L-32 Total Cost Management -copy

Total Cost Management “Market determines the price, Cost determines the profitability” Deloitte to pen cost-cut strategy for Goa Carbon,

BS

18.8.04

Companies have more control over cost than the price therefore they maximize the value to the customer by managing its Cost i.e. Offer more value at lesser price and still maintain profitability. This necessitated an integrated approach in cost mgt. i.e. at strategic as well as at operational area. Total Cost Management (TCM) rose to this

Total Cost Management –

What it

is ?  company-wide systematic and structured approach  provides a holistic framework to control, reduce and eliminate costs , throughout the value chain  process of managing the financial outcome of activities encompasses all operations, internal and external.  A must tool for competitive advantage.

Total Cost Management – How to achieve it ?  Environment becoming more competitive, inefficiency of one is becoming an opportunity for the other.  Inefficiency is in terms of the non-value– adding activity present in the system.  To identify and gauge the progress and to eliminate the inefficiency, measurement is the key.  “If you cannot measure it, you cannot manage it”  “ it is better to be approximately right, than to be precisely wrong”  This calls for a structural change in the measurement systems

Total Cost Management – How well informed are our sourcing decisions

What are our product costs and their profitability?

example

Which are our profitable customer segments

TCM Can we reduce our prices and yet increase the customer value

Do our costs go up despite our cost cutting efforts?

Total Cost Management – Techniques

• Activity based costing • Activity based management • Target costing • Supply chain management • Strategic cost management

Total Cost Management – Activity Based Costing • Every aspect (produce/sale) of an organization involves certain activity. • Activities consume resources. • ABC is measuring the performance of the activities, according to their consumption of the resources. • This enables to allocate overheads to products, more accurately. • Activity based costing is a method that measures cost of a product/service, based on the activities performed to produce the product/service. •

product or customer  activities  the cost

Total Cost Management – Activity Based Management-

• Using ABC to improve a business is called activity-based management (ABM). • It identifies opportunities for improvement It identifies and helps in eliminating non-value added activities deploys resources to activities that yield maximum benefit.

Total Cost Management – Target Costing -

• • • • •

Understand market is the key Understand what price the customer will pay . Target cost = Target selling price - target profit Product is designed to meet a specific cost Achieves target cost by value engineering / supplier integration • Link engineering decisions to market requirement • Deliver optimal value to end customer. (Target costing is a approach to determine the life cycle cost at which the proposed product with specified functionality and quality must be produced to generate the desired level of profitability for the so estimated price)