Strategic cost management has become an essential area now days.

While
formulating the strategy for the accomplishment of organizational overall objectives,
different cost driver should be clearly identified. Identification of key cost drivers
help companies to focus on key activities that will constitute almost 90% of the total
costs. In view of this, the importance of strategic cost management should not be
underestimated. This implies that organization should be installing appropriate
framework of strategic cost management to reduce its costs in key areas on which
the success of organization is heavily dependent.

To give spotlight to the companies in this complex business model we have covered
some important aspects of strategic cost management. Which can be very much help
full to the business world. In this paper we have tried to give some general
explanation of strategic cost management. We have first defined the meaning and
applications of strategic cost management and then we w3ent on to describe the
framework and steps involved in strategic cost management programme. And lastly
we have tried to identify some key enablers that will facilitate effective
implementation of strategic cost management programme along with the questions
that are to be answered while implementing strategic cost management programme
in an organization successfully.

Introduction:

Many of the terms are not new: cost reduction, target costing, total cost
management, or cost avoidance. These efforts have been targeted in several
organizations. But how many purchasing and supply organizations have adopted
these tactics for the short-term gain and how many have taken a strategic approach
that spans several links in the supply chain? More and more will be taking the
strategic approach, focusing on strategic cost management. It has now a days
become abuzz word in the street of corporate houses. Corporate houses are now
searching out for ways to manage their huge conglomerates.

The downsizing and reengineering initiatives so prevalent in the early '90s have
largely proved financially short-sighted. With hindsight, we now know that almost
half of downsizing companies reported lower profits the year following their cutbacks.
Cost-cutters' stock prices grew more slowly than those of companies which
successfully grew both their top and bottom lines. Less than one in five cost-cutters
were subsequently able to put their companies back on a profitable growth track.
Pressures on costs come from many external quarters, including shifting customer
priorities, the emergence of new competitors and channels, and increasingly
inquisitive financial mark.

Concept of Strategic Cost Management:

Trying to define strategic cost management requires looking at today's leading

organizations who are venturing in this area. Some of the processes are new and
uncharted territory, so there's no textbook to spell it out.

Cost Management Defined:

The Purchasing Handbook defines cost management as, "the establishment of

programs that regularly analyze purchase requirements and suppliers to
identify lowest total cost and maximize total value to the company. The
development of a savings forecast by commodity is necessary to define
budget parameters for building cost-of-goods structures."

Strategic Cost Management:

Strategic cost management can be defined as" scrutinizing every process within your
organization, knocking down departmental barriers, understanding your suppliers'
business, and helping improve their processes"

Applications of Strategic Cost Management:

There are three basic business areas where strategic cost management can be
applied.

Strategy:

A strategy in general terms refers to a plan of action that will shape the direction of
organization's success. Companies of late have realized the importance of clear
articulation of strategy and its effective implementation. Before formulating any
strategy, the management should think about the business model whether it is still
relevant or need to be changed? Or whether the objectives of the business are going
to be accomplished through laid out strategy.

Operations:

By setting the priorities according to its significance we can operate the tasks
effectively and efficiently.

Organization:

Company should time and again check whether it is allocating its limited resources in
the businesses which generate more value for the entire organization. Resources as
such are the liming factors for any organization and that's why the company should
be focus on the structure of the business and it should decide well in advance
whether it should own all resources or not?

Strategic Cost management framework:

The Strategic cost management framework provides a clear plan of attack for
addressing costs and decisions that affect them. Following are the three core
components of this framework.

Core Functions:

Core functions elaborate on the nature of the business. It answers the very obvious
question what type of business are we in? At this stage the company has to clearly
identify its courses of actions with respect to strategy planning, research and
development, and product development.

Customer Delivery Function:

This step emphasizes more on value addition with various activities such as
marketing, sales, manufacturing, quality assurance and control, sourcing,
procurement and logistics, engineering and maintenance, customer service and
technical support etc. Excellence in those activities can create a sort of competitive
advantage for the company if it could harness its resources intelligently than its
competitors.

Support Functions:

As the name suggests, to support the core activities of business some secondary
activities are to be carried out which includes IT, Finance and Accounting, HR
management General administration. These activities will facilitate the performance
of the core activities in a way that goals of the business can be accomplished
successfully without wasting limited resources. They will also help in synchronizing
the different tasks which are to be carried out simultaneously.

