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The Total Cost Organization

Quality Control Processes in Cost Management


by Michael Vargas

Michael Vargas is the founder and principal of Atlas Project Support. Mr. Vargas has more than 10 years of construction and energy accounting and utilization experience, and is a Certified Business Energy Professional through the AEE; a California Association Building Energy Consultant - Certified Energy Plans Examiner, LEED Green Associate; and Green Building Certification Institute Continuing Education Advisory Panel Member. Mr. Vargas also holds a BSBA from San Diego State University, and MBA and MPM from Keller Graduate School of Management. For more information contact Michael at mvargas@myatlasproject.com or via the web at www.myatlasproject.com.

Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risks. Simply stated, it is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product, or service. This is accomplished through the application of cost engineering and cost management principles, proven methodologies and the latest technology in support of the management process. ("John K. Hollmann, Fellow and Technical Director at AACEI)

Introduction
Total Cost Management (TCM) is the sum of the practices and processes that an enterprise uses to manage the total life cycle cost investment in its portfolio of strategic assets. Costs in TCM include any investment of resources in the enterprise's assets including time, monetary, human, and physical resources. Total refers to TCM's comprehensive approach to managing the total resource investment during the life cycle of the enterprise's strategic assets. The enterprise can be any endeavor, business, government, group, individual, or other entity that owns, controls, or operates strategic assets. Strategic asset is shorthand for any unique physical or intellectual property that is of long term or ongoing value to the enterprise. For most cost engineers, strategic assets equate to capital assets; however, the term strategic asset is more inclusive (e.g., may include things that are considered expenses). The asset may be a building, an industrial plant, a software program, or a stage production. Strategic asset investments are made through the execution of projects or programs. Projects are temporary endeavors for creating, modifying, maintaining, or retiring strategic assets. Products and services may be considered strategic assets in that before a product can be made or a service performed, many investments must be made through the execution of projects for research, development, design, and so on. One way that TCM adds value to the body of cost engineering knowledge is that it integrates areas of cost management that are too often
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treated as separate entities or fields. It is important that cost engineers understand the four relationships between the various fields of practice with which they are likely to interact or in which they may be expected to perform. TCM is an integrating process that not only maps the fields of practice of cost engineering, but also provides links to the fields of project management, resource management, and management accounting practice. TCM provides a unique technical perspective that is often missing from financially focused approaches (hence the term cost engineering). The Figure below illustrates how TCM, with roots and emphasis in project management and project control, has a balanced focus on product and capital costs, project and operational work processes, and resources of all types. In other words, it covers the total costs of the business.

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Literature Review
The purpose of the TCM Framework is to provide an integrated and theoretically sound structure upon which recommended best practices can be developed for those areas of TCM. The Framework achieves this objective by establishing an integrated process map of TCM. The process map helps ensure that best practices products are consistent with each other and free of unnecessary duplication. As the structure for best practices products, the Framework, by extension, also provides a technical framework that all companies producing products and services can use. Having achieved its primary purposes, there are many other possible uses of the Framework. For example, the Framework defines key concepts and provides illustrations that can aid communication between cost engineering practitioners. This is particularly important because cost management is practiced in a myriad of enterprises such as construction, manufacturing, software development, real estate development, healthcare delivery, and so on. Also, practitioners striving for functional excellence may lose sight of overall cost management objectives. In addition, students and newcomers to the cost management field can gain a broad understanding of the field from the Framework. For educators, the framework can provide the structure for a course that can be enhanced with selected readings. Companies and skilled cost engineering practitioners that are looking for better ways to tie their disparate cost functions and asset management into an effective system will find that the framework adds structure and value to their efforts. The Framework also provides a conceptual process model on which professionals can benchmark or pattern cost management work processes and practices within their enterprises.

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Total Cost Management is a quality driven process model. As such, the Framework employs process management conventions. A process consists of a flow of inputs and outputs with mechanisms that transform the inputs to outputs. The Framework maps the process flows of TCM. The transforming mechanisms or activities are referred to as tools, techniques, or subprocesses. The inputs and outputs of TCM consist primarily of data and information.

