AAOM Handbook

Note that the cost of most resources is not the major source of volatility in cost forecasts, because of either small and gradual price changes or because they do not have a dominant position in the cost of the activity. The major source of volatility is more often the variability in the workload - hence the importance of a credible OMS to the delivery of a credible expenditure forecast. Ideally, each Activity on the OMS should have either a Job Template or a Cost collector, or both, in the Enterprise Resource Planning system (ERP). These records should identify both the Resource Types that are utilised in the work and the consumption and cost of these resources. Where available, this information should be used to populate the Resource Types and their cost estimates for the EPS. If this information is not available from the ERP (e.g. when a new OMS Activity is created) then the Resource Types and costs will need to be estimated from first principles. Where the OMS should be used as a roadmap to the achievement of the process output targets, the EPS should be used as a guide to the responsible commitment of costs. In order to achieve this the progress of actual work and cost commitments against the forecast of the OMS/EPS must be tracked. This requires that each work package created in the ERP be recorded as an event and cost against the appropriate Activity in the OMS/EPS. These records support the tracking of the actual frequency, timing and cost of work compared to the forecast of the OMS/EPS. This comparison can be used to validate the accuracy of estimates and, to identify the degree of variability over time, or to identify where detailed analysis may be necessary in order to update the estimates of resource usage and costs. It is not necessary to record the cost of every occurrence of an Activity in the EPS (the detail will reside in the ERP). What is necessary to record in the EPS is the number of occurrences of each Activity within a forecasting/measurement period and the total cost of all of the occurrence during that period. If there is a significant difference between the forecast and actual frequencies and costs for a period then the detailed analysis can be made in the ERP. When Activities have both significant cost per occurrence, and a low frequency of occurrence in a forecasting/measurement period (for cost information the shortest interval is usually monthly), the impact of this variability on the forecast for that period may be substantial. When Activities have a high frequency of occurrence in a forecasting/measurement period the total cost will converge on the product of the frequency and the average cost. Hence low frequency Activities will require an estimate of the distribution of likely cost outcomes while high frequency Activities can use an estimate of the average cost. Because of the inevitable presence of variation in both frequency and cost of Activities, the cost forecasts from the EPS cannot be a single value, they must be probability distribution of outcomes. The EPS must therefore provide a statistical model that deals with these variables and forecasts the probability distribution of outcomes. The confidence level of the cost performance target can be determined from this distribution. Resources such as materials and utilities that are consumed in the course of completing work, are managed through a supply system, and are charged to the appropriate work order/cost receiver as used. The pricing of these

© McAlear Management Consultants 2006

Operational Planning: Set Expenditure Schedule

Updated: August 2018

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