Here is an overview, a complete step by step check list to implement “The AIM & DRIVE® Process”:

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Checklist for Preparing for an AIM & DRIVE Exercise

  1. Chart out where you are on the journey from leveraging volume to leveraging ideas.
  2. Determine whether you are ready for an AIM & DRIVE exercise.
  3. Make a buy-in presentation to top management.
  4. Select key categories and top suppliers for each.
  5. Send invitations to stakeholders and key suppliers.
  6. Brief customer/supplier team leaders on the AIM & DRIVE process.
  7. Determine resource requirements (both monetary and human).
  8. Educate participants.
  9. Schedule strategy sessions.

 

Step-1. Agreeing on the Need to Manage Costs through the Supply Chain

Let’s not waste precious time developing a strategy if it’s only going to gather dust on a bookshelf. Before going further you’ve got to ask yourself: ‘‘Am I interested in managing costs through the supply chain, thereby becoming more competitive, along with my suppliers and customers?” If the answer is ‘‘yes’’ you are ready to proceed with the rest of the steps. The first step involves selecting your project, putting together a cross-functional team that includes your key supplier/s as well as internal and external stakeholders, and determining the goals of the team from different perspectives. You’ve got to start identifying like-minded companies in the supply chain as soon as possible. And you’ve got to start leading the supply chain in the AIM & DRIVE process right away. At least before other competing supply chains get their act together.

Here are steps to do:

  1. Review business plan and procurement/marketing strategy.
  2. Identify initial participants for the team.
  3. Agree on the primary cost or project topic for AIM & DRIVE.
  4. Select the rest of the cost management team, including stakeholders and supplier/s.
  5. Determine team goals from various perspectives.
  6. Complete a Goal Specification Worksheet.
  7. Update Master Worksheet.

 

Step-2. Identifying Critical Costs in the Supply Chain

A cost that is not understood is a cost that is hard to manage. The second step involves understanding the supply chain cash flow. Money enters the supply chain only once and it’s the job of the cost management team to determine how cash flows through your company and your supply base. While many companies prefer not to discuss cost breakdowns with their customers, this step is a true test of a collaborative relationship. No one expects a full disclosure or ‘‘open kimono.’’ However, unless one understands where costs are incurred in a supply chain, it becomes increasingly difficult to determine which costs are critical and therefore require more detailed analysis.

Here are steps to do:

  1. Map the process and list activities.
  2. List the cost elements associated with various activity boxes in the process map.
  3. Obtain cost data for each cost element from suppliers, should cost models, or internal data.
  4. Organize the cost data in the Cost Activity Worksheet.
  5. Complete the worksheet for identifying critical costs in the supply chain:
    • Break down costs into level one, level two, level three, etc.
    • Determine whether the cost elements are future cash flows or not.
    • Select the top two or three future cash flows (costs) to carry forward for more analysis and list the reasons for doing so.
  6. Complete Master Worksheet.

 

Step 3. Measuring Secondary and Tertiary Costs

Once costs are identified through the supply chain, the next stage is to apply a measurement process to each major cost or sub-cost. This is by far the most difficult part of cost management, yet a very critical one. Remember, a cost that is not measured is not managed. The question is: what is the best method to measure costs? Since traditional and, to some extent, even modern cost accounting systems have failed to help the users of those systems to ‘‘manage costs,’’ we’ll use a commonsense approach called Formula Based Costing that I invented only because I was so frustrated with the existing cost accounting systems. This will be explained in greater detail in Chapter 5. The objective of Formula Based Costing is to generate a list of cost drivers through the use of algebraic equations. A cost driver is a measure of an activity that causes a cost. A driver represents a ‘‘causal relationship’’ between an activity and a certain cost. This means that a change in a given activity should result in a change in the cost that is driven by that activity.

Here are steps to do:

  1. Select the critical costs identified in Step 2.
  2. Write a formula for each of the critical costs, keeping in mind:
    • The objective is not to calculate numbers but to identify cost drivers.
    • In a formula the left-hand side (LHS) must be equal to the right-hand side (RHS).
    • The LHS represents the cost element being measured.
    • The RHS represents the cost drivers.
    • Cost drivers move within a range unless they are constants.
  3. Stretch the formula as much as possible.
  4. Name each variable (cost driver) in the equation.
  5. The end of a formula should typically be the revenue driver.

 

Step 4. Defining Key Cost Drivers and Developing Strategic Options

The most difficult part of measuring costs is to extract a list of cost drivers. Once this is accomplished in Step 3 of the process, the next step is to select one or more drivers as key cost drivers. Selecting a driver as a key cost driver can be done by a cross-functional team, either by observation or by using a matrix described in greater detail in Chapter 6. Attention is then focused on developing a list of strategic options for the selected drivers. Strategic options tell us what makes the value of a cost driver change. This is, in effect, your databank of ideas.

Here are steps to do:

  1. List the cost elements that you identified as critical cost elements in Step 2.
  2. List the cost drivers for each of those cost elements based on your formula.
  3. Eliminate repetitive names of cost drivers.
  4. Assign weights to each cost element based on their respective values.
  5. Evaluate the impact of each cost driver on its corresponding cost element.
  6. Calculate the weighted impact score of each cost driver.
  7. Determine the current value of the cost drivers listed.
  8. Determine the potential in the value of each cost driver.
  9. Determine whether the team can impact the value of each cost driver.
  10. Select three or four key cost drivers based on your calculations (matrix) or by observation.
  11. For each selected cost driver list as many factors that affect the value of that driver.
  12. Rank the factors in order of importance for strategy development.
  13. Select four or five factors or strategic options to carry over to the next step.
  14. Update Master Worksheet.