Strategic Management Programme Steps:

SCM Programme includes following five steps. These steps can be detailed out as
follows:

1. Focus:
 Focus state starts with reviewing the different strategies of the company. Reviewing
the strategies will lead to clear identification of performance gaps and this will help
to bridge the gap by improving targets already set beforehand. Modifying the targets
will lead to developed plan of attack which will foster better internal communication
within the organization.

2. Planning and Training:

Planning plays a crucial role in implementing strategic cost management

programme. To implement the planning, a manager should gather very efficient
team members and train them accordingly. Setting up of project management
structure will facilitate the implementation of strategic cost management by clearly
identifying the day to day activities, steering guidance and offering ad hoc
assistance.

3. Fact Finding:

This stage includes the tasks such as data gathering, conducting interview,
developing benchmarks, conducting and customer surveys.

4. Analysis and Recommendations for changes:

Analysis of activities plays a crucial role in ascertaining the cost of the company. It
can be done by various strategic cost management analytical tools viz. cost driver
analysis, activity-based costing, selective business process reengineering etc. An
action plan for proposed change should address the following questions what, who,
when how aspects of the activities.

5. Implementation:

In implementation stage the first task to be done is to define responsibilities and

accountability of each individual and controlling i.e. monitoring and corrective action
should be the taken at each stage of programme. And this is how the continuous
improvement can be achieved. The third, fourth and fifth sate in the above process
indicates continuous improvement.

Key Enablers That Facilitate Strategic Cost Management.

Each individual organization needs to review their various supply needs and supply
chains and determine what enablers are of prime importance to their situations. We
will discuss an approach to that problem later in the paper. In this section we will
discuss a number of generally applicable enablers, some of which are likely to be
present in many supply situations. The enablers are grouped by the three phases
present in most cost management approaches: analysis and planning,
implementation, and ongoing management and control. Some apply to more than
one phase and are so listed but discussed only at the first listing.

Analysis and Planning Enablers:

• Top management support and sponsorship - Without this forget the

whole idea of cost management. However, to get this support, top
 management must understand the value of supply chain management to the
bottom line. If management seems reluctant to recognize this from internal
efforts alone, cooperative efforts with suppliers and/or customers may help to
convince them.
• Information systems - To capture spending by commodity or service,
supplier, and geographical area. Information can be used to: identify
opportunities for synergy with other supply chain members in areas such as
leveraging spend, pooling knowledge, acquiring/providing/sharing technology,
identify areas where transfer of best practices will reduce costs, optimize
location and use of resources, such as inventories, in the supply chain, and
help to identify total cost drivers.
• Identity of total cost drivers - What are all of the elements that make up
the total cost in a given supply chain? Total cost drivers may vary by
geographical areas and may include items such as logistics, transportation,
inventory, lead time, lack of infrastructure, lack of qualified or trained
personnel, lack of qualified suppliers, and production impact of particular
products or services. Additional drivers that may be present in a global
analysis could include tariffs and duties, currency exchange rates, hostile
political or geographical environments.
• Cost models - If models of major costs in the supply chain are not available,
they may need to be developed. Cost models may have to be adjusted by
country or region in global supply chain situations. Some techniques for
modeling costs include learning curve analysis, experience effect analysis,
price productivity analysis, implied set-up cost analysis, should-cost analysis,
comparative process analysis, and cost breakdown analysis. Some
approaches to cost and price modeling and analysis are presented in Chapter
19 of the current edition of The Purchasing Handbook.
• A strategic cost management plan - There must be known cost
management objectives and a plan as to how you are going to achieve them.
One approach to prepare such a plan is to use a three-step approach that
includes: classifying purchases, matching cost analysis tools with the
purchase classifications, and focusing on strategic cost management
techniques to achieve cost management results.
• Effective cross-functional teams - Vital to the success of any cost
management effort because of the varied departments and functions that are
affected and need to be involved to implement cost management initiatives.
All parties either affected by the costs in question or involved in generating
those costs need to be involved in the applicable cost management teams.
• Obviously, to achieve alignment, overall
•

Known Business strategies - To develop purchasing cost management strategies,

overall business strategies must be known. The maximum effect of strategic cost
management in the supply chain can only be achieved when supply chain strategies
are aligned with overall business strategies. Strategic cost management not only leads
to incremental performance improvement but also to transformational change across the
value chain. Strategic costing is viewed as part of a larger business process to influence
decisions on pricing and profitability across several dimensions: product, customer,
region, and distribution channel. Learn how your costing process aligns with industry
best practices, and be on the leading edge of emerging practices such as value chain
costing, shared services costing and outsourcing. Understand how German Cost
Accounting and Resource Consumption Accounting are being put into practice.

