Achieving Business Excellence through Strategic

Cost Management

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CMA Deepak CMA Deepak UkidaveUkidave

Evolution of Business Evolution of Business ProcessesProcesses

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

Processes)Processes)

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BPR & Lean Six SigmaBPR & Lean Six Sigma

Value is defined according to customer’s needs & Value is defined according to customer’s needs & thereafter product is defined in terms of specific price thereafter product is defined in terms of specific price & time.& time.

Process Mapping is done to determine management Process Mapping is done to determine management tasks for the business & to do comprehensive tasks for the business & to do comprehensive overview of documentation system.overview of documentation system.

Eliminate Wastages, functional barriers at planning Eliminate Wastages, functional barriers at planning stage to improve lead time.stage to improve lead time.

Need to develop & improve customer desire for Need to develop & improve customer desire for product or service rather than pushing sales.product or service rather than pushing sales.

There is no time for complacency. The next lean There is no time for complacency. The next lean transformation is repeated when perfection is reached transformation is repeated when perfection is reached in the first initiative.in the first initiative.

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Classic Examples of BPRClassic Examples of BPR

Centralised Online real-time exchange (CORE) Centralised Online real-time exchange (CORE) Banking, where all banking services are available Banking, where all banking services are available to customers at any branch, ATM and thru internet to customers at any branch, ATM and thru internet & mobile banking channels.& mobile banking channels.

Instant fund transfers- Radical change in the Instant fund transfers- Radical change in the Banking System.Banking System.

Online Business transactions between parties.Online Business transactions between parties. Credit Card transactions & authentication ensuring Credit Card transactions & authentication ensuring

safety & security.safety & security. E-tendering & transparency in allowing competitive E-tendering & transparency in allowing competitive

bidding.bidding. E-payments of statutory dues.E-payments of statutory dues.

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Classic Examples of BPRClassic Examples of BPR

E-Filing of Statutory Returns.E-Filing of Statutory Returns. E-Procurements & Supply Chain ManagementE-Procurements & Supply Chain Management Accounting transactions thru BPO firms across Accounting transactions thru BPO firms across

borders.borders. Computer Aided Designing & Manufacturing for Computer Aided Designing & Manufacturing for

products.products. ERP & MRPERP & MRP

……………………………………etc.etc.

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Business Process Management Business Process Management (BPM)(BPM)

Technique of Value creation for customers & cost Technique of Value creation for customers & cost reduction, thereby enhancing profits.reduction, thereby enhancing profits.

Helps companies to gain Competitive Advantage.Helps companies to gain Competitive Advantage. Sustainable Growth in market share.Sustainable Growth in market share. Highly motivated workforce & ensures employee Highly motivated workforce & ensures employee

retention.retention. BPM involves aligning, process designing, BPM involves aligning, process designing,

modelling, implementing, measuring & modelling, implementing, measuring & optimisation.optimisation.

Constructing a Cost Competitive Organisation and Constructing a Cost Competitive Organisation and focussing on VALUE.focussing on VALUE.

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Role of CMAs in BPMRole of CMAs in BPM

Benchmark Analysis- Problem Identification StageBenchmark Analysis- Problem Identification Stage Documentation of “Best in Industry” performance levels.Documentation of “Best in Industry” performance levels. Suggestion of proper KPIs which measure progress towards Suggestion of proper KPIs which measure progress towards

improving operational efficiency.improving operational efficiency. Generate Analysis which accurately highlight the relevant Generate Analysis which accurately highlight the relevant

workflows & appropriate performance measures.workflows & appropriate performance measures. Application of Cost Mgmt. tools like SCM, CRM, ERP for effective Application of Cost Mgmt. tools like SCM, CRM, ERP for effective

implementation of BPM.implementation of BPM. Application of Learning Curve Technique to the proposed process Application of Learning Curve Technique to the proposed process

improvement and assess the impact on Strategic decisions improvement and assess the impact on Strategic decisions related to employment levels, costs, capacity & pricing. related to employment levels, costs, capacity & pricing.

