A Structured Approach to Cost Management




A structured approach to cost management would obviously first involve defining its goals & objectives. The supply chain cost management & reduction exercises should be well aligned with the overall business strategy. With overall business strategy we mean key business plans, customer expectations, opportunities & threats, supply chain road-map, marketing plans and last but not least, a clear understanding of the relationships shared between various functions and departments. Those that are not tied to these long-term strategic goals are often misguided and create havoc due to the myopic focus on short-term productivity gains.

Team goals should be set with the involvement of all departments & functions, so as to infuse the interest & concern of all. Again, a pure department-focused cost reduction exercise will only motivate a single department and not multi-departments that actually forms a team.

Just as in any strategic exercise, cost management drives also require a core team entrusted with adequate responsibility & authority to drive manage and monitor all cost management initiatives. They should also keep in mind that goals should be realistic, focused, measurable and quantifiable. It should be breakable into clear units of work which can then be assigned to each team. On the other hand, unrealistic or vaguely defined goals can dampen motivation and guarantee the failure of cost management.

2. Identify Supply Chain Costs

Now that the Goals & Objectives have been identified, it is now important to classify all the supply chain costs and its flow. From the primary costs that have been stated in the previous step, the secondary costs and sub costs will emerge. Now the team can drill down on all the activities to be taken up in order manage all these costs step by step.

At each stage one can review this process and the core team, to continually improve both. If needed, more relevant / value-add individuals and teams can be added.

3. DEFINE THE KEY COST DRIVERS

Identification of the cost drivers and the interaction between these identified drivers is very critical in gaining a clear understanding of the cost behaviour. Traditionally cost behaviour was analysed solely based on the volume of output. However, such a cost driver analysis does not give a proper picture when a long term analysis is done. In a typical strategic cost driver analysis, cost drivers are classified into two categories (Shank & Govindrajan):

• Structural: these drivers relate with the strategic choices made by the company

• Economies of Scale
• Scope: the extent of vertical integration in the firm
• Learning and experience curve effects
• Technology requirements
• Complexity/broadness of the product line

• Execution: these drivers are related to the organizational skills i.e. they depend on the way management uses the resources available to meet the customer needs

• Capacity utilization
• Workforce Involvement and commitment to continuous change
• Efficiency of plant layout, production processes and other internal operations
• Efficiency of linkages with suppliers and customers
• Time-to-market of new products
• Commitment of workforce towards quality

Thus a firm needs to identify the key cost drivers in order to make strategic decisions aimed at supply chain cost reduction.

4. IDENTIFY OPPORTUNITIES FOR COST ELIMINATION/REDUCTION

Cost reduction is a direct function of controlling the cost drivers related to each activity in the value chain. Hence the team needs to clearly identify the areas for cost elimination/reduction by quantifying each of them and perform a cost-benefit analysis for each cost reduction opportunity. Then classify the opportunities based on two criteria: investment required and time taken to implement. It is advisable to first target the quick hits and then address the other identified areas.

5. DEVELOP ROAD-MAP, IMPLEMENT & MONITOR

The road-map that follows aims at breaking each activity or exercise into clear tasks and units of work. Therefore, this should possess clear action statements and action owners similar to a RASCI matrix. RASCI stands for:

• Responsible: the clear owner of the exercise
• Accountable: the authority who approves and signs-off initiatives; R is accountable to him/her
• Support: person who supports & assists
• Consult: person who provides the information & expertise necessary for the success of the initiative
• Inform: person who should be notified and informed of the results

After developing a similar matrix, the schedules i.e. start and end-dates with time-lines for critical activities should be listed out. KPIs (Key Performance Indicators) should also be set to measure the effectiveness of the implementation.

This entire road map should be easily implementable and the results / details should be fed back. This in turn will be checked against the KPIs to review the process & its success; it will at the same time help in continual improvement.

KPIs and KPI-reporting can be done through Dashboards and Metrics that allow top management to get an instant window into how effective the various cost management initiatives have been, and the current implications of it. They also provide instant feedback on what is working, and what is not; tracking progress and monitoring schedules. In case the need arises, this forms the foundation for modelling various other scenarios / initiatives to alternatively take.