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INTRODUCTION TO

STRATEGIC COST
MANAGEMENT (SCM)
Prof. Priyanka Acharya

What is a Cost?

The total money, time and resources
associated with a purchase or activity.
Cost means the amount of expenditure
(actual or notional) incurred on, or
attributable to, a given thing.

.Cost Management Information   Cost Management Information (CMI) includes financial information about cost and revenues and relevant non-financial information about productivity. quality and other key success factors for the firm CIMA includes both financial and nonfinancial and both short-term and longterm information – that managers need to lead their firms to competitive success.

3. 2. Strategic Management Planning and Decision-Making Management and Operational Control Preparation of financial statements .CMI used for Four Management Functions 1. 4.

Types of Organizations 1 2 3 4 Merchandising Manufacturing Service Industry Not for profit organizations .

Their can be three types of cost management initiative. negative or neutral.What is SCM?   According to Cooper and Slagmulder strategic cost management is "the application of cost management techniques so that they simultaneously improve the strategic position of a firm and reduce costs". based on whether the impact on the organization's competitive position is positive. .

 .What is SCM? Shank and Govindarajan defines strategic cost management as "the managerial use of cost information explicitly directed at one or more of the four stages of strategic management: (1) formulating strategies (2) communicating those strategies throughout the organization (3) developing and carrying out tactics to implement the strategies and (4) developing and implementing controls to monitor the success of objectives".

SCM-Concept .

it is seeking to improve productivity. superior customer service. This philosophy plays a vital role in determining the future of the company because it promotes the idea of continually finding ways to help organizations make the right decisions to create more customer value at lower cost An organization's products and services are measures of customer value through quality products. maximize profit. fair .Philosophy     Strategic cost management is a philosophy of improving cost and revenue It is not only cost management but also revenue management. and improve customer satisfaction. therefore.

Market orientation Holistic overview Anticipatory approach Continuous Participation Cross-functional .Attitude        SCM represents a proactive attitude that all the costs of the products and services result from management decisions within the company and with customers and suppliers.

Set of Techniques   The set of techniques or instruments are used individually to support a specific goal or together to serve the overall needs of the organization For example: An ideal cost management system should provide any desired information. in any desired format. and on demand to any authorized person in the organization .

Forces of change and cost management-primary concern in the 20th century .

Forces of change and strategic cost management-primary concern in 21st century .

customer. and function With a strongly internal focus Value added is a key concept In terms of the various stages of the overall value chain of which the firm is a part With a strongly external focus Value-added is seen as a dangerously narrow concept .Comparison of traditional cost management and strategic cost management Traditional Cost Management Strategic Cost Management Focus Internal External Perspective Value-added Value chain Cost analysis-way In term of product.

Comparison of traditional cost management and strategic cost management Cost analysisobjective Traditional Cost Management Strategic Cost Management Three objectives all apply. the design of cost management system changes dramatically depending on the basic strategic positioning of the firm: either under a cost leadership strategy. Although the three objectives are always present. without regard to the strategic context: Score keeping. and problem solving. or under a product . attention directing.

scale.Comparison of traditional cost management and strategic cost management Cost driver concept Traditional Cost Management Strategic Cost Management A single fundamental cost driver pervades literature .g. total quality management) Each value activity has a set of unique . experience.cost is a function of volume. technology. Multiple cost drivers such as: Structural drivers (e. scope.g. Applied too often only at the overall firm level. complexity) Execution drivers (e. participative management.

Strategic cost management concerns and objectives .

are. productivity.Objectives of SCM    Strategic cost management is not limited to cost but is inclusive to all resources used and deployed across the value chain Strategic cost management is not confine to its concerns and objectives only to cost. or are going . and at the same time the strategic position of the company. the organizations need to understand what their total costs were. For determining the profitability. customer value. but also consider revenue.

SCM-Cost Improvement and revenue enhancement   Object-Resources Means By identifying cost drivers that link resources. activities and cost objects and using resources efficiently  Focusing resources on the customers  By measuring the cost and performance of resources  By improving the purchasing process  Managing procurement costs  .

SCM-Cost Improvement and revenue enhancement   Object-Processes Means        Reduce operational costs by optimizing value-added activities and eliminating non-value-added activities Explore customer expectations and define value from the customer's perspective Identify which steps add value for the process customer and those that don't Determine which investments in process improvement will maximize the value produced Manage company costs in terms of what you do (processes) not resources consumed Gain competitive advantage by reducing cycle time Develop better financial and non-financial performance measures .

SCM-Cost Improvement and revenue enhancement   Object-Products Means Cost management should be inherent to each stage of a product's life cycle  Identify and analyze cost drivers  Provide accurate product cost information  .

SCM-Cost Improvement and revenue enhancement   Object-Customers Means    Managing customer service costs Competitors Means  Competitor Cost Analysis .

3. The guiding principles of strategic cost management The key concepts of strategic cost management The objects of strategic cost management To analyze the fields & activities of strategic cost management The instruments of strategic cost management The key support factors of the suggested framework .SCM-Framework 1. 4. 6. 2. 5.