How Can Cost Modeling Improve Decisions And Field Service Profitability?

Blog, Project and Job Costing

Last updated Dec 23, 2019 at 4:01PM | Published on Jan 15, 2013 | Blog, Project and Job Costing

For mobile field service providers and industrial equipment contractors, projected cost modeling can help reduce procurement costs, improve performance throughout the supply chain, and lead to better business decisions.

First, companies need the tools to collect internal data, such as mobile field service software.

But what is cost modeling? In cost modeling, a company uses models to determine the projected or true cost of the products and services they produce or purchase from other suppliers, according to an article on the Inside Supply Management website.

They develop the models by analyzing a range of resource data: direct labor and direct material costs; indirect costs (such as general overhead and labor benefits); research and development costs; selling, general and administrative (SG&A) costs; and profit.

Cost models may be either internal (derived from a company’s own accumulated data) or external (using such sources as industry associations, the U.S. Economic Census or the Bureau of Labor Statistics).

It’s actually quite easy to create external cost models from what’s available in the public domain. To increase field service profitability, companies need the tools to collect internal data. Being able to compare both internal and external models offers significant advantages in negotiation and may support collaborative supply-chain improvements.

When suppliers and supply management use a projected cost model, it “helps ensure that the negotiation is based on fact rather than opinion or negotiation prowess,” according to Victor E. Sower and Christopher H. Sower, authors of the Inside Supply Management article. “It also is more likely to lead to a purchase price that is fair to both parties.”

For field service providers and industrial equipment contractors constructing good cost models, using internal data is a must if you are going to compare it to external data. Getting the right level of granularity by item means your job cost software and field service system needs to track data in the right cost categories — that’s why mobile field service software is so important.

In the end, companies don’t save money through cost models, but instead, through the better decisions this information allows them to make and the communication and collaboration skills they use to engage the cooperation of all stakeholders.

Source: Inside Supply Management, November 2012