cost control presentation
TRANSCRIPT
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THE ROLE OF
HUMAN RESOURCE
DEPARTMENT INORGANISATIONAL COST
CONTROL AND REDUCTION
By Dr Aaron Koo
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All businesses are experiencing increasing
competitiveness as a result of one or a
combination of the following factors:
1)scarcity of resources,
2)sophisticated customer needs,
3)technological advancements,
4)social and economic factors.
Business competition
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To be competitive, a business has to build its
competitive advantage or core competency . . . .
and sustain it as well!
Business competition
Sustainable competitive advantage depends on
the company size in the targeted market, on
superior access to resources or customers, and
on restricted options of competitors.
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- is an environment characterised by intense and rapid
competitive moves, in which competitors must movequickly to build advantages and erode the advantages of
their rivals.
- Instead of creating sustainable advantages, strategists in
hypercompetitive environments should focus on
developing a series of temporary advantages. The
rationale behind it is that there is no sustainable
advantage competitors will move quickly to break andreplace the competitive advantage.
- Eg Microsoft, American Airlines (early stage)
*DAveni,Hyper Competitive Rivalries, 1995]
Hypercompetition
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Competitive Advantages
Lower Cost Differentiation
Broad Cost DifferentiationTarget Leadership
Competitive
Scope
Narrow Focus
Target
Types of competitive advantages (Porter)
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IT IS NOT A PROGRAMME!!!
Not an ad-hoc approach during economic
downturn!
It is a way of life to stay competitive and to stay
alive!
Planned long term approach and address in
strategic planning
Cost Control & Reduction
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It is the prevention of waste within the existing
environment.
It is the procedure whereby actual results are
compared against the standards so that waste can be
measured and where appropriate action can betaken to correct the activity.
It is the process of regulating the action so as to keep
the elements of cost within the set parameters.
This process is exercised by setting the norms,
targets based on past actual.
It is the process of utilizing the available resources
economically.
Cost Control
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Cost Reduction
This involves the examination of the purposes forwhich costs are incurred and, by a variety of means
eliminates or reduces the reasons for spending.
The existing standards are closely examined at the
broad and detailed levels with a view to
improvement.
It seeks ways to achieve a given result through
improved design, better methods, and newcoordinated set of contingent actions to achieve the
dual objective of reducing overall costs without
corresponding loss of efficiency.
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Importance of Cost Control
& Cost Reduction
Strengthen the competitive muscle by cutting away
fats
Better utilization of resources
To prepare for meeting a future competitive position
Reasonable price for the customers
Firm standing in domestic and export markets.
Improved methods of production and use of latest
manufacturing techniques which have the effect of
rising productivity and minimizing cost.
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Cont
By a continuous search for improvement creates
proper climate for the increase efficiency.
Improves the image of company for long-term
benefits. Improve the rate of return on investment.
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Cost Control v/s Cost ReductionCost Control Cost Reduction
1. It is the competitive analysis of actual
results with established norms.
This process finds out the substitute by
finding new ways or methods.
2. The variances are appraised and
reported and necessary course of action
will be taken to revise norms, standards
etc.
The necessary steps are taken for further
modification in the method.
3. It starts from established cost standards
and attempts to keep the cost of operations
of a process in line with those standards.
It challenges the standards forth-with and
attempts to reduce cost on continuous
basis.
4. The emphasis is on the present and past
behavior of costs.
The emphasis is partly on the present costs
and largely on future costs.
5. It attempts to achieve the best possible
results at the least cost under given
conditions.
Under this no conditions are considered to
be permanent where a change will secure a
lowest cost figure.
6. Cost control is a preventive function. Cost reduction is a corrective function.
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Cost Control Process
Steps involved in designing process of cost controlsystem:
Establishing norms: To exercise cost control it isessential to establish norms, targets or parameters
which may serve as yardsticks to achieve the
ultimate objective. These standards, norms or targets
may be set on the basis of research, study or pastactual.
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Cont..
Appraisal: The actual results are compared with theset norms to ascertain the degree of utilization of
men, machines and materials. The deviations are
analyzed so as to arrive at the causes which are
controllable and uncontrollable.
Corrective measures: The variances are reviewed
and remedial measures or revision of targets, norms,standards etc., as required are taken.
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Cost Reduction Process
The achievement of real and permanent reduction in
the unit cost of goods manufactured or services
rendered without impairing their suitability for the
use intended. Reduction in the cost of product must be brought
about by the elimination of wasteful and
unnecessary resources employed in its design,
manufacture, sale and distribution.