Application of Project Mgmt. tools to increase the process speed Application of Project Mgmt. tools to increase the process speed or reduce cycle time to improve quality, to reduce costs, ensure or reduce cycle time to improve quality, to reduce costs, ensure best value use of resources & satisfy needs of project’s best value use of resources & satisfy needs of project’s stakeholders.stakeholders.

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Cost ReductionCost Reduction

Permanent, Real & reflects genuine Cost Savings Permanent, Real & reflects genuine Cost Savings in per unit cost of the product.in per unit cost of the product.

Corrective function, since it presumes existence Corrective function, since it presumes existence of potential savings in norms or standards.of potential savings in norms or standards.

Analysis & challenge of standards, if reqd.Analysis & challenge of standards, if reqd. Continuous process of critical examination.Continuous process of critical examination. Fully Dynamic approach.Fully Dynamic approach.

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Cost ControlCost Control

Achievement of pre-determined target.Achievement of pre-determined target. Preventive function, where costs are optimised Preventive function, where costs are optimised

before they are incurred.before they are incurred. Concerned with maintenance of performance Concerned with maintenance of performance

according to standards, investigation of variances according to standards, investigation of variances & remedial action.& remedial action.

Routine Exercise & lacks dynamic approach.Routine Exercise & lacks dynamic approach. Oriented towards monitoring mechanism.Oriented towards monitoring mechanism.

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Cost Reduction or Control ?Cost Reduction or Control ?

Staff Transport Facility withdrawn.Staff Transport Facility withdrawn. Canteen facility discontinued.Canteen facility discontinued. Nomination to external training programs Nomination to external training programs

suspended.suspended. Employee welfare measures kept on hold.Employee welfare measures kept on hold. Learning & Development activities abandoned.Learning & Development activities abandoned.

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Areas for Cost ReductionAreas for Cost Reduction

Introduction of new product design to achieve Introduction of new product design to achieve savings in material usage.savings in material usage.

Improvement of existing design to affect savings in Improvement of existing design to affect savings in materials by substitution of cheaper materials.materials by substitution of cheaper materials.

Standardisation & simplification of parts & Standardisation & simplification of parts & components to improve productivity & reduce components to improve productivity & reduce inventory.inventory.

Production planning to reduce costs through better Production planning to reduce costs through better layout, change of location, etc.layout, change of location, etc.

Tool design & standardisation to eliminate Tool design & standardisation to eliminate materials wastages & reduce labour time.materials wastages & reduce labour time.

Efficient use of support services.Efficient use of support services.

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Areas for Cost ReductionAreas for Cost Reduction

Look out for alternative sources of materials.Look out for alternative sources of materials. Undertake energy saving schemes by reducing Undertake energy saving schemes by reducing

use of steam & power.use of steam & power. Control transmission losses of power by better Control transmission losses of power by better

insulations.insulations. Technical innovations & technological Technical innovations & technological

improvement to effect economies in yield.improvement to effect economies in yield. Achieve lower cost by better economies of scale.Achieve lower cost by better economies of scale.

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Techniques of Cost ReductionTechniques of Cost Reduction

Value Chain Analysis to identify unnecessary costs.Value Chain Analysis to identify unnecessary costs. Work & Time and Motion Study to eliminate wasteful Work & Time and Motion Study to eliminate wasteful

procedures.procedures. ABC Analysis to control inventory.ABC Analysis to control inventory. Vendor rating for better deals or trapping new Vendor rating for better deals or trapping new

sources.sources. EOQ & other methods for improvement in lead time.EOQ & other methods for improvement in lead time. Operations Research Techniques like LPP, PERT/CPM, Operations Research Techniques like LPP, PERT/CPM,

Simulations, etc.Simulations, etc. Use of marginal costing technique in managerial Use of marginal costing technique in managerial

decisions like make or buy or exploration of new decisions like make or buy or exploration of new markets.markets.

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Corporate Examples Corporate Examples

Tata MotorsTata Motors

Peak sales of 27,000 units of Nano in Jan- March Peak sales of 27,000 units of Nano in Jan- March 2012 quarter dropped to 4,000 units in Oct- Dec. 2012 quarter dropped to 4,000 units in Oct- Dec. 2013.2013.

