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4

What are the typical cost drivers?

Hello everybody, I heard feedback from a Case Partner that I should name cost drivers faster. So my thinking here is the following: there are fixed and variable cost, and the main drivers for fixed and variable are:


Fixed costs:

  • Rent / Lease / Property / Production site
  • Possible depreciation
  • Administration

Variable costs:

  • Personnel
  • Energy/ Water
  • Unit costs/ material

Now my two questions:

1) Are these the most important cost blocks or have I overlooked something important here? I am interested in an overview of the possible cost sources, which can then be adapted to specific cases.

2) Where would you also assign the terms production costs, operating costs and investment costs to fixed and variable areas?

Thanks a lot!

Hello everybody, I heard feedback from a Case Partner that I should name cost drivers faster. So my thinking here is the following: there are fixed and variable cost, and the main drivers for fixed and variable are:


Fixed costs:

  • Rent / Lease / Property / Production site
  • Possible depreciation
  • Administration

Variable costs:

  • Personnel
  • Energy/ Water
  • Unit costs/ material

Now my two questions:

1) Are these the most important cost blocks or have I overlooked something important here? I am interested in an overview of the possible cost sources, which can then be adapted to specific cases.

2) Where would you also assign the terms production costs, operating costs and investment costs to fixed and variable areas?

Thanks a lot!

4 answers

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Alright, so let's try to bring some order into this. :)

You first have to understand that there are different ways to classify costs. These can then be layered on top of each other using a matrix or similar if this is considered sensible.

At the highest level, there are

  • Operational costs
  • Costs of capital (usually interest payments)
  • Investments

You are mostly talking about Operational Costs. Depending on the criterion used, there are at least 4 possible categories for subdivision:

  • Contingent on the behavior of costs in the event of fluctuations in production, there are
    • Fixed Costs
    • Variable Costs
  • Depending on the type of production factors consumed, a distinction is made between
    • Personnel costs
    • Operating costs
    • Material costs
  • According to the functional area in the value chain, there are
    • Procurement costs
    • Warehousing/storage costs
    • Manufacturing costs
    • Administrative expenses
    • Direct sales & distribution expenses
    • Aftersales expenses
    • Other costs (such as marketing)
  • Depending on how costs are attributed to the products or services, a distinction can be made between
    • Direct costs
    • Overhead

A couple of important points:

  • Production costs usually cover all costs that can be attributed to the production of produced goods (but interestingly, they are not always direct costs, since material overheads and production overheads can also be included!). This would include the three cost types procurement costs, storage costs and manufacturing costs in the breakdown by functional areas (as mentioned, if directly attributable to the product).
  • Overhead costs and are usually fixed.
  • Investments are not operational costs and should therefore be separated from the above consideration

    Cheers, Sidi

Alright, so let's try to bring some order into this. :)

You first have to understand that there are different ways to classify costs. These can then be layered on top of each other using a matrix or similar if this is considered sensible.

At the highest level, there are

  • Operational costs
  • Costs of capital (usually interest payments)
  • Investments

You are mostly talking about Operational Costs. Depending on the criterion used, there are at least 4 possible categories for subdivision:

  • Contingent on the behavior of costs in the event of fluctuations in production, there are
    • Fixed Costs
    • Variable Costs
  • Depending on the type of production factors consumed, a distinction is made between
    • Personnel costs
    • Operating costs
    • Material costs
  • According to the functional area in the value chain, there are
    • Procurement costs
    • Warehousing/storage costs
    • Manufacturing costs
    • Administrative expenses
    • Direct sales & distribution expenses
    • Aftersales expenses
    • Other costs (such as marketing)
  • Depending on how costs are attributed to the products or services, a distinction can be made between
    • Direct costs
    • Overhead

A couple of important points:

  • Production costs usually cover all costs that can be attributed to the production of produced goods (but interestingly, they are not always direct costs, since material overheads and production overheads can also be included!). This would include the three cost types procurement costs, storage costs and manufacturing costs in the breakdown by functional areas (as mentioned, if directly attributable to the product).
  • Overhead costs and are usually fixed.
  • Investments are not operational costs and should therefore be separated from the above consideration

    Cheers, Sidi

(edited)

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Hi,

I recommend selecting the top industries and downloading the annual company reports of the biggest public companies in each industry. Start going trhough the reports and googling all the concepts that you do not understand. It's good to make a mindmap for each industry / function

Focus on the most common industries in the following priority (sorted by probability of geting a case): 1-retail and CPG; 2-airlines; 3-Telecom; 4-banking; 5-natural resources; 6-tech

For each industry, you should understand:

  • Revenue streams
  • Cost structure
  • Margins
  • Key performance indicators
  • Key revenue drivers
  • Industry trends

I strongly recommend drawing the typical structures for each industry - profitability, value chain, etc

In terms of functional knowledge it is:

  • Marketing (Brand and trade marketing tools, etc)
  • Supply chain (Ops metrics like cycle time and throughput time, distribution and delivery specifics, etc)
  • Operations (Process optimization basics)
  • Finance (Very basic Finance and Valuation)

Good Luck

Best!

Hi,

I recommend selecting the top industries and downloading the annual company reports of the biggest public companies in each industry. Start going trhough the reports and googling all the concepts that you do not understand. It's good to make a mindmap for each industry / function

Focus on the most common industries in the following priority (sorted by probability of geting a case): 1-retail and CPG; 2-airlines; 3-Telecom; 4-banking; 5-natural resources; 6-tech

For each industry, you should understand:

  • Revenue streams
  • Cost structure
  • Margins
  • Key performance indicators
  • Key revenue drivers
  • Industry trends

I strongly recommend drawing the typical structures for each industry - profitability, value chain, etc

In terms of functional knowledge it is:

  • Marketing (Brand and trade marketing tools, etc)
  • Supply chain (Ops metrics like cycle time and throughput time, distribution and delivery specifics, etc)
  • Operations (Process optimization basics)
  • Finance (Very basic Finance and Valuation)

Good Luck

Best!

Hi Anonymous,

this is obviously a HUGE question.

A very basic, but useful framework for the revenue side is the Ansoff Matrix (look it up). This will help you to come up with a lot of ideas.

On the cost side, you should consider the two main drivers: economies of scale and economies of scope. Also, think about the configuration of the value chain: where do you see the potential for in- or outsourcing? Is "geo-arbitrage" an option, by shifting labour-intensive processes to low-wage countries (or energy intensive processes like Aluminum smelting or data centre operation) to countries with low energy costs, such as Iceland. What about a reduction of complexity (--> A/B/C analysis)?

I know these are just some very general pointers, but they should get you started.

Cheers

Elias

Hi Anonymous,

this is obviously a HUGE question.

A very basic, but useful framework for the revenue side is the Ansoff Matrix (look it up). This will help you to come up with a lot of ideas.

On the cost side, you should consider the two main drivers: economies of scale and economies of scope. Also, think about the configuration of the value chain: where do you see the potential for in- or outsourcing? Is "geo-arbitrage" an option, by shifting labour-intensive processes to low-wage countries (or energy intensive processes like Aluminum smelting or data centre operation) to countries with low energy costs, such as Iceland. What about a reduction of complexity (--> A/B/C analysis)?

I know these are just some very general pointers, but they should get you started.

Cheers

Elias

(edited)

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