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PREFACE
Objective of the Total Cost Management (TCM) Framework
AACE Internationals vision as shown on the cover of this magazine is the Advancement of Cost Engineering Through Total Cost Management. TCM is defined in the AACE International Constitution as, a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service.
To help make our vision a reality and to better define this systematic approach, the AACE Technical Board is developing what is being called the Total Cost Management (TCM) Framework. The TCM Framework will be a process map and associated text that provides an overview of the scope of all the various sub-processes or functions of cost engineering and illustrates how all these sub-processes are related to each other using process management conventions. The TCM Framework will also provide a hierarchical structure that will guide Recommended Practices and Standards development. When complete, the process map and Volunteers supporting text will be a stand-alone text of about 250 pages. We are also looking for volunteers to participate in TCM Framework development. The full document on the website provides an annotated outline of the Framework. Please review this TCM Framework Development Approach outline and let us know if you would be interested in participating The TCM Framework is being developed in serial fashion, in developing any of the sections listed there (contact John section by section (i.e., sub-process by sub-process). A serial Hollmann, PE CCE at jhollmann@ipaglobal.com or 703-810approach is being used because of the size of the effort and 1296). because it facilitates a more meaningful review process. In the coming months, each section (i.e., each TCM subprocess) of the TCM Framework will be developed and issued for A Note on Terminology review until the entire text is complete. The first sections issued The TCM Framework includes some terminology definitions for review are currently available at www.aacei.org. These initial that are either new, or that differ from those in AACEs sections provide the purpose of the TCM Framework, the defini- Recommended Practice and Standard 10S-90, Standard Cost tion of TCM, and the the high level process maps of TCM. They Engineering Terminology. Revisions and new additions are needalso provide an outline of the entire text, listing the many TCM ed to reflect the integrated life cycle process perspective of TCM.
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The review documents on the website separately highlight each proposed definition revision/addition. AACE members are encouraged to comment on this terminology in conjunction with their review of the TCM Framework sections.
build the plant for fabricating the microchipsthe physical plant is another strategic asset. Finally, workers are hired and trained to operate the plant. Worker skill and knowledge are strategic assets and their initial training and plant start-up are executed as projects. Finally, the plant must be maintained and eventually decommissioned. Each component of the chip makers strategic asset portfolio requires investments realized through the execution of projects whose cost must be managed. Each component of the companys asset portfolio has its own life cycle with cost investments to integrate over time. The complex interaction of the asset portfolio component costs over their various life cycles and during operations calls for a total cost management process.
The Basic TCM Process ModelPlan, Do, Check, and Assess (PDCA)
The TCM process model is based upon the PDCA management or control cycle that 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: it is time-proven and widely accepted as a valid management model; it is quality driven; and it is highly applicable to cost management processes that are cyclical by nature. Figure 1 illustrates the PDCA process steps.
during the asset ideation, creation, operation, modification, and termination phases.
CHECK (measure performance of activities) Figure 1The Plan, Do, Check, Assess Cycle or phases that occur during the lifetime of an object or endeavor. The stages or phases are sequential groupings of processes that result in an intermediate deliverable or progress milestone. While the life cycle for a given asset has a defined beginning and end, the process actions are not a straight linean asset is usually modified and recycled many times with ongoing ideation leading to changes and improvements. The life cycle of a strategic asset can be summarized in the following 5 stages. 1) Ideationrecognize an opportunity or need for a new or improved asset, evaluate, research, develop and define optional asset solutions that address the opportunity, and select an optimum asset solution. 2) Creationcreate or otherwise implement the asset solution through execution of a project or program. 3) Operationdeploy or put the new or modified asset into service, function, production, operation or other use. 4) Modificationimprove, modify, or otherwise change or recycle the asset through execution of a project or program. 5) Terminationdecommission, close, retire, demolish, remove, dispose or otherwise terminate the asset from the enterprises portfolio (often through execution of a project or program). Resource investments are made via the execution of projects
STRATEGIC ASSET PLANNING (4)
Plan
Assess
STRATEGIC ASSET PERFORMANCE ASSESSMENT (3)
Assess
Strategic Asset Management Process (2.3) PROJECTS IMPLEMENTATION (5) PROJECT PERFORMANCE ASSESSMENT (7) Project Control Process (2.4) PROJECT ACTIVITY IMPLEMENTATION (9)
Do
STRATEGIC ASSET PERFORMANCE MEASUREMENT (6) PROJECT PERFORMANCE MEASUREMENT (10)
Do
Check
Check
Portfolio of Projects