Strategy: Introduction of new Nano Twist (costing Strategy: Introduction of new Nano Twist (costing just under Rs. 2.36 lakhs) & Nano eMax focussing just under Rs. 2.36 lakhs) & Nano eMax focussing on youth & re-positioning of its Nano brand as on youth & re-positioning of its Nano brand as “smart city car” and fashion accessory for “smart city car” and fashion accessory for youngsters. youngsters.

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Corporate Examples Corporate Examples

Toyota Motor Corp.Toyota Motor Corp.

Reported highest annual loss of $4.4 billion in 2008-09Reported highest annual loss of $4.4 billion in 2008-09

Strategy: Strategy: Reinstall Toyota Production System (TPS) for Reinstall Toyota Production System (TPS) for total waste elimination, quick delivery of high total waste elimination, quick delivery of high quality, low cost vehicles as desired by customers.quality, low cost vehicles as desired by customers.

Set up a training academy Toyota Tech. in Bangalore Set up a training academy Toyota Tech. in Bangalore to offer training to bright students from rural to offer training to bright students from rural schools to mould them into world class technicians schools to mould them into world class technicians in automobile manufacturing & plant maintenance. in automobile manufacturing & plant maintenance.

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Myths & OtherwiseMyths & Otherwise

““We are making good profits, why cringe on costs?”We are making good profits, why cringe on costs?” That’s the best time for ‘Strategic Cost That’s the best time for ‘Strategic Cost

Management’!Management’! ““Only troubled businesses need to worry”Only troubled businesses need to worry” Good & Healthy Business may have more cost Good & Healthy Business may have more cost

inefficiencies!inefficiencies! ““It’s their (!!) Responsibility”It’s their (!!) Responsibility” ‘‘Cost Management’ is everyone’s business!Cost Management’ is everyone’s business! Costs are ‘incurred’.Costs are ‘incurred’. Costs should be carefully planned & purposefully Costs should be carefully planned & purposefully

spent!spent!

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Strategic Cost ManagementStrategic Cost Management

Overhead absorption, variance analysis not over-Overhead absorption, variance analysis not over-emphasised.emphasised.

Price is secondary to right quality, quantity & time.Price is secondary to right quality, quantity & time. Focus on ‘Value’ & not ‘Cost’.Focus on ‘Value’ & not ‘Cost’. Non- Financial measures also on radar, like ppm Non- Financial measures also on radar, like ppm

defects, yield analysis, machine downtime costs, defects, yield analysis, machine downtime costs, etc.etc.

Systematic tracking of customer acceptance.Systematic tracking of customer acceptance. Customer as Focus area- Zero Defect Concept.Customer as Focus area- Zero Defect Concept. Quality Costing as a diagnostic & management Quality Costing as a diagnostic & management

control tool.control tool.

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CONTEMPORARY ISSUES IN STRATEGIC CONTEMPORARY ISSUES IN STRATEGIC COST MANAGEMENT SYSTEMCOST MANAGEMENT SYSTEM

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

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Target Costing ProcessTarget Costing Process

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Target CostingTarget Costing You are the manager of a paper mill (Alpha Ltd) and have You are the manager of a paper mill (Alpha Ltd) and have

recently come across a particular type of paper, which is being recently come across a particular type of paper, which is being sold at a substantially lower rate (by another company – Beta sold at a substantially lower rate (by another company – Beta Ltd) than the price charged by your own mill. The value chain 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, for one use of one tonne of such paper for Beta Ltd is follows,

  

Beta Ltd Beta Ltd Merchant Merchant PrinterPrinter CustomerCustomer

Beta Ltd sells this particular paper to the merchant at the rate 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 of Rs.1,466 per tonne, Beta Ltd pays for the freight which amounts to Rs.30 per tonne. Average returns and allowances amounts to Rs.30 per tonne. Average returns and allowances amount to 4% of sales and approximately equals Rs.60 per amount to 4% of sales and approximately equals Rs.60 per tonne.tonne.

