scm

STRATEGIC COST

MANAGEMENT (SCM)

- A RE-VISION!!

Prof. Priyanka Acharya

Cost Management Information

Cost Management Information (CMI) includes financial information

about cost and revenues and relevant non-financial information about

productivity, quality and other key success factors for the firm

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.

What is SCM?

According to Cooper and Slagmulder strategic cost

management is "the application of cost

management techniques so that they simultaneously

improve the strategic position of a firm and reduce

costs".

Their can be three types of cost management

initiative, based on whether the impact on the

organization's competitive position is positive,

negative or neutral.

What is SCM?

Shank and Govindarajan defines strategic cost management as "the managerial use of cost information explicitly directed at one or more of the four stages of strategic management:

(1) formulating strategies

(2) communicating those strategies throughout the organization

(3) developing and carrying out tactics to implement the strategies and

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

SCM-Concept

Philosophy

Strategic cost management is a philosophy of improving cost and revenue

It is not only cost management but also revenue management, therefore, it is seeking to improve productivity, maximize profit, and improve customer satisfaction.

This philosophy plays a vital role in determining the future of the company because it promotes the idea of continually finding ways to help organizations make the right decisions to create more customer value at lower cost

An organization's products and services are measures of customer value through quality products, superior customer service, fair pricing, etc.

Attitude

SCM represents a proactive attitude that all the costs of the products and services result from management decisions within the company and with customers and suppliers.

Market orientation

Holistic overview

Anticipatory approach

Continuous

Participation

Cross-functional

Set of Techniques

The set of techniques or instruments are used individually to support a

specific goal or together to serve the overall needs of the

organization

For example: An ideal cost management system should provide any

desired information, in any desired format, and on demand to any

authorized person in the organization

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 function

With a strongly internal

focus

Value added is a key

concept

In terms of the various

stages of the overall

value chain of which the

firm is a part

With a strongly external

focus

Value-added is seen as

a dangerously narrow

concept


cost management

Traditional Cost

Management

Strategic Cost

Management

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 product

differentiation strategy.


cost management

Traditional Cost

Management

Strategic Cost

Management

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

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

SCM-Cost Improvement and revenue enhancement

Object-Processes

Means

Reduce operational costs by optimizing value-added activities and eliminating non-value-added activities

Explore customer expectations and define value from the customer's perspective

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

Determine which investments in process improvement will 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-financial performance measures

Improve profits without sacrificing customer satisfaction


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

SESSION 2

The Guiding Principles of Strategic Cost

Management

1. Understand what causes the cost and revenue

structure of the business

2. Identify the firm's activities and select those that can

be used to produce (or sustain) a competitive

advantage

3. Understand and reduce inter-functional complexity

4. Increase effectiveness and continuously improve costs

5. Use strategy to manage costs

6. Build skills

7. Involve employees in decisions

Strategic Cost Management - Analyze Fields &

Activities

Instruments of Strategic Cost Management

Activity based costing and management

Target costing

Life cycle costing

Benchmarking

Total Quality Management

Value-chain analysis

Strategic Cost Management - Key Support Factors

Strategic cost management-framework cannot be established without

the active support of the top management of the company.

Top management's commitment is a prerequisite to the successful

implementation of any strategy or innovation

In order to develop and implement the strategic cost management-

framework, commitment on the part of the top management should

include a culture of continuous improvement

Cost Benefit Analysis with reference to Strategic

Decision Making

When a cost is incurred it could be in a form of deferred cost (asset)

or expired cost (expense).

Deferred costs are unexpired costs which provide benefit in future periods.

Examples of deferred cost are prepaid rent, insurance etc.

Expired Costs are those which have been used in generating revenue and

benefits have been received immediately.

Cost Benefit Analysis Qualitative & Quantitative:

STEPS

First: Determine the strategic issues

Second: Specify the criteria and identify the Alternative Actions

Third: Analyze Relevant Costs

Fourth: Select and Implement the Best Course of action

Fifth: Evaluate Performance

Broad Classification

Functional

Classification

Element

Wise

Classificatio

n

Classification by

Cost

Components

Accounting Classification

Production Costs Direct Costs

(Traceable

Costs)

Direct Material Prime Cost Works Cost Cost of

Production

Cost of sales or

Total Cost

Selling Price

Direct Labour

Direct Expenses

Indirect Cost

(Common

Costs)

Manufacturing

Expenses

Administration

Costs

Administrative

Expenses

Selling & Dist.