gram, SAM is not concerned with day-to-day project tasks; SAM focuses instead on initiating and managing the overall portfolio of projects in a way that addresses the strategic objectives of the enterprise. To paraphrase an old saying, the SAM process is more concerned with doing the right projects than with doing the projects right. The main financial objective of many enterprises is to maximize the total long-term economic return or profit from its asset investments. The economic performance of existing and proposed assets is often difficult to measure, yet the pressure to improve performance is relentless. Resources available to invest in assets are often limited or scarce while various parts of the enterprise may be in competition for those resources. In addition, the business environment is highly dynamic and uncertain. The SAM process therefore attempts to balance opportunities and risks against demand and supply for resources in such a way that the enterprises objectives are met. As previously discussed, strategic asset management is built on the following PDCA cycle steps: (1) Planestablishing resource investment plans in assets; (2) Domaking measurements of asset and project performance; (3) Checkcomparing the measurements against the plan; and (4) Assess/Acttaking corrective, mitigating, or improvement action as may be determined. Figure 3 translates those overall steps into subprocesses that will be more generally recognizable by practitioners (the numbers refer to future sections of the TCM Framework that will elaborate on each sub-process). The SAM process starts with assessing enterprise objectives,
Project Control
Enterprise Management Business Strategies, Goals, Objectives, Requirements Strategic Requirements Assessment (3.1) Improvement Opportunities (variance from baseline plans) Strategic Performance Assessment (3.2) Investment Options Development (4.1)
(4.2) Estimating, Parametric Analysis, ABC Economic & Profitability Analysis Problem and Decision Analysis Iterative, concurrent processes Analysis Basis & Feedback Value Engineering & Management (8.5) Risk Analysis & Management (8.6)
Strategic Scope, Requirements, and Budget Decision (Resource Allocation for Selected Options)
(4.2)
Asset Performance Asset Performance, and Valuation Measures History & Learnings Asset Life Cycle Operations
requirements, and resource constraints and from those determining strategic asset performance requirements (Section 3.1). Benchmarking and other means are used to identify improvement opportunities for new or existing asset performance (Section 3.2). Considering the requirements and opportunities, asset investment options are identified and developed (Section 4.1), and then evaluated and decided upon (Section 4.2). The investment decisions are part of an integrated asset portfolio management plan (Section 4.3). Asset investment plans and requirements are communicated to and executed by project teams (Section 5.1). Asset performance measurements usually include profitability, but quality or other performance measures may be used (Section 6.1). Asset performance assessment includes techniques for determining if the profitability, quality, and other parameters vary from established plans and benchmarks. Also, adverse or positive trends or changes in performance are evaluated (Section 3.2). If everything is according to plan, the process continues on. If there are performance deviations noted in assessments, action should be taken to correct or improve the asset performance trend. If performance corrections will affect asset portfolio investment plans, or changes to enterprise requirements or resource availability occur, then asset portfolio investment plans must be managed to incorporate the changes (Section 4.3.)
Figure 4 further illustrates project control as a process (the numbers refer to future sections of the TCM Framework that will elaborate on each sub-process). A project starts with assessing strategic asset requirements and determining project performance requirements (Section 7.1). Based upon the project requirements, the strategic asset scope description is expanded to a project scope (Section 8.1) and
Strategic Asset Management Strategic Asset Scope Description, Project System Requirements, & Budget (5.1) Project Requirements Assessment (7.1) Asset, Project History & Learnings (6.1) Forecasting, Corrective Action, & Change Management (7.3)
Planning & Scheduling (8.2) Cost Estimating & Budgeting (8.3) WBS
Schedule Baseline (Activities) Cost Baseline (Budget) Communicate, Execute Plans (9) Project Accounting (10.1)
Improvement Opportunities (variance from baseline plans) Project Performance Assessment (7.2) Value Engineering (8.5)
Analysis Basis & Feedback Risk Analysis & Contingency (8.6) Baseline Plans
integrated plans for cost, schedule, and resource management are developed (Sections 8.2 to 8.4). The plans are time-phased baselines against which performance is measured. Value engineering (Section 8.5) ensures that the scope and plans consider the functional importance of scope relative to costs. Risk analysis (Section 8.6) ensures that the scope and plans address uncertainty. The plans are communicated to and executed by the performing parties (Section 9.1 and 9.2). For work in progress, performance measurements include accounting for cost expenditures and commitments, as well as physical progressing that includes measures of the work and resource quantities that have been completed (Sections 10.1 and 10.2). Performance assessment includes evaluative techniques for determining if the expenditures and progress vary from the plans and if there are adverse or positive trends, or changing performance (Section 7.2). If everything is according to plan, the control process continues on with more measurements. If there are performance deviations or trends noted in assessments, action should be taken to correct or improve the performance trend. Forecasting techniques (scheduling, estimating, and resource planning) are used to determine if corrective actions will achieve plan targets. If performance corrections will affect the project scope, or changes to the requirements or scope are initiated by the strategic asset or other stakeholder, the project baseline plans must be managed to incorporate the changes (Section 7.3.)
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s should be evident by the number of sub-processes identified on the process maps in this overview article, there is much work to be done to complete the TCM Framework. The Technical Board asks all AACE members that are interested in contributing in some way to this effort to contact John Hollmann, PE CCE at jhollmann@ipaglobal.com or 703-810-1296. Also, please visit www.aacei.org and review the full version of the above material including the annotated table of contents of the TCM Framework. Thank you for your support!N
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