Chapter 1 - Strategic Cost Management: Midterm

LADY OF LOURDES HOSPITAL & COLLEGES OF CAYBIGA, INC.
Strategic Cost Management

MIDTERM
CHAPTER 1 - STRATEGIC COST MANAGEMENT

LEARNING OBJECTIVE: After completing this chapter, you should be able to;
 Define Strategic Cost Management
 Explain What is Strategy is and relate strategic cost management to strategic
management
 Know the Basic Concept of Strategic Cost Management
- Identify 3 general stages of strategies
DISCUSION:
 Strategic Cost Management / (SCM)- is the process through which activities
or cost drivers are identified and analyzed in order to lower costs and maximize
product value so that an entity would have a strategic competitive advantage over other
players within an industry.
 It is the application of techniques which aim to reduce (or regulate) cost.
 Use of cost information as a tool for decision making and business development that
would support the strategic placement of an entity.
Strategy –is a set of policies procedures and approaches to business that produce
long term success while strategic management involves the development of a
sustainable competitive position. Cost management is the practice of
accounting in which the accountant develops and uses cost
management information.
Cost Management Information –is the information that the manager

needs effectively manage the firm, profit-oriented as well as not-for-profit organization.
This includes both financial information about cost and revenues as well as relevant
nonfinancial information about productivity, quality and other key success factor for the
firm.
“Basic Concept in Strategic Cost Management”

 Strategic planning and decision making requires a broad set of information.
-Information about customers, suppliers, different product designs
 Information should
-Include information about the firm’s environment and internal workings
-Must be prospective and should insight about future periods and activities,
Strategic Decision Making: Choosing among alternative strategies with the goal of
selecting a strategy for long term growth and survival. Strategic Cost Management use of cost
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data to develop and identify superior strategies that will help produce a sustainable
competitive advantage.

MIDTERM
Competitive Advantage – creating better customer value for the same or lower cost than
offered by competitors. Or creating equivalent value for lower cost than offered by
competitors
Customer Value – the difference between customer realization (what a customer receives)
and customer sacrifice (what the customer gives up).
-What a customer receives is more than simply the basic level of
performance provided by a product. What is received is total product. Purchased product. The
total product is the complete range of tangible and intangible benefits that a customer
receives from a purchased product…..
Thus, customer realization includes basic and special product features service, quality,
instructions for use, reputation, brand name and any other factors deemed important by
customers.
Customer sacrifice includes the cost of purchasing the product, the time and effort spent
acquiring and learning to use the product and post-purchase costs, which are the cost of
using, maintain, and disposing of the product.
Example: Using of cellphone - the cost of using it is you have to purchased load, or pay for
your internet service provider, cost of charging. Cost of maintaining, if it has any damage that
needs to be repaired or change battery and when it comes to disposing of the product.
Increasing customer value to achieve a competitive advantage is tied closely to judicious

strategy selection. 3 General strategies have been identified:
Three Stages of General Strategies
1. Cost Leadership –A cost leadership strategy happens when the same or better
value is provided to customers at a lower cost than a company’s competitors.
Example : A company might redesign a product so that fewer parts
Are needed, lowering production costs and the costs of maintaining
The product after purchase.
2. Differentiation –strategy strives to increase customer value by increasing what the

customer receives (customer realization). It is a competitive advantage is created by
providing something to customer that is not provided by the competitors. ”Unique
feature that cannot be seen,
Observed, offered by your competitors. It can be functional, aesthetic or
Stylistic.
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Example: A retailer of computers might offer an on-site repair service,
A feature not offered by other rivals in the local market.

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3. Focusing Strategy happens when a firm selects or emphasizes a market or customer
segment in which to compete. One possibility is to select the markets and customers
that appear attractive and then develop the capabilities to serve these targeted
segments. Identifying or classifying your products or services according to age,
gender, preferences taste, religion, educational background, geographical location and
others to make sure you focusing and selecting the proper target market or segment
which your product to be sold.
Example: Focusing Strategy
Strategic positioning – is the process of selecting the optimal mix of the above 3
general strategic approaches. The mix is selected with the objective of creating a sustainable
competitive advantage. (Optimal mix-meaning select the best mix of any general
strategies).Strategic positioning therefore reflects the choices that you make with respect to
two things:
1) The kind of value that your products and services will offer to target consumers (the
products’ “Value Proposition”), and “A good value proposition is at the core of effective strategic
positioning”.
2) 2) How that value will be created differently from other companies (which is
characterized through your business’s “Value Chain”).
 To measure such position, you may use perception maps to track where products in
your market are positioned with respect to each other in the minds of target consumers.
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A perception map can help you measure the positioning of an industry’s products in the minds of its target
consumer.

