgets must offer some means by which management can determine whether planned operations are being accomplished

o   First, every budget should list a set of specific goals (standards by which the organization is to measure its performance) that relate to future operations

o   Second, every budget should provide for a periodic comparison (control feature through usage of budget performance reports) of actual results and established goals

b.      Budgets are developed in terms of cost (major duty of SCM is the review and evaluation of suppliers cost data)

1.       Budgeting’s relationship to the strategic and operational plans

a.       SCM professionals duty is the review and evaluation of suppliers actual or anticipated cost data

b.      Evaluation phase involves experiences, knowledge, and judgment to the cost data

1.       Budgeting’s relationship to the strategic and operational plans

a.       Purpose of evaluation is to project reasonable estimates of contract costs

b.      Estimates become basis for negotiations between the buying organization and the supplier and assist parties in arriving at contract prices satisfactory to both

2.       Steps in budgeting

a.       review goal and objective alignment

o   First step of budget process is to review and approve organizational goals and objectives

o   Important step because the budget will demonstrate in financial terms how these goals and objectives are to be met

2.       Steps in budgeting

a.       Define needed resources

oSecond step is to define resources needed to achieve the organization’s goals

oNecessary to begin with general forecasts in terms of economic trends, purchase prices, sales and profit

2.       Steps in budgeting

oForecasts will serve as the basis for estimates of revenues and expenditures

oActual budget requests are best developed at the level where implementation will take place usually at department level or lower

2.       Steps in budgeting

oThis approach is better than forecasts provided by top management, finance, or marketing because those responsible for implementation are in the best position to identify their own needs, and they will be more motivated if they have had input in the decision making process

oMajor categories of resources used in SCM include personnel, equipment, furnishings and training

2.       Steps in budgeting

oPersonnel expenses include salaries and benefits for the existing staff and proposed additions to staff as well as recruiting expenses such as travel, advertising and relocation expenses

oEquipment expenses include replacement of computer hardware and software, and maintenance of existing equipment, including computers, fax machines, and other hardware and software

2.       Steps in budgeting

oFurnishings include tables, desks, chairs, and other office furnishings

oTraining expenses include travel to seminars, seminar fees, and other training materials, including books, magazines, journals, CD-ROMs and online courses

2.       Steps in budgeting

a.       Estimate the dollar value of resources

oFor budget validation, the dollar value of needed resources must be estimated accurately

oBest starting point is to estimate values by closely analyzing the previous year’s actual expenditures

2.       Steps in budgeting

oThe previous year’s information can be used to extrapolate resource figures for the new budget year

oStandard material purchase costs can be developed from historical data or from an analysis of supply market conditions for coming budget period

oThese costs serve as targets against which to buy for coming period

2.       Steps in budgeting

a.       Present the budget/obtain the appropriation

oHandled differently in organizations

2.       Steps in budgeting

oCommon for a committee to review and consolidate all budgets and make recommendations but many other approaches may exist

oAfter budget presentation and required changes made, appropriations are made to cover the approved expenses during the budgetary period

2.       Steps in budgeting

a.       Variance analysis

oFinal step in budget process is to control the expenditures during the budgetary year

2.       Steps in budgeting

oBudget is the most widely used tool in organizations to provide financial control

oControl activity called variance analysis occurs through matching of appropriations and expenditures, and also through tracking expenditure trends against budget are identified and corrective actions are taken as necessary

3.       Purposes for a budget

a.       Control of expenditures

oPrimary function of budgets is to provide control of expenditures through the allocation of financial resources

oUsing flexible budgeting techniques, the SCM professionals can control expenses relative to the level of business activity

3.       Purposes for a budget

a.       Preapproved funding

oSome organizations, budget indicates pre authorization of expenditures for projects, products, services, or other expenses

oSCM professionals are authorized to spend up to the budgeted amount without gaining additional approvals

3.       Purposes for a budget

a.       Monitoring of expenditures

oAs expenditures are made, they may be compared against the planned expenditures shown in budget

Budgets serve as a management tool that is useful for the evaluation of expected versus actual results

3.       Purposes for a budget

a.       Development of standard costs

oStandard costs are used in estimating budgets for materials and labor

oIf given forecast of revenue, the standard costs are used to estimate material and labor requirements

oSuch costs can then be allocated across budget centers, departments or subsidiaries as appropriate

4.       Types of budgets

a.       Zero based budget

oIs a process that does not use past experience to determine future needs

oISM glossary states zero based budgeting is an operating, planning, and budgeting process in which each manager must begin each budgeting period with no predetermined allocations and must justify and viewed as new requests as opposed to continuations of current programs

4.       Types of budgets

oZero based budget is helpful in questioning the traditional way things have been done in which all programs including those that have been in effect for years must be justified, prioritized, and subjected to scrutiny and approval

oFew organizations use pure zero based budget process

oThose that do use the concept generally employ it for selected segments of the operation and use the traditional historical extension concept for developing the budget for rest of the operation

4.       Types of budgets

a.       Cash flow budget

oISM glossary states a cash flow budget links budgeted expenditures to revenue in each budgetary period

oWhat can be spent is a function of what revenue is received

oFunds are made available as expenditures are required

oThis type of cash outlays are forecast over periods of time in weeks or months

This type is useful when tight cash controls are necessary

4.       Types of budgets

a.       Line-item budget

oFormatted to show individual expenses during the budgetary period without tying those expenses into broad programs or goals

oTypical line item budget would include categories as salaries, office supplies, travel, equipment, telephone expenses and postage

oEach of categories contains further detail of these expenses

oLine item budgets are generally incremental to a large extent they are based on the previous budget period

