strategic cost control

Vinod Bidwaik

http://vinodtbidwaik.blogspot.com

Strategic Cost Control

Types of CostsProductive Costs: Provide value to customer

Support Cost: Necessary, but don't benefit Customer

Waste: No value to customer

Avoid WasteBy rectifying mistakes

By not producing items that nobody wants

By eliminating some of the processing steps that may not be required.

By stopping movement of employee without purpose

By unwanted transport of goods or movement without real purpose

By expediting the upstream activity, so that people or assets may not wait idle

By measuring all the costs and inputs of a particular process.

Form of WasteWaste of material

Waste of machinery

Waste of money

Waste of customer

Waste of supplies

Waste of manpower

Waste of space

Waste of ideas

Organizational controlPlanning & controlEffective controlsControls through teamworkVisible measurementMeasurement of failureRisk ManagementValue added activityElimination of non value added activityChange controlStandardsGood Housekeeping

Effective ControlsBy measurement, appraisal and actions

Process work right

Process work on time

Process work economically

Process work fast

Process work when customer change their mind

Management controlFinancial control

Organizational control

Production control

Quality control

Stock control

Debtors Control

Profit planning, control & improvementBudget & budgetary control

Marginal costing

Cost volume profit analysis and break even charts

Differential & comparative cost analysis

Strategic thinking about cost controlDoes the cost allocation mechanism work?

Can functional heads distinguish those costs assigned to their activities over which they may have some influence?

Are Managers fully aware of the cost implications of their own decisions?

Two formsRestraints: Weak & over detailed and stifle the initiative of managers

Freedoms: Often fail through inadequate information on full costs

Cost control & cost reductionCost Control

Represents efforts made towards achieving a target or a goalTo set up a target, ascertain actual performance & compare it with Targets, check variance & take measuresAssumes existence of standards or norms which are not challengedIs a preventive function, costs are optimized before they are incurredLacks dynamic approach

Cost ReductionRepresents achievement in reduction of costNot concerned with the maintenance of performance according to the standardsAssumes existence concealed potential savings.Corrective functionContinuous process of analysis The main stress is upon in Why of a thing.

Why controls?Better planning

Improved motivation

Economic use of time

Improved competitive edge

Increased commitment

Better decision making

Improved efficiency

More profit

Planning overhead cost controlEstablish company objective and targets

Develop detailed programmes

Organize resources to meet the objectives

Establish performance standards

Develop a system of budgets

Report on performance

Basic elementsProductivity:

More production in lesser manpower

Or

More manpower to produce even more

Doing more with lessDeliver more of Profits, Productivity, Quality, Sales

With less of Money, Staff, Time, Machinery

StrategyIs a means to achieve goalsLinks all parts of an organizationCovers all major aspects of an organizationIs a long term planEnsures that all parts of the plan are compatibleIdentifies basic issues such asWhat is our business?What should it be?What are our products/services, functions, markets?What should we do to achieve our objectives?

StrategyIs a result of analyzing the strength & weaknesses of the organization

Determining opportunities & threats

Is an organization’s planned response to its environment over time.

Elements of Strategy Goals/objectives to be achieved

Policies for action

Programme to achieve goals within the set limits.

Strategic CostsCan you define your strategic costs?

What is your attitude towards costs?

What is your approach towards cost cutting?

Do you practice the new art of cost cutting?

What can you do yourself to cut costs?

Are your profits cost effective?

Think big…………….. But don’t throw away the small small parts, nuts and bolts..

Attitude towards cost Means knowing when, how and which costs to cut

One that value wise spending, prudent cutting and organizational flexibility

Hidden costsThink bottle necks

Cycle times

Downtime rates

Machine set up times and changeovers

Reuse of scrap material

R&D

Procure time

Methods & Procedures

KISS

Keep It Short & Simple

Simple production control

Simple Communications

Simple Measurement

Agree with suppliers to take five days longer credit

Cut debtors days by five through better collection

Reduce stock by 5% by using Material Management techniques. (JIT, FIFO etc)

Get one new customer per day/week

ProceduresCustomer needs

Organization needs

Employee needs

Do we need procedures and processes?

If yes when?

4 W 1 HWhy: Is it necessary? Should it be done at all? Why?

Where: Should it be done? Here or somewhere? Why?

When: Should it be done? Now, sooner or later?

Who: Should do it? Same person, other persons?

How: Should it be done? As at present or another way? Why?

Efficiency & Effectiveness

Efficiency: is to know everything

Effectiveness: is to deliver on time or before time.

Concept Description Characteristics Measurement

Efficiency Are we doing things right?

Easy to monitor and measure against standards but not always linked or identifiable with ultimate goals

Activity level,Costs

Effectiveness Are we doing the right things?

Indirect, subjective appraisal, Frequently impacts on sales, profits or other measures of success

RevenueMarket ShareCompetitive perception

Employers don’t pay wages- they only handle the money. Product pay wages…. Henry Ford

Don’t reduce staffAsk more from your key people

People are better than you think

Thank you!

Vinod Bidwaikhttp://vinodtbidwaik.blogspot.comVinod Bidwaik is the seasoned HR professional working with DSM India Pvt. Ltd. as the Head-HR forIndia operations. He has wide experience in large Indian and Multi-National companies like M & M,Semperit Group and Sakaal Media Group on senior level positions. He has rich experience in HR andIR. He has an expertise working on greenfield projects and establishing HR department. Heimplemented various HR practices; OD interventions in his organizations. During his tenure withSemperit, the company was awarded for Best Innovative HR Practices during 2002 by NIPM. He holdsMaster degree in Personnel Management, Diploma in Production Management. He is the regularwriter for various management journals like BMA Review, Human Factor and other managementJournals. He is on editorial advisory board of CJMR, Journal of Management Research of CMRD, atPune. He writes regular columns in various newspapers on management and development. He isinvited for Guest lectures on specialized subjects by various management and engineeringinstitutions. He is a life member of Bombay Management Association and holds various honorarypositions in different associations.

Disclaimer: Views expressed here are his own views and do not represent his organization's (current & past) views.