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Strategic positioning is concerned with the

way in which a business as a whole
distinguishes itself in a valuable way from its
competitors and delivers value to specific
customer segments
A Strategy, reflecting combinations of the three (3) general strategies can be defined as
“choosing the market and customer segments the business units intends to serve. Identifying
the critical internal business processes that the unit must excel at to deliver the value
propositions to customers in the targeted market segments, and selecting the individual and
organization capabilities required for the internal, customer and financial objectives.
Two types of business activity:

Primary activities: Those that enable it to fulfill its role in the industry value chain and hence
satisfy its customers. They must be linked together effectively.
Support activities: Those which are necessary to control and develop the business over time
and their by add value indirectly.
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The objective of strategic cost management is to reduce cost while simultaneously
strengthening the chosen strategic position, the competitive advantage is tied to costs.
-END-
SUMMARY
In today’s Business organization trying hard to reduce their cost. Ascertaining cost and finding out
ways to reduce it has become the main issue for the organization, by following certain steps and
concepts of Strategic cost management, an organization can effectively and efficiently implement
some good strategies related to reduction of cost and that in turn will decide the future competitive
advantage of the companies trying to maintain their market share and brand image in the tough
competitive markets.

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MIDTERM
CHAPTER 1 – VALUE CHAIN ANALYSIS
 Define Value Chain Analysis, and how it works.
 Learn the steps of Value Chain analysis and be able to make one.
 Benefits of Value Chain Analysis
DISCUSION:
VALUE CHAIN ANALYSIS
The value chain approach was developed by Michael Porter. It represents the internal
activities a firm engages in when transforming inputs to outputs. Value Chain Analysis is a
useful tool for working out how you can create the greatest possible value for your customers.
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It is identifying and exploiting internal and external linkages with the objectives of
strengthening a firm’s strategic position. Analysis process are concerned with producing
“BETTER, FASTER, CHEAPER products and service.
Internal linkages – are relationships among activities that are performed within a firm’s portion of the value chain.
External linkages - describe the relationship of a firm’s value chain activities that are performed with its
suppliers and customers. External linkages has two types: 1.Supplier Linkages and 2.Customer Linkages.
- NOTE: COMPUTATION VCA-exploiting internal Linkages will discuss separate (online or activity) TBA

MIDTERM
For strategic analysis, activities are classified as organizational and operational activities.
 Organizational activities are of two types:
1. Structural activities are that determine the underlying economic structure
Of the organization.
2. Executional Activities are activities that define the processes and capabilities of an
organization and thus are directly related to the ability of an organization to execute
successfully.
 Operational Activities are day to day activities performed as a result of the structure and
processes selected by the organization. Operational COST DRIVERS are those factors that drive
the cost operational activities.
-Operational activities and drivers are the focus of activity based costing.
Example:
Structural Activities Structural Cost Driver

Building Plants Number of plants, scale ,degree of centralization
Management Structuring Management style and philosophy
Grouping Employees Number and type of work
Complexity Number of product lines ,number of unique
processes ,number of unique parts ,degree of
complexity
Vertically Integrating Scope, buying power ,selling power
Selecting and Using Process Types of process technologies ,experience
Technologies
Example inlcude receiving and inspecting incoming parts ,moving materials ,shipping products ,new products
,servicing products and setting up equipment .
Main aspects of Value Chain Analysis
The primary activities (Porter, 1985) of the company include the following:
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• Inbound logistics- These are the activities concerned with receiving the materials from suppliers, storing these
externally sourced materials, and handling them within the firm. (e.g handling of raw materials , inventory control
, warehousing)
• Operations- These are the activities related to the production of products and services. This area can be split
into more departments in certain companies. For example, the operations in case of a hotel would include
reception, room service etc. ( e.g production, assembly ,packaging )
• Outbound logistics - These are all the activities concerned with distributing the final product and/or service to
the customers. For example, in case of a hotel this activity would entail the ways of bringing customers to the
hotel. ( e.g processing of orders , warehousing of finished goods and delivery)
• Marketing and sales -This functional area essentially analyses the needs and wants of customers and is
responsible for creating awareness among the target audience of the company about the firm’s products and
services. Companies make use of marketing communications tools like advertising, sales promotions etc. to
attract customers to their products.
• Service - There is often a need to provide services like pre-installation or after-sales service before or after the
sale of the product or service.( e.g installation ,repair , maintenance and training )

