Business Excellence thru Strategic Cost Mgmt. System

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Achieving Business
Excellence through Strategic
Cost Management
CMA Deepak Ukidave
1
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
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Value is defined according to customer’s 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
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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
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…………………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
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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 project’s stakeholders.
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Cost Reduction
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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
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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
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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
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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.
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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
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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?”
 That’s the best time for ‘Strategic Cost Management’!
 “Only troubled businesses need to worry”
 Good & Healthy Business may have more cost
inefficiencies!
 “It’s their (!!) Responsibility”
 ‘Cost Management’ is everyone’s business!
 Costs are ‘incurred’.
 Costs should be carefully planned & purposefully spent!
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Strategic Cost Management
Overhead absorption, variance analysis not overemphasised.
 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
Set target selling price based
on customer expectations and
sales forecast
Establish profit margin based
on long-term profit objectives
and projected volumes
Determine target (or allowable)
cost per unit (target selling
price less required profit
margin)
Compare with
Establish cost reduction targets
for each component and
production activity, using value
engineering and value analysis
Estimate the current cost
of new product
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Target Costing
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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
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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 can’t be
salvaged – quality audits, reliability test,
cost of analyzing investigating and
reworking defects.
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Quality Costing
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External failure cost – Addressing
customer complaints, warranty repairs,
replacements or product recall
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Quality costing reports throw light on
potential trade off among different types
of quality costs
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Activity Based Costing (ABC)
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Classification of activities into unit level,
batch level, product level and facility level.
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Concept of cost pool and cost driver
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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
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