4.       Types of budgets

a.       Program/project budget

oAlso known as program planning budgeting systems (PPBS)

oThis type of budget is common among not for profit and governmental entities

oProgram budgets tie the organization’s goal and objectives to the programs or sections responsible for meeting those objectives

oTo further the relationship between goals and funds spent, this type uses productivity measurements and cost benefit analysis

oProgram budgets have the advantage of allowing management to evaluate and make decisions on the need for various programs

4.       Types of budgets

a.       Capital budget

oDefined in the ISM glossary as a financial plan specifying the amount of money to be spent on plant and equipment

oCapital budget is for buildings, equipment, and other long term assets used for the operation of the organization

oPrimary purpose of capital expenditures budgeting is to provide a formal summary of future plans for acquiring facilities or equipment

4.       Types of budgets

oPrimary purpose of capital expenditures budgeting is to provide a formal summary of plans for acquiring facilities or equipment

oThis area is critical because of the magnitude of funds involved and the length of time required for capital recovery

oCapital expenditures budget can serve as a basis from which supply management can determine the best possible for a new asset

oCapital expenditures budgeting involves planning both short and long range expenditures

oShort range expenditures must be included in the budget for the current year and must be evaluated in terms of their economic worth

oLong range expenditures usually will not be implemented during the current budget period since their representation in the budget can be somewhat general terms

4.       Types of budgets

a.       Flexible budget

oThose that change depending on changing conditions such as increase or decrease in output

oAnother type of flexible budget is the variable budget which is a set of budgets that account for different conditions

4.       Types of budgets

oFlexible budgets are based on a formula to determine the required budget amounts as a function of planned output

oObvious advantage of flexible budgets is that they allow quick responses to changing conditions

B-3 pg 101-104

Identify savings potential and opportunities and strategies for specific categories through spend analysis

1.       Sources of spend data

2.       Data mining tools

3.       Cost baseline

a.Forecasting future utilization and spend

b.Cost savings versus cost avoidance

c.Budget reduction

d.Current/historical data as the basis for future budget forecasting

4.       Awareness of implementation process

5.       Segmentation/categorization of spend

1.       Sources of spend data

a.       Benefits of spend management include an understanding of what is bought, by whom, and for what purpose

b.      Information can help SCM professionals identify opportunities for cost savings through standardization and aggregation

c.       Spend analysis data Should offer substantial detail on individual suppliers, users, prices, quantities, part numbers, and descriptions and specifications for services

1.       Sources of spend data

a.       Information if available is often widely scattered among ERP systems, accounts payable and general ledger files, purchase order systems, procurement card and e-procurement records, engineering and production control databases, and inventory and warehouse management systems, requiring extensive manual collection efforts

b.      Use of ERP systems which includes modules for data analysis has made identification of spend data less onerous for supply professionals

2.       Data mining tools

a.       Utilization of ERP systems, such as SAP or Oracle, the easiest approach is to use the data-mining suite for spend analysis

b.      If no system is available, wide range of alternatives are available for data mining such as software applications from organizations such as Ariba Inc., i2Technologies and Emptoris, Inc.

2.       Data mining tools

a.       Additionally, number of sourcing services are available through organizations such as Ariba, CGI Group Inc., and Verticalent

b.      Consultants such as A.T Kearney, IBM, or Deloitte may be hired for purposes of analyzing spend

3.       Cost baseline

-          Determination of baseline cost is an important step in conducting spend analysis

a.       Forecasting future utilization and spend

                                                               i.      SCM uses many different forecasting techniques for establishing future utilization and spend

                                                             ii.      Quantitative techniques such as casual models, use indicators including GDP growth and interest rates to predict future volumes

                                                            iii.      Qualitative methods such as Delphi technique may involve gathering opinions from people to develop a forecast

3.       Cost baseline

a.       Cost savings versus cost avoidance

                                                               i.      SCM professionals should distinguish between opportunities for cost reductions and cost avoidance

                                                             ii.      Cost reduction means a reduction of the costs associated with acquiring and using a particular product or service

                                                            iii.      Cost reductions may be obtained by selecting alternative materials, processes, services, sources and purchasing methods

3.       Cost baseline

                                                               i.      Cost avoidance is an effort to prevent or reduce supplier price increases or ancillary changes

                                                             ii.      Cost avoidance and cost savings can be accomplished through identical techniques such as value analysis and negotiation

                                                            iii.      Since cost avoidance savings are less tangible then cost reduction, there is continuing debate over how best to report cost avoidance savings

3.       Cost baseline

a.       Budget reduction

                                                               i.      Spend analysis and opportunities for cost reduction or cost avoidance should be translated into organizations budget

                                                             ii.      This process requires involvement of accounting or finance departments which may have to validate saving opportunities or recalculate new costs

3.       Cost baseline

a.       Current/historical data as the basis for future budget forecasting

                                                               i.      Cost baseline provides a basis on which future performance can be evaluated

                                                             ii.      Changes to the current budget such as expected cost reductions or cost increases are incorporated to develop a forecasted budget

4.       Awareness of implementation process

a.       Spend analysis

b.      Identification of opportunities for cost savings through standardization, leverage, etc

c.       Negotiation with internal stakeholders for new requirements and volumes

d.      Negotiation for new pricing and volumes with supplier

e.      Adjustments to budget

5.       Segmentation/categorization of spend

a.       SCM professionals may segment their organization’s spend along a number of different categories such as by supplier, commodity, category of purchases, region, department, etc.

b.      Usage of computers and e-business systems such as ERP systems possibilities are endless

5.       Segmentation/categorization of spend

a.       Objective of spend segmentation must remain clear to identify opportunities for cost reduction through standardization as well as opportunities for leverage

b.      Method of segmentation should reflect opportunities within the organization

c.       May be necessary for SCM professionals to take several different approaches to identify a full range of opportunities