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

Comparison of traditional cost management and strategic

cost management

Cost analysis-objective

Traditional Cost
Management

Strategic Cost
Management

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.

Comparison of traditional cost management and strategic

cost management

Cost driver concept

Traditional Cost
Management

Strategic Cost
Management

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

SCM-Cost Improvement and revenue enhancement

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

SCM-Cost Improvement and revenue enhancement

Object-Customers
Means
Managing

customer service costs

Competitors
Means
Competitor

Cost Analysis

SESSION 2

The Guiding Principles of Strategic Cost

Management
1.

2.

3.
4.
5.
6.
7.

Understand what causes the cost and revenue

structure of the business
Identify the firm's activities and select those that can
be used to produce (or sustain) a competitive
advantage
Understand and reduce inter-functional complexity
Increase effectiveness and continuously improve costs
Use strategy to manage costs
Build skills
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 managementframework, 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

Element

Classification by

Classification

Wise

Cost

Classificatio

Components

Accounting Classification

n
Production Costs

Direct Costs

Direct Material

(Traceable
Costs)

Prime Cost

Works Cost

Cost
Production

of Cost of sales or Selling Price

Total Cost

Direct Labour
Direct Expenses

Indirect Cost Manufacturing

Administration

(Common

Expenses

Costs)

Administrative

Costs
Selling

Expenses
&

Dist.

Selling Expenses

Costs
Distribution

Expenses
R & D Cost
Net Profit

R&D Expenses
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 This process finds out the substitute by finding new ways or methods.
established norms.
Under this process, the variances are appraised and reported and necessary Under this process necessary steps are taken for further notification in the
course of action will be taken to revise norms, standards etc.

method.

It starts from established cost standards and attempts to keep the costs of It challenges the standards forth-with and attempts to reduce cost on a
operation of a process in line with those standards

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

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 rethinking, 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

Determine cost/
benefit for each
alternative

Select the effort &

define scope

Conduct initial
impact analysis

Define alternative
simulate new
work flow

Implement

Evaluate the
alternatives
available

Analyze process
baseline
information

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.

How To Implement A BPR Project

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.

How To Implement A BPR Project

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.

BPR Life Cycle

Define corporate
visions and business
goals

Visioning

Identify business
processes to be
reengineered

Enterprise-wide engineering

Identifying

Analyze and
measure an
existing process

Analyzing

Identify enabling IT &

generate alternative
process redesigns

Redesigning

Evaluate and
select a process
redesign

Process-specific
engineering

Evaluating

Implement the
reengineered
process

Continuous
improvement of
the process

Manage change and stakeholder interests

Implementing

Improving

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

1985

The Quality Management System concept came into the

existence by ISO

1987

First Guidelines as requirements of Quality Management

Systems has been published for the purpose of certification.

1994

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.

2000

Second revision took place to make it generic for the

application in any type of Industry and simplified form the
Audit Point of View

15th Nov 2008

Third revision published to give more clarity for

implementation and use. Clauses & Structure is same s earlier.

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

Annexes A & B for
information only

Quality management
systems - Fundamentals
& vocabulary

Quality
management
systems Guidelines for
performance
improvement

ISO
9000

Measurement
Audits

ISO
9004

ISO
9001

Technical
Reports

ISO
10012
ISO
19011

Guidelines
Quality management
systems - Requirements

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
UNSATISFACTORY OUTCOME
WORK IMPROVEMENT TEAM
CAUSE INVESTIGATION
CORRECTIVE ACTION
PREVENTIVE ACTION
REVIEW
59

Model of a Process based

Quality Management System
Continual Improvement of the quality management system

C
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Management
Responsibility
Measurement,
Analysis &
Improvement

Resource
Management

Product
Realization

Output
Product

Value-adding activities
Information flow

ARCHANA

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Key Requirement of
ISO 9001:2008
Quality Manual

Procedure

Instruction,
Guidelines List

Forms, Formats,
Registers

Company profile, Organization Structure,

Responsibilities, Quality Policy & Objectives
and brief of QMS Requirements

II

Explains What to do, whom to do its, when to

do, where to do and how to do it is done

III

IV

Explains how a specific Operations/ Activity

has to be done

Formats for recording of information / data

which forms Records