Costs

Selling Expenses

Distribution

Expenses

R & D Cost R&D Expenses

Net Profit Net Profit Net Profit Net Profit

Decisions through Cost Benefit Analysis

Make or Buy

Drop or Add

Operate or Shut down

Special Orders

Sell or Process

Optimizing Product Mix

Cost Control vs. Cost Reduction

Cost control Cost reduction

This process undertakes the competitive analysis of actual results with

established norms.

This process finds out the substitute by finding new ways or methods.

Under this process, the variances are appraised and reported and necessary

course of action will be taken to revise norms, standards etc.

Under this process necessary steps are taken for further notification in the

method.

It starts from established cost standards and attempts to keep the costs of

operation of a process in line with those standards

It challenges the standards forth-with and attempts to reduce cost on a

continuous basis.

The main stress is on the present and past behavior of costs.

The emphasis is partly on the present costs and largely on future costs.

It has limited applicability to those items of costs for which standards have

already been sent.

It is universally applicable. It should be applied to every area of the business.

Cost control is a preventive function. Cost reduction is a corrective function.

Cost control sometimes lacks dynamic approach. It is a continuous process of analysis by various methods of all the factors

affecting costs, efforts and functions in an organization. The main aim is to have

continuous economy in costs.

SESSION 3

What is BPR??

Business Process Re-engineering or BPR is the analysis and redesign of

workflow and processes within and between organizations-Davenport

and Short

The critical analysis and radical re-design of existing business

processes to achieve improvements in performance measures-Teng

Meaning of BPR

Business Process Re-engineering (BPR) is a continuous process of re-

thinking, re-assessment, re-design, evaluation of each element of

business process and consequent improvement in structure and

workplace. It takes care of all facets of operation in an organization.

It is more than just business improvising.

Meaning of BPR

It is applicable to indirect areas of operation of business such as

finance, accounting, personnel and others

BPR means starting all over, starting from scratch

It is an approach for redesigning the way work is done to better

support the organization's mission and reduce costs.

Why Re-engineering??

To have an edge in cost, quality or services as

compared to the competitors

Redefining product / services or entering new

market

To update the core operation processes that are

outdated

To be in a position to achieve strategic business

objectives

Why Re-engineering??

To deal with the change in market place owing to-

Loss of market share

New regulation

New competition

New technology in play

Shorter product life

Basic Principles of BPR

Organize around outcomes, not tasks.

Identify all the processes in an organization and

prioritize them in order of redesign urgency.

Integrate information processing work into the real

work that produces the information.

Treat geographically dispersed resources as though

they were centralized.

Basic Principles of BPR

Link parallel activities in the workflow instead of just integrating their

results.

Put the decision point where the work is performed, and build control into

the process.

Capture information once and at the source.

Operation of BPR

Indentify Possible Project

Conduct initial impact analysis

Evaluate the alternatives

available

Analyze process baseline

information

Define alternative

simulate new work flow

Determine cost/ benefit for each

alternative

Select the effort & define scope

Implement

Update positioning models &

information

Challenges in a BPR Exercise

Identifying Customer Needs & Performance

Problems in the current Processes

Reassessing the Strategic Goals of the Organization

Defining the opportunities for Re-engineering

Managing the BPR initiative

Controlling Risks

Maximizing the Benefits

Managing Organizational Changes

Implementing the re-engineered Processes

How To Implement A BPR Project

The best way to map and improve the organization's

procedures is to take a top down approach, and not

undertake a project in isolation.

That means: Starting with mission statements that

define the purpose of the organization and describe

what sets it apart from others in its sector or industry.


Producing vision statements which define where the organization is

going, to provide a clear picture of the desired future position.

Build these into a clear business strategy thereby deriving the project

objectives.

Defining behaviours that will enable the organization to achieve its'

aims.


Producing key performance measures to track

progress.

Relating efficiency improvements to the culture of

the organization

Identifying initiatives that will improve performance.

Once these building blocks are in place, the BPR

exercise can begin.