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Support activities -The support activities of a company include the following:
• Procurement -This function is responsible for purchasing the materials that are necessary
for the company’s operations. An efficient procurement department should be able to obtain
the highest quality goods at the lowest prices.
• Human Resource Management -This is a function concerned with recruiting, training,
motivating and rewarding the workforce of the company. Human resources are increasingly
becoming an important way of attaining sustainable competitive advantage.
• Technology Development - This is an area that is concerned with technological innovation,
training and knowledge that is crucial for most companies today in order to survive.
• Firm Infrastructure -This includes planning and control systems, such as finance,
accounting, and corporate strategy
The Uses of Value Chain Analysis –
 The main objective is to represent the main activities in the business and
their relationships in terms of how they add value so as to satisfy the customer and
obtain resources from suppliers.
 The information that flows throughout the industry and how critical that information is to
the functioning of the industry and the success of the firms in it, by determining where
and when that information is available, who has it and how it could be obtained and
turned to advantage or used against the firm.
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 The information that is or could be exchanged with customers and suppliers through out
the chain to improve the performance of the business or lead to mutually-improved
performance by sharing the benefits.
 How effectively the information flows through the primary processes and is used by
them:
-Within each activity to optimize performance
-To link the activities together and avoid unnecessary costs and
missed opportunities
-To enable support activities to contribute to the value-adding processes, not
hinder them
How to Use the Tool: Value Chain Analysis is a three-step process:
1. Activity Analysis
 Identify the activities you undertake to deliver your product or service.
STEP -1 –Activity Analysis
• Brainstorm the activities that you, your team or your company undertakes that in some way
contribute towards your customer's experience
• Includes
– marketing of your products or services
– sales and order-taking
– operational processes
– delivery
– support
2. Value Analysis
 Think through what you would do to add the greatest value for your customer.
STEP 2 - Value Analysis
 Key thing is "Value Factors" – the things that your customers' value in the way that each activity
is conducted.
 Next to each activity you've identified, write down these Value Factors.
 Next to these Value, write down what needs to be done or changed to provide great value for each
Value Factor.

MIDTERM
3. Evaluation and Planning
 Evaluate whether it is worth making changes, and then plan for action
Step 3 – Evaluate Changes and Plan for Action
 Quick – “Select the value which can be implemented quickly. The Vale that is taking more time will be
discarded.
 Easy – “Select the value which is will easily be implemented and produce great value. Then screen
the more difficult changes.
 Cheap – “Some values will deliver only marginal improvements, but at great cost. Discard them all.
- NOTE: EXAMPLE of how to use the tool will be discuss online-TBA
The Benefits of Value Chain Analysis

