Introduction to Strategic Cost Management

INTRODUCTION TO STRATEGIC COST MANAGEMENT (SCM)

Prof. Priyanka Acharya

What is a Cost?

The total money, time and resourcesassociated with a purchase or activity.

Cost means the amount of expenditure(actual or notional) incurred on, orattributable to, a given thing.

Cost Management Information

Cost Management Information (CMI)includes financial information about costand revenues and relevant non-financialinformation about productivity, qualityand other key success factors for thefirm

CIMA includes both financial and non-financial and both short-term and long-term information that managers need to

lead their firms to competitive success.

CMI used for Four Management Functions

1. Strategic Management

2. Planning and Decision-Making

3. Management and Operational Control

4. Preparation of financial statements

Types of Organizations

1 Merchandising

2 Manufacturing

3 Service Industry

4 Not for profit organizations

What is SCM?

According to Cooper and Slagmulderstrategic cost management is "theapplication of cost management techniquesso that they simultaneously improve thestrategic position of a firm and reducecosts".

Their can be three types of costmanagement initiative, based on whetherthe impact on the organization'scompetitive position is positive,negative or neutral.

What is SCM?

Shank and Govindarajan defines strategiccost management as "the managerial use ofcost information explicitly directed at oneor more of the four stages of strategicmanagement:

(1) formulating strategies

(2) communicating those strategies throughoutthe organization

(3) developing and carrying out tactics toimplement the strategies and

(4) developing and implementing controls tomonitor the success of objectives".

SCM-Concept

Philosophy

Strategic cost management is a philosophy ofimproving cost and revenue

It is not only cost management but alsorevenue management, therefore, it is seekingto improve productivity, maximize profit,and improve customer satisfaction.

This philosophy plays a vital role indetermining the future of the companybecause it promotes the idea of continuallyfinding ways to help organizations make theright decisions to create more customervalue at lower cost

An organization's products and services aremeasures of customer value through qualityproducts, superior customer service, fairpricing, etc.

Attitude

SCM represents a proactive attitude that allthe costs of the products and servicesresult from management decisions within thecompany and with customers and suppliers.

Market orientation

Holistic overview

Anticipatory approach

Continuous

Participation

Cross-functional

Set of Techniques

The set of techniques or instruments areused individually to support a specificgoal or together to serve the overallneeds of the organization

For example: An ideal cost managementsystem should provide any desiredinformation, in any desired format, andon demand to any authorized person in theorganization

Forces of change and cost management-primary concern in the 20th century

Forces of change and strategic cost management-primary concern in 21st century

Comparison of traditional cost management and strategic cost management

Traditional Cost Management

Strategic Cost Management

Focus Internal External

Perspective Value-added Value chain

Cost analysis-way In term of product, customer, and functionWith a strongly internal focusValue added is a key concept

In terms of the various stages of the overall value chain of which the firm is a partWith a strongly external focusValue-added is seen as a dangerously narrow concept




Cost analysis-objective

Three objectives all apply, without regard to the strategic context: Score keeping, attention directing, and problem solving.

Although the three objectives are always present, the design of cost management system changes dramatically depending on the basic strategic positioning of the firm: either under a cost leadership strategy, or under a productdifferentiation




Cost driver concept A single fundamental cost driver pervades literature - cost is a function of volume.Applied too often only at the overall firm level.

Multiple cost drivers such as: Structural drivers (e.g. scale, scope, experience, technology, complexity)Execution drivers (e.g. participative management, total quality management)Each value activity has a set of unique cost drivers.

Strategic cost management -concerns and objectives

Objectives of SCM

Strategic cost management is not limitedto cost but is inclusive to all resourcesused and deployed across the value chain

Strategic cost management is not confineto its concerns and objectives only tocost, but also consider revenue,productivity, customer value, and at thesame time the strategic position of thecompany.

For determining the profitability, theorganizations need to understand whattheir total costs were, are, or are goingto be over a given period of time

SCM-Cost Improvement and revenue enhancement

Object-Resources

Means

By identifying cost drivers that link resources, activities and cost objects and using resources efficiently

Focusing resources on the customers

By measuring the cost and performance of resources

By improving the purchasing process

Managing procurement costs


Object-Processes

Means Reduce operational costs by optimizing value-addedactivities and eliminating non-value-addedactivities

Explore customer expectations and define value fromthe customer's perspective

Identify which steps add value for the processcustomer and those that don't

Determine which investments in process improvementwill maximize the value produced

Manage company costs in terms of what you do(processes) not resources consumed

Gain competitive advantage by reducing cycle time Develop better financial and non-financialperformance measures

Improve profits without sacrificing customersatisfaction


Object-Products

Means

Cost management should be inherent to each stage of a product's life cycle

Identify and analyze cost drivers

Provide accurate product cost information


Object-Customers

Means

Managing customer service costs

Competitors

Means

Competitor Cost Analysis

SCM-Framework

1. The guiding principles of strategic cost management

2. The key concepts of strategic cost management

3. The objects of strategic cost management

4. To analyze the fields & activities of strategic cost management

5. The instruments of strategic cost management

6. The key support factors of the suggested framework

Documents

Introduction to Strategic Cost Management