Strategic Cost Management

Learn the concepts and techniques related to the provision and analysis of financial
information. Discover how this information is applied to the strategic direction of
your organization's products and services.

Executive Summary—Implementing Benchmarking

The long-term viability of an organization depends largely on how well it understands
and meets its customer requirements on a daily basis. These requirements and the ways to
achieve them are constantly changing, thereby creating opportunities and challenges.
Learn More>>
Executive Summary—Implementing Business Process Redesign
Efficient and effective business processes are critical to any enterprise that hopes to maintain, or improve,
its competitive position. Improvement in quality, time, and costs can result in increased profit. The way an
enterprise structures and manages its business processes has a great impact on these outcomes. Learn
More>>

Executive Summary—Implementing Target Costing

The long term financial success of any business depends on whether its prices exceed its costs by enough
to finance growth, provide for reinvestment, and yield a satisfactory return to its stakeholders. As
competition increases, and supply exceeds demand, market forces influence prices significantly more.
Learn More>>

Executive Summary—Implementing Activity-Based Costing

Accurate and relevant cost information is critical to any organization that hopes to maintain, or improve, its
competitive position. For years, companies operated under the assumption that their cost information
actually reflected the costs of their products and services when, in reality, it did nothing of the kind.

InIn 21st century business environment, effective strategic management is critical to the
succeTowards a Conceptual Framework For Strategic Cost Managementss of the firm or
organization and is thus a pervasive theme of this seminar.

The growinAccounting information plays a vital role in determining the most appropriate
strategic direction for the organization. It guides managerial actions, motivates behaviors,
and supports and creates the cultural values necessary to achieve an organization's
strategic objectives. In particular, cost management information (both financial and non-
financial information) is a critical type of information to the success of the company.
Cost management systems are important, but equally important is knowing how and
when to apply them to achieve long-term success. Cost management systems help
managers understand cost structure and behavior

The strategy of an organization comprises of the systems and processes needed to realize
long-term goals and objectives of the organization. Strategic management refers to a set
of decisions and actions used to formulate and implement strategies that will help gain
sustainable competitive advantage for the organization. Strategy formulation and
implementation entails a number of factors and issues

Fit For The Future: Building Competitive Advantage Through Strategic Cost Reduction

Financial services institutions need to adopt a strategic approach to cost reduction that
generates near-term cost savings while at the same time builds a more efficient operating
model over the long term. This describes why firms that use cost reduction to create a
leaner, more efficient organization will not only survive the current difficult economic
conditions, but will also prosper throughout all phases of the business cycle.

Pressures of global competition, technological innovation, and change in business

processes have made cost management much more critical and dynamic than ever before.
Managers and management accountants must think competitively; doing so requires a
strategy. Because strategic issues are increasing in importance to management, cost
management has moved from a traditional role of product costing and operational control
to a broader, strategic focus: strategic cost management. Strategic Cost Management is
the development of cost management information to facilitate the principal management
function, strategic management. Cost management information is a broad concept and
includes information that the manager needs to effectively mange the firm or not-for-
profit organization and included both financial information about costs and revenues as
well as relevance non financial information about productivity, quality, and other key
success factors for the firm.

21st century business environment, effective strategic management is critical to the

success of the firm or organization and is thus a pervasive theme of this seminar.

The growing pressures of global competition, technological innovation, and change in

business processes have made cost management much more critical and dynamic than
ever before. Managers and management accountants must think competitively; doing so
requires a strategy. Because strategic issues are increasing in importance to management,
cost management has moved from a traditional role of product costing and operational
control to a broader, strategic focus: strategic cost management. Strategic Cost
Management is the development of cost management information to facilitate the
principal management function, strategic management. Cost management information is
a broad concept and includes information that the manager needs to effectively mange the
firm or not-for-profit organization and included both financial information about costs
and revenues as well as relevance non financial information about productivity, quality,
and other key success factors for the firm.