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Sequence of Steps in Cost Reduction
Process
1. Analysis
2. Examination -
a) Vital activitiesb) Secondary activities
3. Developing solutions
4. Selecting a Solution
5. Obtaining Agreement
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Cost Reduction
Cost can be reducedthrough
Reduction (prod time, waiting, inventory)
Elimination (waste, bottle necks, barriers)
Modification (system, design)
Innovation (Re-engineering, methods of
producing, equipment, tooling)
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Identifying Areas for Cost Control &
Reduction
1) Understanding cost concepts and behaviour
2) Analyse individual cost items systematicallyusing value chain
3) Identify areas to target for cost control orcost reduction
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Costs Concepts
Controllable vs non-controllable costs
Avoidable vs unavoidable costs
Discretionary costs - costs resulting from strategic and
tactical decisions of managers and has no directrelationship between the level of spending on an
activity and active production levels
Sunk costs - costs of resources that have already been
committed
Opportunity costs - the costs of foregoing the next best
alternative course of action
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Variable Cost Graph
Cost
Volume
Costs Behaviour
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Fixed Cost Graph
Cost
Volume
Fixed Cost
Relevant Range
Costs Behaviour (Contd)
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Mixed Cost Graph
Cost
Volume
Cost
Volume
Costs Behaviour (Contd)
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Identifying Areas for Cost Control
or Cost Reduction
If avoidable, to reduce. If unavoidable, to control
Assign cost control or reduction activities to those
individuals who have direct control over them
Minimise discretionary costs, and forget about sunk
costs
Weigh and focus on opportunity cost
Generally, variable costs are easier to reduce than fixed
costs. Therefore, reduce variable costs and control
fixed costs
P V l Ch i
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Porters Value Chain
PRIMARY
ACTIVITIES
Infrastructure
HumanResource
Management
Technology
Development
Procurement
Logistics Operations Marketing/
Sales
Service
SUPPORTACTIVITIES
Cost control through comparing actual to standard
Cost reduction through reduction, elimination, modification or innovation
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Product improvement (value analysis and re-
engineering) especially at design stage (design for
manufacturing) Product standardisation and rationalisation
Cost of quality and quality improvements
Process improvement and do it right the first time
approach Use of technology to improve processes or reduce
labour usages
Financial and working capital management to
minimize cost of borrowings
Some Techniques and Areas for
Cost Control & Reduction
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1. Freeze in hiring .
2. Personal awareness to cost cutting.3. No bonuses or pay hikes.
4. Night home drops and pick ups are charged.
5. Reducing off-shore trainings.
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1. Reducing work hours for trainees.
2. Delay in freshers joining the company.
3. Paycut of 5%.
4. Annual shutdown of a week extended to a
fortnight
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1. Shutting down older fabrication units.
2. Freeze in hiring.
3. Reduced travel expenses, using video chats & voice
chats as alternatives.
4. Reducing/reusing inventory.
5. Increasing personal awareness.
6. Avoiding discretionary expenditures.
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1. Introduction of new cost effective technology.
2. Process re-aligning.3. Re-engineering of product.
4. Restructuring of workforce.
5. Rationalising input costs.
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Precautions in Implementing Cost
Control and Reduction
Cost control and reduction must be appropriate and
reasonable to the organization.
Their introduction and implementation must beplanned soundly.
Resistance by employees to control and reduce costs.
Usually because the nature and purpose have not
been properly explained to them, and they feelthreatened by the change.
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Cont
The success in one area is not severely hindering or
damaging other aspects of the business or that
success in one area is not being eroded by failure in
another area.
The cost control and reduction measures should not
have any undesirable effects on external parties e.g.,
suppliers of raw material, buyers of finished productsetc.
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the most important resource of any nation
must be the talents, skills, creativity and the will
of its people . . . . . Our people is our ultimate
resource. Without a doubt, in the 1990s andbeyond, Malaysia must give the fullest emphasis
possible to the development of this ultimate
resource.