1. Improved bids and proposals
2. Better product planning ,research and development
3. Standardized processes
4. Post- Sales service and support
5. Reduced Cost
6. Improved Profitability
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-END-
Summary
Value Chain Analysis is a useful way of thinking through the ways in which you deliver value to
your customers, and reviewing all of the things you can do to maximize that value. It takes place
as a three stage process. By using Value Chain Analysis and by following it through to action,
you can achieve excellence in the things that really matter to your customers.
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MIDTERM
CHAPTER 1 – JUST-IN-TIME MANUFACTURING AND PURCHASING
 Define and understand the Just-in-time Philosophy
 Understand the history of Just-in-time
 Understand Push and Pull System of Production
 Know and understand the five key elements involved in the operations of a JIT system
 Describe the role of people in JIT and why respect for people is so important.
 Describe the benefits of JIT
 Discuss the implementation process of successful JIT system
 Describe the impact of JIT on service and manufacturing organization
DISCUSION:
What is Just-In-Time (JIT) – A set of techniques to increase productivity improve quality, and reduce
cost of an operations
 Just-In-Time (JIT) Philosophy – means making “only what is needed, when it is needed and how
much needed.
o Just-in-time Production – is a system which each component on a production line is
produced immediately as needed by the next step in production line.
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o Just-in-time manufacturing philosophy-is being increasingly utilized by American
manufacturing companies.
-JIT requires raw materials to be delivered at exactly the points they are needed
and just when yhey are needed to initiate production. Partially processed goods are
expected to Move through the factory in such a way that goods come out of one
operation just in time to be processed in the next operation.
-JIT calls also for the transfer of finished goods directly to the vehicles Used to
deliver them to customers, rather than to storage. It is also reduce the cost of handling
from the point of delivery of raw materials to the Point where the finished product is
shipped to the customer.
Ex: custom furniture manufacturers, custom ship builders and custom home-
builders.
 Just- in- Time inventory system, also known as a lean production system, materials are
delivered to the factory immediately prior to their use of production.
-A lean production system significantly reduces inventory carrying cost by
requiring that the raw materials be delivered just in time to be placed into
production. Also, many manufacturing system are combined into work centers
called “Manufacturing cells.
- THE JIT “pull” manufacturing system credo is “Don’t make anything for anybody until
they are ask for it. For JIT to work success fully, a high degree of coordination and
cooperation must exist between the manufacturer and the customer.

MIDTERM
History and development of JIT manufacturing

- -JIT is a Japanese management philosophy which has been applied in practice since
the early 1970s in many Japanese manufacturing organizations. It was first developed
and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means of
meeting consumer demands with minimum delays (Goddadrd, 1986). For this reason,
Taiichi Ohno is frequently referred to as the father of JIT.
“The Toyota production plants were the first to introduction JIT. It gained extended support
during the 1973 oil embargo and was later adopted by many other organizations”.
What is a Push System vs a Pull System?

 In a push-based supply chain, products are pushed through the channel from
production up to the retailers.
 In a pull-based supply chain, procurement, production, and distribution are demand-
driven rather than based on predictions. Goods are produced in the amount and time
needed.
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MIDTERM
Three Elements of Just-in-time

Just-in-Time Manufacturing- -TQM or Total Quality
minimize waste in all forms: Management –continually
avoid waste of materials, space improve process and systems
and labor
Maintaim respect for all workers:

equal respect is paid to all workers.
Human resources are an essential
part of JIT
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Key Components of Just-In-Time
1. Elimination of waste –waste adds unnecessary cost on business ( time, energy
,space or any activity that does not add value to the product
2. A broad view of operation – the entire organization has the same goal – which is
serving the customer” team and goal oriented”
3. Simplicity - simple is better / simple solutions
4. Continuous Improvement – emphazie quality called “kaizen”from by Japanese that
organizations/product/service are never perfect and can always be improved
5. Visibility - waste must be visible to be identified and eliminated
6. Flexibility – being capable of producing of wide range of products through a flexible
production system to just accommodate changing customer demand
The water represents your inventory and below the

surface are rocks representing problems ,a major
aspect of JIT is its VIEW OF INVENTORY - Inventory
or safety stocks hides these inefficient processes
which add hidden cost to your business.

MIDTERM
Elements or Tools of JIT Manufacturing

 JIT Manufacturing is a philosophy of value-added manufacturing
 Achieved by focusing on these elements:
 Inventory reduction - exposes problems
 Kanbans & pull production systems
 Small lots sizes & quick setups
 Uniform plant loading
 Flexible resources
 Efficient facility layouts
JIT Manufacturing: The Pull System

Number of Kanbans Required
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 Computing the Number of Kanbans: an aspirin manufacturer has converted to JIT
manufacturing using kanban containers. They must determine the number of containers at the
bottle filling operation which fills at a rate of 200 per hour. Each container holds 25 bottles, it
takes 30 minutes to receive more bottles, safety stock is 10% of demand during LT.
Variations on Kanban Production
Kanban boxes - space on factory floor for
storing supplies
Flags (signal kanban) - used to indicate when
supplies need to be ordered
Supplier kanbans - brings filled containers to
point of usage in factory/picks up empty
containers

