Achieving Business Excellence through Strategic Cost Management

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Achieving Business Excellence through Strategic
Cost Management
CMA Deepak Ukidave
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Evolution of Business Processes

• Time Motion Study
• Statistical Quality Control (SQC)
• Zero Defects
• Quality Circles
• Total Quality Management (TQM)
• Business Process Re-Engineering (BPR)
• Lean Six Sigma (IT Automated Processes)

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BPR Lean Six Sigma

• Value is defined according to customers needs
  thereafter product is defined in terms of
  specific price time.
• Process Mapping is done to determine management
  tasks for the business to do comprehensive
  overview of documentation system.
• Eliminate Wastages, functional barriers at
  planning stage to improve lead time.
• Need to develop improve customer desire for
  product or service rather than pushing sales.
• There is no time for complacency. The next lean
  transformation is repeated when perfection is
  reached in the first initiative.

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Classic Examples of BPR

• Centralised Online real-time exchange (CORE)
  Banking, where all banking services are available
  to customers at any branch, ATM and thru internet
  mobile banking channels.
• Instant fund transfers- Radical change in the
  Banking System.
• Online Business transactions between parties.
• Credit Card transactions authentication
  ensuring safety security.
• E-tendering transparency in allowing
  competitive bidding.
• E-payments of statutory dues.

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Classic Examples of BPR

• E-Filing of Statutory Returns.
• E-Procurements Supply Chain Management
• Accounting transactions thru BPO firms across
  borders.
• Computer Aided Designing Manufacturing for
  products.
• ERP MRP
• etc.

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Business Process Management (BPM)

• Technique of Value creation for customers cost
  reduction, thereby enhancing profits.
• Helps companies to gain Competitive Advantage.
• Sustainable Growth in market share.
• Highly motivated workforce ensures employee
  retention.
• BPM involves aligning, process designing,
  modelling, implementing, measuring
  optimisation.
• Constructing a Cost Competitive Organisation and
  focussing on VALUE.

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Role of CMAs in BPM

• Benchmark Analysis- Problem Identification Stage
• Documentation of Best in Industry performance
  levels.
• Suggestion of proper KPIs which measure progress
  towards improving operational efficiency.
• Generate Analysis which accurately highlight the
  relevant workflows appropriate performance
  measures.
• Application of Cost Mgmt. tools like SCM, CRM,
  ERP for effective implementation of BPM.
• Application of Learning Curve Technique to the
  proposed process improvement and assess the
  impact on Strategic decisions related to
  employment levels, costs, capacity pricing.
• Application of Project Mgmt. tools to increase
  the process speed or reduce cycle time to improve
  quality, to reduce costs, ensure best value use
  of resources satisfy needs of projects
  stakeholders.

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Cost Reduction

• Permanent, Real reflects genuine Cost Savings
  in per unit cost of the product.
• Corrective function, since it presumes existence
  of potential savings in norms or standards.
• Analysis challenge of standards, if reqd.
• Continuous process of critical examination.
• Fully Dynamic approach.

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Cost Control

• Achievement of pre-determined target.
• Preventive function, where costs are optimised
  before they are incurred.
• Concerned with maintenance of performance
  according to standards, investigation of
  variances remedial action.
• Routine Exercise lacks dynamic approach.
• Oriented towards monitoring mechanism.

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Cost Reduction or Control ?

• Staff Transport Facility withdrawn.
• Canteen facility discontinued.
• Nomination to external training programs
  suspended.
• Employee welfare measures kept on hold.
• Learning Development activities abandoned.

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Areas for Cost Reduction

• Introduction of new product design to achieve
  savings in material usage.
• Improvement of existing design to affect savings
  in materials by substitution of cheaper
  materials.
• Standardisation simplification of parts
  components to improve productivity reduce
  inventory.
• Production planning to reduce costs through
  better layout, change of location, etc.
• Tool design standardisation to eliminate
  materials wastages reduce labour time.
• Efficient use of support services.

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Areas for Cost Reduction

• Look out for alternative sources of materials.
• Undertake energy saving schemes by reducing use
  of steam power.
• Control transmission losses of power by better
  insulations.
• Technical innovations technological improvement
  to effect economies in yield.
• Achieve lower cost by better economies of scale.

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Techniques of Cost Reduction

• Value Chain Analysis to identify unnecessary
  costs.
• Work Time and Motion Study to eliminate
  wasteful procedures.
• ABC Analysis to control inventory.
• Vendor rating for better deals or trapping new
  sources.
• EOQ other methods for improvement in lead time.
• Operations Research Techniques like LPP,
  PERT/CPM, Simulations, etc.
• Use of marginal costing technique in managerial
  decisions like make or buy or exploration of new
  markets.

