Here is the way a good organization tries to find the way through cutting costs while meeting and even surpassing competition in today's business world.
Strategic Cost Management ( SCM ), in its simplicity, aims at making sure cost management and strategy for the company become tightly bound together, saving both money and time in the long run.
We will break down SCM into simple terms and explain how it can be beneficial for businesses in the rest of this blog post.
What is Strategic Cost Management(SCM)?
This process, called strategic cost management, refers to a procedure of decreasing and controlling the cost for an organization's ability to achieve its long-term objectives.
This method is different from short-term cost-cutting measures because it aligns the efforts exerted to save costs with the overall business strategy so that the corporations will be able to remain competitive and increase their profitability.
For example, one company would be looking to be market leaders offering the lowest prices.
The SCM becomes allocating how the company can reduce some cost in production, supply chain, or marketing, hence enabling the company to slash the prices obtained by a firm without them having to give up on quality or service delivery.
Why is Strategic Cost Management Important?
1. Competitive Advantage:
SCM puts an organization in a position of better competitive advantage through cost reduction in strategic areas, wherein the organization can sell at a lower price while offering more services or invest in growth.
2. Sustainability:
An increase in costs hurts long-term growth; therefore, being strong in the future, SCM sustains both short-term and long-term benefits.
3. Value to Customers:
SCM is about the company but associated with value to customers. By minimization of unnecessary cost, firms can offer better value in terms of lower prices or enhanced products and services.
Key Concepts in Strategic Cost Management
Having understood why SCM is so crucial, let us see some of the key concepts that make SCM powerful:
1. Cost Drivers
Those activities or factors that have a bearing to rise or fall in cost are called a cost driver. With the knowledge of cost drivers, businesses can identify which costs are to be directed towards their management and reduction.
For example, raw materials, labor, and machinery come under the category of cost drivers in manufacturing.
Cost drivers can be broadly classified into two types:
- Structural Drivers:
Comprise long-term decisions where several costs relate with the choice of the production method, or facility size, or investment in technology.
- Executional Drivers:
Those include the nitty-gritty operations, for example, how productive employees are or fine-tuning of processes
2. Value Chain Analysis
Value chain analysis looks into all the activities a firm performs to get its products or services to the market. It covers design, manufacture, marketing, and distribution.
Value chain analysis helps firms identify areas that are more valuable and those that are wasteful so they can save money in the right areas.
3. Strategic Positioning
Every business has a strategy that makes it unique in the marketplace. Some businesses aim to become low-cost leaders (like Walmart), while other businesses are more focused on differentiation, where unique products are the featured items (such as Apple).
SCM is aligned with this strategic positioning through coordinating cost management.
4. Target Costing
This method takes the price the customers would be willing to pay and then goes back working on cost-cutting within a frame set by that price.
For example, assuming that the customers are only ready to pay $50 to $10 profit, the company target would be $40.
How is Strategic Cost Management Done?
Applying SCM requires following steps:
1. Set Objectives
First, the company should identify its objectives. Is it to be a low-cost leader? Or shall it spend in premium products?
Determining the ultimate goals helps form the concentration of its cost management.
2. Value Chain Analysis
The company examines its value chain with the intent to eliminate any forms of wastes but not at the expense of sacrificing the quality of its product or service.
This may relate to making its production process more streamlined, enhancing its supply chain management, or reducing unnecessary marketing expenses.
3. Analyze Cost Drivers
From such key cost drivers, organizations can understand in which areas they are expending their resources and what drives the costs.
For example, if labor costs are on the increase, the organization would probably seek ways and means to automatically carry out some procedures.
4. Implement Cost-Cutting Measures
Having an idea of the areas of improvement, firms can undertake cost-cutting techniques, like lean manufacturing ( the elimination of waste ) activity-based costing ( focuses on where resources are being spent ) target costing ( means designing products to meet certain cost targets ).
5. Monitor and Adjust
SCM is not a one-time affair. A business needs to continuously monitor its cost management initiative and tweak strategies as market conditions change.
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Techniques and Tools Used in SCM
Several tools facilitate cost management strategically:
1. Activity-Based Costing (ABC)
ABC cost allocation is not evenly distributed. Instead of spreading overhead administration cost proportionately over every product, the ABC method allocates costs to the products depending on how much resources each product consumes.
2. Lean Manufacturing
Lean manufacturing is an approach that eliminates waste while retaining productivity. It's about doing more by using fewer resources, be it in terms of time, material, or man hours.
3. Kaizen Costing
Kaizen is a Japanese term describing "continuous improvement."
In Kaizen costing, companies work at making small but continuous improvements in costs overtime.
4. Benchmarking
Benchmarking is the comparison of your business's costs and performance against that of the best companies in the industry.
Learning from leaders in an industry may help the businesses to find some cost-minimization and efficiency enhancement techniques.
5. Lifecycle Costing
This is cost approach that takes account of the whole lifecycle of the product from development to final product disposal.
It is beneficial in the justification of the sense in which investments in early stages are no waste but rather a saving in the long run.
Advantages of Strategic Cost Management
SCM provides different advantages to an organization:
1. More Profits:
The preservation of costs without affecting quality gives companies more profit margins.
2. Better Decision Making
SCM offers cost data information that would be used as part of a decision, like which products to concentrate on or whether to invest in new technology.
3. System Improvements:
Tools such as lean manufacturing improve business processes so that more is produced with less.
4. Sustainable Growth:
SCM will drive companies toward sustainable cost savings to ensure that costs are maintained in the long term.
5. Improved Customer Value:
Companies are able to produce superior products and services but at lower costs, thereby enhancing the value of customers to a greater extent and therefore improving customer satisfaction along with loyalty.
Limitations of Strategic Cost Management
Though SCM is very helpful, it has some limitations
1. Complexity:
SCM calls for great knowledge of the cost structure of the company along with the conditions of the market. This could be a complex and time-consuming process.
2. Continuous Monitoring Needed
SCM requires continuous monitoring. The cost-saving measures must be reviewed from time to time, and if the investment does not match the needs of the current period, it has to be adjusted.
3. Myopic cuts:
The attempt to slash costs to any extent damages the business's prospects in the long term, especially when such cuts lead to underinvestment in innovation or employee development.
4. External controls:
SCM suffers at the hands of factors outside the organizational system or control, like market-related fluctuations or shifts in customer demand.
Conclusion
Strategic cost management is such a powerful tool that it has empowered businesses to have control over costs that are aligned with the business as a whole.
Cost-cutting measures are not even in the area of this strategy, but rather to explain or define where these costs originate, how the business may be affected, and how such costs may be controlled without jeopardizing quality and long-term growth.
Using value chain analysis, activity-based costing, and tools in lean manufacturing will help companies achieve sustainable cost savings that will increase the profitability of a firm, boost its competitiveness, and create even more value for customers.
SCM is such a process that has to be well planned and executed very carefully and then monitored. However, when executed appropriately, SCM can change the business game for any company.
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