Continued….Continued….2020

The value chain of your company, through which the paper The value chain of your company, through which the paper reaches the ultimate customer is similar to the one of Beta reaches the ultimate customer is similar to the one of Beta Ltd. However, your mill does not sell directly to the merchant, Ltd. However, your mill does not sell directly to the merchant, the latter receiving the paper from a huge distribution center the latter receiving the paper from a huge distribution center maintained by your company at Haryana. Shipment costs maintained by your company at Haryana. Shipment costs from the mill to the Distribution Center amount to Rs.11 per from the mill to the Distribution Center amount to Rs.11 per tonne, while the operating costs in the Distribution Center tonne, while the operating costs in the Distribution Center have been estimated to be Rs.25 per tonne. The return on have been estimated to be Rs.25 per tonne. The return on investments required by the Distribution Center for the investments required by the Distribution Center for the investments made amount to an estimated Rs.58 per tonne.investments made amount to an estimated Rs.58 per tonne.

You are required to compute the “Mill Manufacturing Target You are required to compute the “Mill Manufacturing Target Cost” for this particular paper for your company. You may Cost” for this particular paper for your company. You may assume that the return on the investment expected by your assume that the return on the investment expected by your company equals Rs.130 per tonne of such paper.company equals Rs.130 per tonne of such paper.

Target CostingTarget Costing

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Product Life Cycle (PLC) Product Life Cycle (PLC) Costing Costing

PLC costing traces costs and revenues of each PLC costing traces costs and revenues of each product over several calendar periods throughout product over several calendar periods throughout their entire life cycle. their entire life cycle.

The costs are included in different stages of the PLC.The costs are included in different stages of the PLC. Development phase Development phase – R & D cost / Design Cost.– R & D cost / Design Cost. Introduction phase Introduction phase – Promotional cost / Capacity – Promotional cost / Capacity

costs.costs. Growth phase / Maturity Growth phase / Maturity – Manufacturing cost / – Manufacturing cost /

Distribution costs / Product support cost. Distribution costs / Product support cost. Decline / Replacement phase Decline / Replacement phase – Plants reused / sold / – Plants reused / sold /

scrapped / related costs. scrapped / related costs.

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Quality CostingQuality Costing

While better quality of work may While better quality of work may reduce the reworking cost, improving reduce the reworking cost, improving quality calls for some expenditure.quality calls for some expenditure.

Various quality cost Various quality cost Cost associated with quality of designCost associated with quality of design Cost associated with quality of Cost associated with quality of

conformanceconformance

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Prevention cost – To reduce number Prevention cost – To reduce number of defective unit producedof defective unit produced

Appraisal cost – Quality standards, Appraisal cost – Quality standards, inspection costinspection cost

Internal failure cost – Manufacturing Internal failure cost – Manufacturing losses, scrap, spoiled units which losses, scrap, spoiled units which can’t be salvaged – quality audits, can’t be salvaged – quality audits, reliability test, cost of analyzing reliability test, cost of analyzing investigating and reworking defects. investigating and reworking defects.

Quality CostingQuality Costing

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External failure cost – Addressing External failure cost – Addressing customer complaints, warranty customer complaints, warranty repairs, replacements or product repairs, replacements or product recallrecall

Quality costing reports throw light on Quality costing reports throw light on potential trade off among different potential trade off among different types of quality coststypes of quality costs

Quality CostingQuality Costing

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Activity Based Costing Activity Based Costing (ABC)(ABC)

Classification of activities into unit Classification of activities into unit level, batch level, product level and level, batch level, product level and facility level.facility level.

Concept of cost pool and cost driverConcept of cost pool and cost driver

More accurate than traditional More accurate than traditional costingcosting

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Increase profitabilityIncrease profitability Helps in price determinationHelps in price determination Process improvementProcess improvement Accurate inventory valuationAccurate inventory valuation Optimum use of resourcesOptimum use of resources Useful for internal decision makingUseful for internal decision making Control of non-production costControl of non-production cost Make or buy decisionsMake or buy decisions

Advantages of ABCAdvantages of ABC

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Thank YouThank You

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