Cost Drivers

Cost drivers. A cost driver is a cause of cost. If you do more of it, it drives your cost up. If you do less of it, it drives your cost down.

Let's review a couple of examples here, just to solidify the concept.

Setup Machines

Setup machines is one example. First, a little background: some companies have crews that go out and set up the machines to make the next batch of product. It can be something as simple as cleaning the paint tank to switch from painting red to painting green. It can be an auto company that is stamping bumpers, changing the dye in the machine so that it can start stamping doors.

What causes the cost? You've got a cost pool called "setup machines" and there's $1,000,000 in it. Where did that $1,000,000 in cost come from?

• Part of it is from the number production runs scheduled. Assuming that each production run requires a set up, then every time you schedule another production run, the setup crew has to go out and change the machine, and that's costly.
• The length of time it takes to do a set-up is another part. A four-hour setup is more costly than a one-hour setup.
• The scheduling of the setups is another factor. If you have your setup crew doing the setups while the facility is in full operation and they have to make production workers stand and wait, that's going to be a more costly setup than if you have the setup crew do the setup while the factory is closed or do the setup on an extra machine that is idle.
• The size and pay rate of the set-up crew affects the cost. If you give your setup crew a 5% raise, everything else held equal, your setups are going to be more expensive than they were before the raise.
• The equipment available for setups and its condition affects the cost. If you're using old forklifts that break down, it's going to affect the time and cost of doing a setup.

Shipping

Shipping is another example. Shipping cost is caused by a number of factors:

• The number or shipments: more shipments cost more money.
• The method of shipment: shipping overnight is more expensive than shipping a five-day delivery.
• The size of the shipment: if you have two boxes that are each ten pounds, and one is a square foot while the other is five square feet, the bigger one is more expensive to ship.
• The weight of the shipment: if you have two boxes that are each two square feet, and one weighs 10 pounds while the other weighs 40 pounds, the heavier one is more expensive to ship.
• The fragility of the shipment: assuming you are packing fragile items more carefully or with more materials to protect them, paying extra insurance for the fragility, or are replacing items that break in shipment, more fragile items are more expensive to ship.
• The size and pay rate of the shipping department staff.

So, there are a lot of things that drive cost.

Now, why are we covering this? If you're going to manage cost at an organization, the first thing you need to do is figure out what is driving that cost.

Let's take this shipping cost, I can look at this list and say, "Wow, we've got all these causes of shipping cost. What should I address first?" You need to ask, "What's the biggest contributor to shipping costs at our organization?" Let's say that you found out that your organization is so behind on customer orders that it is shipping overnight 40% of the time. Then, perhaps you should first address the method of shipment and try to fix the system, so you don't need to use overnight shipping frequently. After you fix the expedited shipping problem, you need to ask, "Now, what's the biggest contributor to shipping costs at our organization?" in order to determine what to work on next. For example, if you have a lot of breakage in shipment, which you have to replace at your cost, you could review how you pack your shipments.

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