Do you know the SECRET behind the ability that a great category manager instantly “grasp” the most important cost issues in his category?
The secret is simple: best category managers and procurement advisory professionals have mastered the skill of using ‘Cost driver trees’ to understand ‘cost’ value generation! World-class category management is an ask of most CPOs on earth and without tangible value and cost-saving, the profit targets are difficult. ‘Cost driver trees ' are the #1 tool to understand how and where to fix the spend aka cost.
What are cost driver trees (and why category manager should care about it)
Cost driver trees are a special kind of issue tree, that is created with the sole intent of analyzing the spend – and cost drivers in a category considering unit cost and volume for various cost branches. It helps in -
1. Improving understanding of ‘Cost Insights’ of the category
Insight is the culmination of the value available through all the outputs of this tool. Specifically, it provides insight on the current state of the cost angle of category management and identifies a portfolio of improvements and strategies that match the business needs category management is supporting. Additionally, it also produces a thorough business case based on the costs of implementation and the resulting benefits expected from the change.
2. Supporting benchmarking of status quo
The tool helps to slice and dice the cost-specific details to the granular level. AT this level one can benchmark the relative cost performance of your organization against the best in class peers in the same industry, or compare them against the commercial best in class saving case getting developed
3. Supporting diagnostics
The derived results from the exercise can be used to define the main factors currently contributing or detracting from the cost performance of the category. Results can be used to reinforce or dismiss anecdotal theories describing what is affecting the cost performance.
4. Benefits Tracking
When a cost perforce leavers are implemented, the resulting change in cost performance can be compared to baseline figures. This can provide evidence as to the success of the improvement, or act as an early warning that additional intervention is required to ensure that the improvement meets its expected improvement goals
5. Reinforcing the Value generation
Ultimately, the purpose of the tool is to equip decision-makers with the information and insight they require to improve how the cost reform needs to take place at the category level and at the spend bucket level
I was introduced to the very systematic Cost Driver Tree concept while in my first experience of cost transformation for a Pharma Giant in 2008. It was introduced by Supply chain leadership to achieve the cost clarity of the spending and hence derive the tangible ways to reduce the spend. Over the period of time, this tool has become a favorite of mine and I was able to deliver tangible savings and value through this tool. Cost Driver Trees are a simple effective tool that can be used in any category. In this article, I want to explore the concept in more detail, explain how they can help your category management. A Cost Driver Tree is a map of how different unique spend branches in a given category fit together. On the far left, you have an overarching metric you want to drive. As you move to the right, you become more granular in terms of how you want to achieve that goal. Each branch gives you an indicator of the component parts that make up the “what” above them.
Every category manager wants to achieve sustainable value and saving generation. And skillfully using cost driver trees is the most efficient, direct way to understanding if you are paying more than a market average/ comparable standards. Most of the category managers use cost driver tress for 2 major reasons -
- There are many, many category nuances in how you can and should use cost Trees linked with decision trees to solve different problems. Get these nuances right and you’ll see insights faster
- Cost driver Trees are derived from decision tree philosophy to slice and dice the cost to understand the root cause of high cost and. It can be used to solve pretty much any category management decision-making. Sometimes they serve to be the primary tool, other times just a secondary one. But they’re always useful
I am planning to describe the cost tree framework in 3 major sections (Will be published as a separate article in the coming days).
- Know the Basics – Let's see what is the underlying logic of the cost tree framework, how to find some salient saving drivers in it
- Process of Customizing cost tree - If you’re always breaking down costs using the same drivers, regardless of industry and business situation, you’re missing the whole point of slicing and dicing the cost. Let's see how to customize it for your category
- Example of customized cost tree