STRATEGIC COST MANAGEMENT Business Made Simple Managers need to know What do the customers want?

nt? What will they pay for it? What will it cost to provide it?

Costly mistakes can be avoided with this information. Information is the Key to Success To manage in the future, executives will need an information system integrated with strategy, rather than individual tools that so far have been used largely to record the past Information should answer the key question What should I do? - Not What are the results of what Ive already done? Information is the Key to Success Must develop an integrated cost / quality / functionality measurement system Traditional accounting information is not sufficient Backwards looking Fails to measure important items Much important information is not quantitative Designed to meet reporting requirements, not management needs Types of Information Foundation information Basic diagnostics May indicate something is wrong, but not why Basic financial ratios Benchmarked Productivity information

Productivity of key resources Concern should be for total productivity Benchmarked Types of information Competence information Indicates where a business has a leadership advantage Innovation is the most important core competence To win, you have to be the best at something

Resource allocation information How to best use the resources available What if it fails to produce the intended results? What if it is more successful than we imagined? Effective Cost Management Cost management is most effective at the development stage About 85% of costs are committed to at the development stage It is too late to effectively manage costs at the production stage All links in the value chain must be managed Suppliers you customers

Cost Commitment and Incurrence Return on Management Management effort is a vital resource Return on management Organizational productivity Management time and attention invested Stay focused on strategy Do not diffuse talent over too many opportunities Return on Management

Channel energies into the correct projects Detrimental capital budgeting

Pick important measures Should reflect critical success factors Avoid measures that are interesting but not useful

Can managers recall their key measures? Maximum of seven measures

Return on Management Does everyone watch what the boss watches? Are there common goals within the organization? Conflicting goals may be beneficial Stretch goals with adequate resources Stimulate creativity Reduce paperwork and the processes that tie managers down Distinguish between useful and interesting information STRATEGIC COST MANAGEMENT Introduction Imperative for business concerns engaged in Services or production of goods to reduce costs and enhance quality of goods and services to provide better INTRINSIC VALUE to the customer. Entities providing better value & enhancing Customer satisfaction can hope to increase market share STRATEGIC COST MANAGEMENT Introduction Today emphasis of industry is on reduction in COSTS while improving internal efficiencies & product quality. Strategies should be adopted to indulge in Cost reduction and maintain/ increase level of excellence in production and services. Quality and Costs are not INVERSELY RELATED. Strategy is to MINIMIZE COST for GIVEN QUALITY or OPTIMIZE QUALITY for GIVEN COSTS. STRATEGIC COST MANAGEMENT Introduction

SCM has gained because of spiraling costs of manufacturing, marketing, selling and other related functions. It is difficult for industry to survive and thrive unless costs are CORRECTLY ACCOUNTED FOR, CONTROLLED AND REDUCED so as to remain solvent. STRATEGIC COST MANAGEMENT Strategic Cost management consists of :Strategic Analysis of the business is to identify unprofitable products, customers, marketing and distribution channels etc. An evaluation of the business from a value chain perspective It is optimisation of business processes and activities instead of functions and evaluation of decisions It is implementation of continuous cost improvement programmes instead of comparisons with standard costing approaches The use of performance measurement systems that are early indicators of Corporate success in critical areas like time, quality and cost. STRATEGIC COST MANAGEMENT Improvements in activities that add value while value-destroying activities are identified and eliminated Elimination of constraints Helps in implementation of Productivity Management programmes. Value Engineering and Value Analysis are used as important tools to restructure costs. Helps in thorough understanding of Costs behavior and Cost drivers STRATEGIC COST MANAGEMENT STRATEGIC DECISION REGARDING MANAGEMENT OF COST HOW MUCH COST TO ALLOCATE TO EACH ACTIVITY NO FIRM DECISIONS GIVEN/TAKEN A SUBJECTIVE EVALUATION OF BUSINESS CLIMATE AND ALLOCATION OF COSTS ACCORDINGLY WHY STRATEGIC COST MANAGEMENT ? THE PREVAILING COST ACCOUNTING SYSTEM AND PRACTICES DO NOT GIVE TIMELY AND ADEQUATE INSIGHT INTO THE RAPIDLY EVOLVING BUSINESS CLIMATE FOR EFFECTIVE DECISION MAKING.

WHY STRATEGIC COST MANAGEMENT ?