The TCM Framework

Basic Processes of TCM

Functional Processes for Strategic Asset Management

Functional Processes for Project Control

Enabling Processes for TCM

Introduction

The TCM Process Maps

Strategic Asset Planning

Project Control Planiing

Enabling Processes

Basis

Project Implementation Project Control Plan Implementation Strategic Asset Performance Measurement Strategic Asset Performance Assessment

The Enterprise in Society People and Performance Management Information Management

TCM

SAM

Project Control

Project Performance Measurement

Quality Management Project Performance Assessment

Value Management Environment, Health, and Safety

The figure above illustrates how chapters and key sections can be grouped by basic or overarching processes, functional or working processes, and enabling and supporting processes.

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The TCM process model is based upon the PDCA management or control cycle, which is also known as the Deming or Shewhart cycle. The PDCA cycle is a generally accepted, quality driven, continuous improvement management model. PDCA stands for plan, do, check, and assess, with the word check being generally synonymous with measure. The word assess is sometimes substituted with act as in to take corrective action. The PDCA cycle is the framework for TCM because: (1) it is time-proven and widely accepted as a valid management model; (2) it is quality driven; and (3) it is highly applicable to cost management processes, which are cyclical by nature. The PDCA cycle in TCM includes the following steps: Plan - plan asset solutions or project activities Do (i.e., execute) - initiate and perform the project or project activities in accordance with the plan Check (i.e., measure) - making measurements of asset, project, or activity performance Assess (i.e., act) - assessing performance variances from the plan and taking action to correct or improve performance to bring it in line with the plan or to improve the plan.
PLAN Plan Activities

ASSESS Evaluate Measures, Act upon Variances PDCA Cycle

DO Perform Activities

CHECK Measure Performance of Activities

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Demonstrations and Business Applications


The pursuit of increased productivity and quality has been a driving force of worldwide business management for decades. Process management and process reengineering emphasize the need for enterprises to identify their work processes and continually improve them. At the same time, global mergers, acquisitions, and reorganizations in the digital age have created continual disruption, deconstruction and re-birth in the economy. This seeming chaos demands speed and flexibility while putting a premium on innovation and leadership. Effective processes are needed to support continuous quality improvement while nurturing innovation and change without chaos. TCM as described in the Framework is a process map that supports continuous process improvement while being flexible. It is not intended to be a set of rigid rules or work procedures. While each of the sub process maps of TCM may look rigid when set on paper, users may chose to emphasize those process steps that are most critical to their situation. Steps can be skipped when they are not applicable and information flows can be modified to suit the needs of the enterprise. If the enterprise or market is growing, the emphasis can be placed on asset creation and scheduling aspects. On the other hand, if the enterprise or market is mature, the emphasis may be put on asset maintenance and cost aspects. In practice, the processes are quite flexible. In addition, TCM supports cross-functional integration and multi-skilling. Few enterprises in a dynamic environment can afford to have cadres of functional specialists. However, multi-skilling may come at the price of having less experience, skill, and knowledge than desired in any one function. Weaknesses in individual skill and knowledge place a premium on having reliable, integrated processes like TCM.

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One real life example of implementation of the TCM is paper products maker MeadWestvaco in Glen Allen, Virginia. As the company's procurement organization began to outline its 2008-2010 strategy, it reviewed some of its sourcing initiatives, especially as they related to supplier innovation, total cost management, demand management and market intelligence. "We felt that there were important enablers that could help us differentiate ourselves in sourcing," says Daniel McNally, Senior Director of Raw Materials and Energy Sourcing (Atkinson). Another example of a successful transition into TCM, Ford Motor Co. has put suppliers as the focus of its cost-cutting campaign. The automaker's new Total Cost

Management Center furthers Ford's efforts to make suppliers more efficient by getting rid of waste. True, in many ways the Center is simply a new house for existing programs. But the building, which opened last month, also symbolizes the company's efforts to improve. "We must cut costs continually and strongly," said Germinder Bedi, Ford Vice President of Truck Vehicle Operations. He was speaking to representatives from Ford's 150 biggest suppliers recently at the grand opening of the center in Dearborn, Michigan.

