A critical part of managing cost is to understand how resources are utilized within processes. Managing processes is therefore about optimizing the use of your resources. What we do is help organizations with understanding the cost of sub optimal situations. We do this by using the existing activity based costing model or build one. When we analyze processes we want to know a number of things. Here are a few of them.
Best Practices
When you do something it should be done in the best way. That means that given a certain outcome you look for the best execution. People sometime confuse cost of resources with cost of activities. Let say there is an activity Diagnose patient. Let’s assume that this activity can be done by either a psychiatrist, EUR 120/hr, or a certified nurse, EUR 80/hr. People easily think that the psychiatrist is more expensive. But in practice the opposite might be the case as the psychiatrist might only need 0.5 hr with a total cost of 0.5×120=EU 60 per diagnosis, whereas the nurse needs 1 hour with a total cost of 1×80=EU 80 per diagnosis.
Standardization
When an organization has an activity or process executed at multiple locations it is very valuable to understand the differences in execution. The cost of non-standardization are in general much higher than just the activity itself. Normally it goes back to the quality of materials used (supplier) but also the option provided to customers to request something different.
Opportunity Cost
Every company and organization deals with opportunity cost. The art is to limit these as much as possible by quantifying and visualizing them. We define opportunity cost as the loss of income due to sub optimal use of resources. You have missed out on the opportunity to earn more. Sometimes it is very obvious. For instance someone makes an appointment with the hairdresser but doesn’t show up and there are no other customers. The capacity of the hairdresser is not utilized and you miss income. Other examples are empty hotel rooms, empty warehouse space, airplane seats that are not sold etc. Opportunity cost are especially high when the non utilized capacity can not be used/sold again. And that is always the case with services that are measured in unit of time. Examples M2/day, room/night, rent/month, x hour meeting. But also a seat on flight YY9999 on day x.
Non Value Added activities
First of all we like to know which activities do not add value, or add very little value, to the process. These are the so called Non Value Added (NVA) activities. You like to eliminate or reduce these activities as much as possible. In most cases this is only possible if some prior activities are executed properly. Or that the activity is (more) automated.
Activities that start with RE
As a general rule of thumb do we focus on activities that start with RE. In general the letters Re in Latin means repetition or again. And that means that normally the the prior time was not good enough. Activities you can think of include Reset, Redo, Reorder, Refresh, Receive, Refer, Remind, etc. Some of them seem obvious some maybe less. Of course there are exceptions to this rule of thumb. For instant activities like Reuse, Recycle, Regenerate.