 

Step 5. Reducing, Changing, or Eliminating Activities That Cause Costs

Costs do not disappear with the wave of a magical wand. Having defined the key cost drivers in Step 4, you need to take the list of strategic options and create strategy statements. Each strategy statement is then put through a rigorous risk-benefit analysis from different perspectives in order to identify potential strategies. Strategies are plans that are practical and implement-able. They do not have to be complex or sophisticated in order to be effective. A useful strategy would be to reduce, change, or eliminate one or more of the drivers. The discussion should center on the implications of a change in a given activity. If costs are to go down, certain activities have to be eliminated or reduced. Otherwise, these costs will merely be moved to another account head or redistributed by the creative accountants of the world.

Here are steps to do:

  1. Review the Risk-Return model and think about which box most appropriately describes the project under discussion.
  2. Identify and discuss constraints, if any.
  3. Take the top four or five options and create a strategy statement for each of them with a verb in front and an explanation after each phrase from the list of options.
  4. Discuss and develop a list of risks and benefits from different perspectives for each strategy statement.
  5. Quantify those risks and benefits that can be quantified.
  6. Discuss if any of the benefits can be leveraged and the expected value of the leveraged benefit.
  7. Determine whether strategies are mutually exclusive or not.
  8. Prioritize the selected strategies for implementation.
  9. Enter the results in Master Worksheet.

 

Step 6. Implementing an Action Plan

Developing an implementation plan is as critical to the cost management process as identifying a strategy and writing a strategy statement. While strategies are ideas, implementation plans are a means of converting those ideas into action. This stage involves listing the actions required for each strategy statement. The action plan consists of determining who will do what, how, and by when. Yes, even executives in industry need to be ‘‘organized’’ in order to successfully achieve the benefits of cost management. Why? Because it’s so easy to abandon a project at this stage and go on to fight other fires. Implementation plans, obviously, aim at successfully implementing a given strategy. It is the height of optimism to expect that all strategies will be implemented without a hitch. Murphy’s Law (what can go wrong will go wrong) tends to apply from time to time and put a spoke in your wheel. It makes sense, therefore, to add another dimension to your implementation plan. This requires the creation of contingency plans: alternative strategies you will implement if your goals cannot be achieved by the proposed strategy.

Here are steps to do:

  1. Prepare a detailed list of actions for each strategy statement.
  2. Review risks from previous step and make sure to address those risks.
  3. Get agreement from all members of team on the action plan.
  4. Assign responsibility for each action item.
  5. Specify completion dates for each action item and get agreement from those who are responsible for each such step.
  6. Prepare a contingency plan.
  7. Identify audience for presentation of the strategy.
  8. Have the person presenting go through a rehearsal of the presentation.
  9. Make presentation to obtain buy-in for the plan.

 

Step 7. Verifying the Plan with Cost Monitors

All too often, good strategies do not realize their true potential. You may wonder why not. Perhaps a better idea came along. Not likely. In my experience, plans that fail do so because no one bothered to verify and monitor the process. The purpose of verifying the plan with cost monitors is to make sure that actions are not measured based on mere completion of an item on an action list, but by measuring the impact of change on the value of a given cost driver.

Here are steps to do:

  1. Appoint a project coordinator.
  2. Hold weekly or biweekly meetings or conference calls.
  3. Attend all meetings.
  4. Avoid negotiating during AIM & DRIVE exercises.
  5. Monitor performance against action items.
  6. Draw a new process map.
  7. Document savings and show all calculations.
  8. Document qualitative benefits.
  9. Review goal specification worksheet.
  10. Modify action plan if necessary.
  11. Hold review sessions after six months to grade the team(s).
  12. Share the learning process by publicizing success and acknowledging development opportunities.

 

Step 8. Eternally Improving and Leveraging the Process

Cost management is a journey, not a destination. And the journey, like that of Total Quality Management, never ends. If the process of cost management, spelled out in the seven preceding steps, works successfully on a set of critical costs or sub-costs, then it’s time to start again on other costs, cost drivers, or strategic options. There’s no time to stop and smell the roses. Remember that there’s no patent on improvement. If you are successful, your competitors will be on your heels, putting the same strategies into practice. So, there’s no time to lose; keep the wheels of cost management moving faster than those of your competitors.

Here are steps to do:

  1. Expand on the current strategy to fully exploit all the cost savings.
  2. Select another strategic option for one of the key cost drivers and continue the process from there.
  3. Select another key cost driver or select a cost driver that was not earlier considered a key cost driver.
  4. Identify another cost element for the same primary cost and continue the process.
  5. Select another supplier or other project to implement an AIM & DRIVE strategy.
  6. Set up an AIM & DRIVE database to store all worksheets from various projects.
  7. Use Web 2.0 and other technology to spread the results and success stories.
  8. Leverage ideas across other similar product lines or service contracts.
  9. Reward participants for their effort in the process.

 

Read also other cost management topic related below :

  • Cost Management: The So-Called AIM & DRIVE® Process
  • Cost Management: The Story of Anything Inc.