CURRENT ACCOUNTING PRACTICES, PRIMARILY THE BALANCE SHEET AND PROFIT AND LOSS STATEMENT TELL WHAT HAS HAPPENED IN THE COMPANY IN THE PAST (AND EVEN THAT CAN BE SUCCESSFULLY PADDED UP TO REFLECT THE DESIRED RESULT) BUT GIVE NO CLUE ABOUT WHY IT HAPPENED. MORE IMPORTANTLY, IT GIVES NO CLUE AS TO WHAT CAN BE EXPECTED IN THE NEAR FUTURE.

WHY STRATEGIC COST MANAGEMENT ? FINAL COST OF THE PRODUCT INCLUDES RAW MATERIAL COSTS, PRODUCTION COSTS, ADMIN OVERHEADS, DEVELOPMENT COSTS, ADVERTISING /MARKETING COSTS, COST OF CAPITAL, ETC. HOW MUCH COST TO INCUR ON WHICH HEAD LARGELY DEPENDS ON THE NATURE OF PRODUCT, MARKET CONDITIONS, COMPETITION, ETC.

WHY STRATEGIC COST MANAGEMENT ? EG COST OF BOOST HOW DO YOU ALLOCATE PROFITS TO MAREKETING TEAM EFFORTS OR TO SACHIN TENDULKAR OR RECEIVABLES OR PAYMENT CYCLE ENSURED BY SALES TEAM

WHY STRATEGIC COST MANAGEMENT ?

WHY STRATEGIC COST MANAGEMENT ? ANY PRODUCT TO SURVIVE IN THE MARKET MUST HAVE ONE OF THE FOLLOWING ATTRIBUTES :- COST (TOPAZ VS GILLETE BLADES) - FUNCTIONALITY (GILLETE VS TOPAZ BLADE) - QUALITY (ROLEX VS OTHER WATCH BRANDS) - VALUE (PERCIEVED VALUE OF A LIFESTYLE PRODUCT VS COMMODITY PRODUCT)

CLASSIFICATION OF COSTS Costs may be classified as follows :(a) By Nature Material. Labour, Expenses (b) In relation to Cost Centre Direct material, Direct labour, Indirect material, Indirect labour

(c) By Function/Activities Production, Admin, Selling, Distribution Cost (d) By Time Historical Cost, Pre-determined Cost, Standard Cost

CLASSIFICATION OF COSTS (e) For Management Decision Making Marginal Cost, Opportunity Cost, Replacement Cost (f) By Nature of Production Process Batch Cost, Process Cost, Operating Cost (g) By Behaviour Fixed, Variable and Semi-Variable Cost TARGET COSTING It is a system where-in the cost of the final product is fixed before putting the product on the drawing board. Thereafter, the raw material, production processes, functionality (Features), quality, etc are selected to meet the cost objective. This system is relevant for products made for extremely price sensitive segment. It is also used as a market penetration strategy by the new entrants in a matured products market.

TARGET COSTING As companies begin to realize that the majority of a product's costs are committed based on decisions made during the development of a product, the focus shifts to actions that can be taken during the product development phase.

TARGET COSTING Until recently, engineers have focused on satisfying a customer's requirements. Most development personnel have viewed a product's cost as a dependent variable that is the result of the decisions made about a products functions, features and performance capabilities. Because a product's costs are often not assessed until later in the development cycle, it is common for product costs to be higher than desired TARGET COSTING

TARGET COSTING TC is based on three premises: Orienting products to customer affordability or market-driven pricing Treating product cost as an independent variable during the definition of a product's requirements Proactively working to achieve target cost during product and process development. TARGET COSTING

TARGET COSTING Target costing builds upon a design-to-cost (DTC) approach with the focus on marketdriven target prices as a basis for establishing target costs. Following steps required to required to install a comprehensive target costing approach within an organization :a. Re-orient culture and attitudes b. Establish a market-driven target price c. Establish a market-driven target price

TARGET COSTING d. Balance target cost with requirements e. Establish a target costing process and a team-based organization f. Brainstorm and analyze alternatives g. Establish product cost models to support decision-making h. Use tools to reduce costs i. Reduce indirect cost application

j. Measure results and maintain management focus PRODUCTIVITY CONCEPTS Productivity is defined as ratio between Output of Work and Input of Work used in process of creating wealth. Productivity = Output --------------Input

PRODUCTIVITY CONCEPTS Productivity is simply the ratio between amount produced & amount used in course of production These resources can be :(a) Land (Area) (b) Material (Metric Ton) (c) Plant & Machinery (Machine Hours) (d) People (Man Hour) (e) Capital (Rupees) PRODUCTIVITY CONCEPTS Productivity is different from Performance Productivity = Output = Input Performance = Performance Achieved Resources Consumed Actual Work done Ideal or Standard expected work PRODUCTIVITY CONCEPTS Partial Productivity = Ratio of output to one class of input. At one time it considers only one input and ignores all other inputs. It tells us utilization of one resource. Labour Productivity is measured using utilization of