Define corporate

visions and business

goals

Identify business

processes to be

reengineered

Analyze and

measure an

existing process

Identify enabling IT &

generate alternative

process redesigns

Evaluate and

select a process

redesign

Implement the

reengineered

process

Continuous

improvement of

the process

Visioning

Identifying

Analyzing

Redesigning

Evaluating

Implementing

Improving

Manage change and stakeholder interests

Enterprise-wide engineering

Process-specific

engineering

BPR Life Cycle

SESSION 4

Costs of Quality

The cost of quality comprises of control and failure activities

Control Activities: performed by an organization to prevent or detect poor quality

Prevention Cost

Appraisal Cost

Failure Activities: performed in response to poor quality

Internal Failure Cost

External Failure Cost

Prevention Costs

Quality training costs

Design Reviews

Quality planning costs

Equipment maintenance costs

Supplier assurance costs

Information systems costs

Product redesign and process improvement

Appraisal Costs

Test and inspection costs

Acquisition cost of Test equipment and instruments

Quality audits

Laboratory acceptance testing

Field evaluation and testing

Information costs

Failure Costs - Internal

Rework and scrap costs

Repairs

Re-inspect and retest costs

Design Changes

Expediting costs

Lost contributions due to increased demand on constraint resources

Failure Costs - External

Costs to handle customer complaints and returns

Product recall and product liability costs

Lost sales duo to unsatisfactory products and customer ill will

Warranties

Discounts due to defects

TQM Benefits

It is a comprehensive process that can bring a company to the forefront of the global market.

TQM is an operating philosophy, a goal, and a way of doing business.

For many companies, it is a major cultural change; from 'solving a crisis' to 'not having a crisis'.

The typical 'just do it' approach to business is replaced by clearly defined processes.

Primary responsibility for product quality rests with top management.

Quality should be customer focused and evaluated using customer based standards

The production process and work methods must be designed consciously to achieve quality

conformance.

Every employee is responsible for achieving good product quality.

Quality cannot be inspected into a product. So, make it right the first time and every time

Quality must be monitored to identify problems quickly and correct quality problems

immediately.

The organization must strive for continuous improvement.

Evolution of Quality

System

Contribution Factors

Globalization & increased Competition

Changer Over of Market to Buyers Market

Customer :- Quality Conscious

Need

Changed perception of Quality- PRICE, DELIVERY, PERFORMANCE

Result- Development of Common Quality System Guidelines by ISO, which are Globally recognized.

History of ISO 9000 Series

The Quality Management System concept came into the existence by ISO 1985

First Guidelines as requirements of Quality Management Systems has been published for the purpose of certification. 1987

First revision took place to make it more practical for the implementation and simple to understand. Four Standards published ISO 9001, ISO 9002, ISO 9003, ISO 9004.

1994

Second revision took place to make it generic for the application in any type of Industry and simplified form the Audit Point of View

2000

Third revision published to give more clarity for implementation and use. Clauses & Structure is same s earlier. 15th Nov 2008

Process of Drafting & Publications of Standards by ISO

ISO Draft Standards ( DIS), ISO / PAS, ISO/TS, ISO

Processes, Not Products

Processes affect final products or services.

ISO 9001 gives the requirements for what the organization must do to

manage processes affecting quality of its products and services.

ISO 14001 gives the requirements for what the organization must do

to manage processes affecting the impact of its activities on the

environment.

ISO 9000:2000 Family

ISO

9000

Quality management

systems - Fundamentals

& vocabulary

ISO

9004

Quality

management

systems -

Guidelines for

performance

improvement

ISO

9001

Quality management

systems - Requirements

Technical

Reports

ISO

10012

Measurement

ISO

19011

Audits

Guidelines

Annexes A & B for

information only

ISO 9000 is about QUALITY

Quality is: defined by customer needs

defined in terms of fitness for purpose

achieved through continuous improvement

managed through prevention not detection

getting it right at the first time

measurable

Quality Management

Principles

Customer focus

Leadership

Involvement of people

Process approach

System approach to management

Continual improvement

Factual approach to decision making

Mutually beneficial supplier relationships

ISO 9000 Requires :

The Continuous

Improvement Mechanism

59

UNSATISFACTORY OUTCOME

WORK IMPROVEMENT TEAM

CAUSE INVESTIGATION

CORRECTIVE ACTION

PREVENTIVE ACTION

REVIEW

Model of a Process based

Quality Management System

ARCHANA

Continual Improvement of the quality management system

Product

Product

Realization

Management

Responsibility

Resource

Management

Measurement,

Analysis &

Improvement

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Input Output

Value-adding activities

Information flow

Key Requirement of

ISO 9001:2008

Company profile, Organization Structure, Responsibilities, Quality Policy & Objectives

and brief of QMS Requirements

Explains What to do, whom to do its, when to do, where to do and how to do it is done

Explains how a specific Operations/ Activity has to be done

Formats for recording of information / data which forms Records

I

II

III

IV

Quality Manual

Procedure

Instruction,

Guidelines List

Forms, Formats,

Registers