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Corporate Examples

• Tata Motors
• Peak sales of 27,000 units of Nano in Jan- March
  2012 quarter dropped to 4,000 units in Oct- Dec.
  2013.
• Strategy Introduction of new Nano Twist (costing
  just under Rs. 2.36 lakhs) Nano eMax focussing
  on youth re-positioning of its Nano brand as
  smart city car and fashion accessory for
  youngsters.

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Corporate Examples

• Toyota Motor Corp.
• Reported highest annual loss of 4.4 billion in
  2008-09
• Strategy Reinstall Toyota Production System
  (TPS) for total waste elimination, quick delivery
  of high quality, low cost vehicles as desired by
  customers.
• Set up a training academy Toyota Tech. in
  Bangalore to offer training to bright students
  from rural schools to mould them into world class
  technicians in automobile manufacturing plant
  maintenance.

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Myths Otherwise

• We are making good profits, why cringe on
  costs?
• Thats the best time for Strategic Cost
  Management!
• Only troubled businesses need to worry
• Good Healthy Business may have more cost
  inefficiencies!
• Its their (!!) Responsibility
• Cost Management is everyones business!
• Costs are incurred.
• Costs should be carefully planned purposefully
  spent!

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Strategic Cost Management

• Overhead absorption, variance analysis not
  over-emphasised.
• Price is secondary to right quality, quantity
  time.
• Focus on Value not Cost.
• Non- Financial measures also on radar, like ppm
  defects, yield analysis, machine downtime costs,
  etc.
• Systematic tracking of customer acceptance.
• Customer as Focus area- Zero Defect Concept.
• Quality Costing as a diagnostic management
  control tool.

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CONTEMPORARY ISSUES IN STRATEGIC COST MANAGEMENT
SYSTEM

• Target Costing
• Value Chain Analysis
• Quality Costing
• Life Cycle Costing
• Activity Based Costing (ABC)

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Target Costing Process
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Target Costing

• You are the manager of a paper mill (Alpha Ltd)
  and have recently come across a particular type
  of paper, which is being sold at a substantially
  lower rate (by another company Beta Ltd) than
  the price charged by your own mill. The value
  chain for one use of one tonne of such paper for
  Beta Ltd is follows,
•  
• Beta Ltd Merchant Printer Customer
• Beta Ltd sells this particular paper to the
  merchant at the rate of Rs.1,466 per tonne, Beta
  Ltd pays for the freight which amounts to Rs.30
  per tonne. Average returns and allowances amount
  to 4 of sales and approximately equals Rs.60 per
  tonne.
• Continued.

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Target Costing

• The value chain of your company, through which
  the paper reaches the ultimate customer is
  similar to the one of Beta Ltd. However, your
  mill does not sell directly to the merchant, the
  latter receiving the paper from a huge
  distribution center maintained by your company at
  Haryana. Shipment costs from the mill to the
  Distribution Center amount to Rs.11 per tonne,
  while the operating costs in the Distribution
  Center have been estimated to be Rs.25 per tonne.
  The return on investments required by the
  Distribution Center for the investments made
  amount to an estimated Rs.58 per tonne.
• You are required to compute the Mill
  Manufacturing Target Cost for this particular
  paper for your company. You may assume that the
  return on the investment expected by your company
  equals Rs.130 per tonne of such paper.

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Product Life Cycle (PLC) Costing

• PLC costing traces costs and revenues of each
  product over several calendar periods throughout
  their entire life cycle.
• The costs are included in different stages of the
  PLC.
• Development phase R D cost / Design Cost.
• Introduction phase Promotional cost / Capacity
  costs.
• Growth phase / Maturity Manufacturing cost /
  Distribution costs / Product support cost.
• Decline / Replacement phase Plants reused /
  sold / scrapped / related costs.

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Quality Costing

• While better quality of work may reduce the
  reworking cost, improving quality calls for some
  expenditure.
• Various quality cost
• Cost associated with quality of design
• Cost associated with quality of conformance

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Quality Costing

• Prevention cost To reduce number of defective
  unit produced
• Appraisal cost Quality standards, inspection
  cost
• Internal failure cost Manufacturing losses,
  scrap, spoiled units which cant be salvaged
  quality audits, reliability test, cost of
  analyzing investigating and reworking defects.

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Quality Costing

• External failure cost Addressing customer
  complaints, warranty repairs, replacements or
  product recall
• Quality costing reports throw light on potential
  trade off among different types of quality costs

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Activity Based Costing (ABC)

• Classification of activities into unit level,
  batch level, product level and facility level.
• Concept of cost pool and cost driver
• More accurate than traditional costing

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Advantages of ABC

• Increase profitability
• Helps in price determination
• Process improvement
• Accurate inventory valuation
• Optimum use of resources
• Useful for internal decision making
• Control of non-production cost
• Make or buy decisions

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• Thank You