On the opposite spectrum is an example of the forced movement to the TCM philosophy that occurred at NWP. NWP operates an interstate natural gas pipeline system consisting of approximately 4000 miles of trunk line and 42 compressor stations. The entry process to TCM and the first process for strategic asset planning is requirements elicitation and analysis. In the case study, NWP identified stakeholders, elicited primary needs and expectations but did not scrutinize or evaluate expectations regarding long term costs and the assumed minimum level of reliability. NWP has the strategic objective to be the low cost provider of natural gas transportation services in their market areas. Two basic and unequivocal requirements are that NWP will operate its pipeline system in a safe and reliable manner. Anything less would

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eliminate them from competition within the natural gas industry. (Lewis). This case study demonstrates the lack of the TCM process being implemented. In this case study the alternative selection was short sighted and did not fully consider the associated risks. This case study also shows a lack of measured discipline in the face of business urgency. NWP has learned from this lesson in TCM and has adopted new processes that now include some form of the TCM framework processes. (Lewis). The TCM processes have been primarily described from a quantitative, monetary perspective with the primary end of the process being the wealth or monetary welfare of the enterprises owners. We need to remind ourselves that TCM, at least in the investment decisionmaking process, should be concerned with economic costs. Economic costs consider that the value of money is relative to time, currency, and context, including the societal context; an amount of money saved to benefit both the enterprise and society has a greater value than the same amount of money saved to benefit only the enterprise. All societal values must be considered in planning, measurement, and assessment. (Hollmann). It is expected that an

enterprise will to do everything possible to promote performance and productivity. Performance begins with having capable or competent people. The figure below illustrates a typical performance expectancy model in which the individuals have basic capabilities that result from many factors. The performance outcome of the individuals activities partly depends on effectively developing and using that capability. Competency models help assure that appropriate skills and knowledge are developed and experience is obtained over the course of an individuals career. For example, an individuals performance of competencies in the model can be rated, with overall performance being weighted for the importance of each competency to the

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organizations objectives. Identified performance gaps can be addressed through training, new assignments, coaching, mentoring, and so on.

Conclusion
Like many other Quality Management Systems, I have identified the precursors, processes, and results of the Total Cost Management Theory. A company that consistently selects the right projects and executes them with excellence can improve return on capital employed (ROCE) and ultimately total shareholder return (TSR). Four key elements to success are a structured project management process, management's active involvement, application of value improving/best practices and total cost management. Effective project management improves ROCE by increasing revenues, decreasing expenses, and reducing capital employed (Lavingia). There are many definitions and perceptions of what quality and quality management are. In simple terms, quality in TCM is conformance of an asset with requirements and

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expectations. Quality management is what an enterprise does to ensure that its assets meet these requirements and expectations.

In my own career as a Project Manager, I have found considerable benefit from understanding the framework for compiling and analyzing how economic costs impact a project. This big picture understanding of the economics of my projects has led to numerous quantifiable rewards. I conclude with some "friendly advice" on total cost management. Total cost

management should be approached as a process, not a program, developed and implemented by a full-time manager. Training and skills development need constant attention. You need to obtain management support early and keep results and issues visible to maintain that support. An important part of the process is to drive ownership to the local/operational level. Resourcing the process is important and you need commitment from the parties and dedicated financial support.

Total Cost is not easy. It can be complex in the early years when changes are being made to culture and processes. It takes a lot of work and the execution can be difficult, but it works and the payback on your investment can be very high. For several years, leading-edge companies have applied the principles of Total Cost Management. TCM helps these companies focus on the business processes and activities giving rise to costs and consuming resources. Key elements of TCM are activity-based costing, process value analysis, and performance measurement. These tools have increased cost accuracy and have identified and eliminated duplicative and non-valueadded activities. The Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risk. Simply stated, TCM is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service.

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Works Cited
Atkinson, William. "MeadWestvaco leverages market intelligence for procurement." Purchasing; Metals Edition, Vol. 136 Issue 11 (8/16/2007): 18-19, 2p. Hollmann, John K. PE CCE, Editor. Total Cost Management Framework: An Integrated Approach to Portfolio, Program, and Project Management. Morgantown,: AACE International, 2006. Lavingia, Nick J. " Improve Profitability Through Effective Project Management and Total Cost Management." Cost Engineering; (Nov2003): 22-24, 3p, 3 charts. Lewis, Rose Mary and Spencer, Gary Rock. "Total Cost Management: A Case Study in Missed Opportunity." AACE International Transactions (2007): 03.1-03.6, 6p. Woodyard, Michael and Sherefkin, Rober. "Ford escalates war on waste." Automotive News (1999): Vol. 73, Issue 5815.

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