now, no signup required!
Traditional cost management programs primarily focus on cost reduction and cost control by allocating production overheads and costs. However, excessively focusing on cost reduction has severe negative impacts on quality, customer experience, development and business growth, making traditional methods unreliable.
Controlling cost is just not enough in this environment. Organizations need to concentrate on managing costs strategically if they want to keep making profits and adding value for their shareholders. With that in mind, we’ll discuss strategic cost management meaning, its importance and techniques and some examples of strategic cost management.
-
Strategic Cost Management Meaning
-
Importance Of Strategic Cost Management
-
Strategic Cost Management Techniques
-
Strategic Cost Management Examples
Strategic Cost Management Meaning
Strategic cost management (SCM) is a cost management technique that aims to reduce costs and boost the strategic position of an organization. It’s the process of combining cost information with the structure of decision-making to reinforce the overall business strategy. Cost is measured and managed to align it with the organization’s business strategy.
There are four stages of SCM:
- Formulating the strategies
- Communicating strategies across the entire organization
- Planning tactics and executing strategies
- Developing controls and implementing them to track the success
Strategic cost management is a vital part of the value chain as it covers various aspects like production, design, sales, purchase and service.
Importance Of Strategic Cost Management
Let’s look at the importance of strategic cost management:
- SCM can be considered an updated cost analysis program that improves the overall position of an organization by clearly and formally placing each strategic element
- It can be used to analyze cost information and achieve sustainable competitive advantage by developing various measures
- It offers a better understanding of an organization’s overall cost structure to gain a competitive advantage in a market
- SCM specifically governs the formulation, communication, implementation and control stages of a strategic management process by using cost information
- It identifies the cost relationship between value chain activities and the process of management
The primary importance of strategic cost management lies in its ability to constantly improve the quality of products offered to customers. To reduce heavy cost failure, an organization must implement strategic cost management in the initial stages of production.
Strategic Cost Management Techniques
Here are some of the most common strategic cost management techniques:
Bundling
It’s the method of combining two or more products and offering them as a package and at the price of one.
Activity-Based Outsourcing (ABC)
ABC works on the principle of ‘controlling activities to control cost’. Activities and the related expenses and cost drivers are identified before working out the cost of the product.
Total Quality Management (TQM)
TQM emphasizes setting the highest standards and consistently tries to meet or exceed customer expectations. It focuses on process measurement and controls for continuous improvement.
Life Cycle Costing (LCC)
LCC considers the cost of a product over its entire life span. The analysis includes the cost of planning, production, research and development, replacement cost and disposal.
E-Business
E-business is fairly recent but has shown the huge scope that lies in terms of high cost-effectiveness and working beyond boundaries.
Managers can identify several other strategic cost management techniques for long-term sustainability and competitive advantage.
Strategic Cost Management Examples
Let’s look at a few strategic cost management examples to understand the concept better:
- A manufacturing firm decides to offer better turnaround and quote reduced delivery time to customers by tightly controlling bottleneck production operation. To keep the bottleneck running 24X7, they would need to expend extra funds and incur extra costs. If they cut costs, the production capacity will reduce and profit will be impacted. Strategic cost management allowed the firm to cut costs in downstream or non-bottleneck areas without affecting the delivery times.
- Product A shows an annual net profit of ₹40 lakhs with ₹10 lakhs overhead costs, while Product B records a loss of ₹4 lakhs and has overheads costs as high as ₹24 lakhs. With traditional cost management, the organization found that if, to save money, it shuts down the production of Product B, Product A sales would fall by only 25%. However, strategic cost management revealed that the business had to rethink its strategies. Since the loss of 25% sales of A meant a loss of ₹10 lakhs, shutting down the manufacture of B would result in a total loss of ₹6 lakhs annually instead of ₹4 lakhs.
In a nutshell, the meaning of strategic cost management isn’t cost control but a method to use the information for efficient managerial decision-making. The fundamental objective is leveraging cost leadership and product differentiation and gaining a sustainable competitive advantage.
Managers have to make intelligent decisions to manage resources better and drive value. The Manage Projects Expertly pathway by Harappa is designed to combine robust methodology with deep expertise. It’ll help you realize strategies and the best ways to implement them to help you predictably deliver high-quality results. Learn to create efficient action plans, make the right decisions and execute solutions with agility. Use methods like SWOT and Cost-Benefit Analysis and The Good-Cheap-Fast Rule to rapidly move between ideas and see patterns, connections and trends. Sign up today!