Tun Dato Seri Dr Mahathir Mohamad , 28 February
1991, after unveiling the blueprint for Vision 2020
The Importance of Human Resource Function
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HR functions consisted of mainly 3 sections :
Human resourcing which includes the planning,
recruitment, selection and termination of human
resourcesEmployee development which encompasses the
training, career development, performance
measurement, compensation and rewards of human
resourcesEmployee relations which deals with issues like
discipline, unions, employees welfare and health and
safety of workplaces
Human Resource Functions
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HR costs are related to these 3 functions:Human resourcing
- cost of hiring (advertisements and recruitments)
-job fit (cost of wrong person on wrong job, wrong person
on right job, and right person on wrong job)
-cost of bad hires (loss of productivity, cost of rejects and
wastages, cost and time in training and counselling, cost
of removal and replacement, cost of lost opportunitiesand lost customers, etc)
-other than cost of hiring (unavoidable, hence to control),
others are avoidable and can be minimised by using
psychometric profiling tools!
Cost of Human Resources
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Human resourcing (Contd)
- Many psychometric profiling tools, eg Myers Briggs,
Thomas International, The Big 5, Unique Profiling etc
- Be aware of the pitfalls of most tools:
a) instrument is based on one or two theoreticalconstructs
b) Putting a number on the typology of personality
c) Assuming that our behavior pattern is constant
and is not affected by the environmentd) Classifying human differences using polar traits,
type nouns and adjectival descriptors
Cost of Human Resources
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Human resourcing (Contd)
e) Assuming that human being is simple and their
behavioral pattern is recognizable, predictable and
is consistently persistent across situations and
over timef) Limit its interpretation of personality to positive
traits
g) The report of psychometric instrument is not free
from human bias- Overall Unique Profiling has an edge over the rest and
is reasonably objective and accurate. Cost is much
lower than the rest.
Cost of Human Resources
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Employee development
- Cost and time of identifying performance gaps and
training needs
- Time and cost of training
- Time and cost of designing and implementingperformance appraisal, compensation and rewards of
human resources
- All unavoidable, hence can control only
- May use certain psychometric profiling tool to assistin identifying training and especially individuals
growth needs
Human Resource Functions (Contd)
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Financial perspective
To succeed financially,
how should we appear
to our shareholders?
Customers perspective Internal businessTo achieve our vision, Vision & processes
how should we appear Strategy At what business
To our customers? process must we excel?
Learning & growth
To achieve our vision,
how will we sustain ourability to change and
improve?
Balanced Scorecard - Kaplan & Norton
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Employee relations
- Cost ofemployees welfare
- Cost and time of unhealthy employees
- Cost of safety of workplaces
- Above costs can be categorised as statutory orvoluntary
- Statutory requirements: EPF, SOCSO, OSHA, annual
leave, maternity leave, public holidays etc
unavoidable and non-controllable- Voluntary: Insurance, medical and hospitalisation
benefits for employees and families, paid vacation,
additional annual/maternity leave etc all are
avoidable and discretionary.
Human Resource Functions (Contd)
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Employee relations (Contd)
- Voluntary benefits
- Some are expensive eg medical and hospitalisation,
paid vacation, additional leave etc; whereas some
are relatively cheaper, eg insurance- Benefits of insurance: Containment of costs via a)
collective bearing of risks, and b) increase perceived
value of benefits
- HR initiative for the employers. It is an employeefriendly gesture which promotes a feeling of
satisfaction and helps in reducing attrition
Human Resource Functions (Contd)
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Employee relations (Contd)
- Voluntary benefits
- Types of insurance and their benefits:
- Many risks can be offset by buying insurance
Midsize and large employers can buy insurancemore cheaply than can individuals. This makes
employer-sponsored insurance a preferred
benefit
- Group term life insurance is one of the oldestand most widely available employee benefits.
Most full-time employees of medium/large
private firms are covered
Human Resource Functions (Contd)
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Employee relations (Contd)
- Voluntary benefits
- Types of insurance and their benefits:
- Medical and hospitalisation insurance is a
preferred benefit due to ever increasing cost ofhealthcare. Most employees and their
immediate families get basic or major medical
and/or hospitalisation coverage. Research shown
that those with these benefit will do regularcheck up more often. Healthy employee means
productive workforce!
- But these benefits cease once the employees
leave the employment!
Human Resource Functions (Contd)
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Leveraging on Insurance to Contain Cost
3 ways HR can help to control and reduce cost
- Protecting the interests and assets of the company
with general insurance on assets and fidelity
insurance on employees
- Avoiding unpleasant surprise and upsurge of costswith group life, hospitalization and medical
insurance
- Keeping cost of employees benefits low by
increasing the perceived value of benefits withinsurance, to leverage on the group coverage which
is not available to employees
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Thank you
Questions & Answers Session