Labour hours whereas Capital Productivity is measured in Rupees. PRODUCTIVITY CONCEPTS Total Productivity Factor = Ratio of output to two input factors labour and capital Eg When a firm installs a new machine, productivity of labour goes up whereas capital productivity decreases Eg Production worth Rs 1000 was manufactured And it consumed Rs 200 worth labour hours and Rs 550 worth capital so TPF = 1000 = 1 .33

200 + 550 PRODUCTIVITY CONCEPTS Total Productivity Model developed in 1979 by David J Sumanth. This considers 05 inputs like Human, Material, Capital, Energy and an item called Other Expenses. It is applied in Service and Manufacturing organisations.

Total Productivity = Total Tangible Output Total Tangible Input

PRODUCTIVITY CONCEPTS Hard and Soft Factors of an Organization. Hard Factors such as costs, quality and availability of resources and raw materials are part of traditional organisations evaluation and are reasonably quantifiable. Soft factors include issues like political and social issues( anti-growth movements, environmental restrictions, labour laws) and factors like Job satisfaction, Incentives, Recognition, Job Morale, Safety etc PRODUCTIVITY CONCEPTS Hard and Soft Factors of an Organization. Hard Factors in Productivity are concerned with physical comforts and other quantifiable elements desired by employees like :(a) Plant conditions

(b) Ergonomics (c) Transportation and Canteen Facilities (d) elimination of hazard PRODUCTIVITY CONCEPTS Hard and Soft Factors of an Organization. Improving Soft Factors will lead to higher morale and improved Productivity in a firm. A manager can do the following :(a) involve workers in development of new methods of working (b) Asking for suggestions from workers (c) Understanding employees through Maslows Hierarchy of Needs TOTAL QUALITY MANAGEMENT Total Quality Management (TQM) is defined as an integrated approach in delighting the Customer (both internal and external) by meeting their expectations on continuous basis, through everyone involved with the organisation, working on continuous improvement alongwith proper problem solving methodology.

The term Customer refers to all those whom we supply products, service etc. Apart from ultimate users, retailers, stockists etc are external customers wheras departments within the company are internal customers to each other. Eg Production department is customer to Purchase department and supplier to Sales and Dispatch department.

TOTAL QUALITY MANAGEMENT Quality is defined as :1. Quality is fitness for use Lays emphasis on Customer. Customers may put product or service to multiple use which manufacturer may not have intended. 2. Quality is establishing Standards and Specifications Laying down standards and specifications for products and services offered is very important. 3. Quality is conformance to standards Standards laid down have to be conformed to TOTAL QUALITY MANAGEMENT Customer satisfaction is unique. Conformance to 99.9% standards maintained in the product may not rise customer satisfaction to 99.9% proportionately. Only when Conformance reaches to

100%, customer satisfaction jumps to 100%. Customer DELIGHT means gaining Customer satisfaction to 100%. TQM means Meeting the agreed requirements of the Customer at the LOWEST COST, FIRST TIME AND EVERY TIME. First time and every time means without rework or rejection. TQM is not a ONE TIME ACTIVITY but has to be pursued by all the employees of the organisation continuously. TOTAL QUALITY MANAGEMENT A customer needs three things Quality, Price and Delivery (QCD). There need not be a tradeoff between Quality and Cost. Costs go up when one blindly raises the standards and specifications of the products without analyzing whether it is adding proportional value to the product in eyes of the Customer. Eg Gold car. QFD Matrix helps in designing the product that is oriented towards customer requirements. TOTAL QUALITY MANAGEMENT QUALITY FUNCTION DEPLOYMENT. It is a technique to assure that the product is designed and manufactured to exceed the customer expectations. It utilizes customer requirements, engineering capabilities and competitive analysis from customer and technical view point. It integrates product requirement with product development. It shows interrelation between engineering requirements and market tests. Helps tell design team on all issues it should focus on. TOTAL QUALITY MANAGEMENT QUALITY FUNCTION DEPLOYMENT. All the information is summarized in a matrix called House of Quality. It consists of :(a) WHAT Specifies voice of customer in terms of requirements to be satisfied. These are termed as Primary, Secondary and Tertiary and ranked as per relative importance. (b) HOW Answers as to HOW customer requirements will be fulfilled. (c) RELATIONSHIP MATRIX - Joins WHAT and HOW rooms. It gives relationship between engineering design and voice of the customer