MIDTERM
Small Lot Sizes & Quick Setups

 Small lots mean less average inventory and shorten manufacturing lead time
 Small lots with shorter setup times increase flexibility to respond to demand changes
 Strive for single digit setups- < 10 minutes
 Setup reduction process is well-documented
-External setup- do as much preparation while present job is still running; thus
can be performed while machine is still running
-Internal setup- simplify, eliminate, shorten steps involved with location, clamping,
& adjustments; requires the machine to be stopped in order to be performed
 Ultimate goal is single unit lot sizes
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Flexible Resources
 Moveable, general purpose equipment:
 Portable equipment with plug in power/air
 Drills, lathes, printer-fax-copiers, etc.
 Capable of being setup to do many different things with minimal setup time
 Multifunctional workers:
 Workers assume considerable responsibility
 Cross-trained to perform several different duties
 Trained to also be problem solvers
Facility Layouts
Workstations in close physical proximity to reduce transport & movement
Streamlined flow of material
Often use: Cell Manufacturing Placement of dissimilar machines and equipment together to produce a family of
products with similar processing requirements
 U-shaped lines
Allows material handler to quickly drop off materials & pick up finished work; flexibility

MIDTERM
TQM
TOTAL QUALITY MANAGEMENT
 Product versus process  Preventative
-Quality in JIT is Maintenance: HOMEWORK: MAKE A
RESEARCH
centeredABOUT
on building  Regular inspections and
quality into the process maintenance to keep JIDO JIDOKA
 POKA
AND –YOKE
Quality at the source - machines operational.
sequential inspection “Costly, yes but less expensive
 Jidoka - authority than unexpected machine
to stop line breakage”.
 Poka-yoke – fail  Work environment
–safe - processs
 perform maintenance as Page 16 of 19
part of their regular work
 Care of equipment and
well -trained workers are
very important.
Respect for People
The Role of Employees:
 Genuine and meaningful respect The Role of Management:
for employees
 Responsible for culture of mutual
 Willingness to develop cross- trust
functional skills
 Serve as coaches & facilitators
 Associates gather performance -Responsible for developing
data; make production and workers
quality decisions -Provide multi-functional
 Bottom-round management. training
- consensus management by - Facilitate teamwork
committees or teams
 Support culture with appropriate
 Quality circles incentive system including non-
-small volunteer teams that solve monetary
quality problems
 Everyone is responsible for Quality Supplier Relationships
and preventive maintenance  Single-source suppliers
- Can supply entire family of
Lifetime Employment: parts; external factory
 Everyone feels secure/is
 Build long-term relationships with
empowered small number of suppliers
 Everyone is responsible for - Suppliers locate near customer
quality: understand both internal -Fewer contracts
and external customer needs -Cost and information sharing
- Work together to certify
processes
MIDTERM
Benefits of Just-in-time
 reduction in inventories
 Improved quality
 Reduced space requirements
 Shorter lead times
 Lower production costs
 Increased productivity
 Increased machine utilization
 Greater flexibility
Implementing JIT
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 Starts with a company shared vision of where it is and where it wants to go
 Management needs to create the right atmosphere
 Implementation needs a designated “Champion
Implement the sequence of seven steps: 1. Make quality improvements 2. Reorganize workplace
3. Reduce setup times 4. Reduce lot sizes & lead times 5. Implement layout changes 6. Switch to pull
production 7. Develop relationship with suppliers
Just-in-time in Services - Many JIT concepts also apply to Service companies
▪ Improved quality such as timeliness, service consistency, and courtesy ▪ Uniform
facility loading to provide better service responsiveness ▪ Use of multifunction workers
▪ Reduction in cycle time ▪ Minimizing setup times and parallel processing ▪ Workplace
organization
Just-in-time Across the Organization- eliminates organizational barriers and improves

communications Accounting changes or relies on activity-based costing Marketing by
interfacing with the customers Finance approves and evaluates financial investments
Information systems create the network of information necessary for JIT to function
SUMMARY
JIT is a philosophy that was developed by the Toyota Motor Company in the mid-1970s. It has
become the standard for many industries by focusing on simplicity, eliminating waste, taking a
broad view of operations, visibility, and flexibility. Three key elements of this philosophy are JIT
manufacturing, total quality management, and respect for people. JIT views waste as anything
that does not add value. Traditional manufacturing systems use “push” production; JIT uses
“pull” production. Push systems anticipate future demand and produce in advance in order to
have products in place when demand occurs. Pull systems work backwards. Key elements of
JIT manufacturing are the pull system and kanban production, small lot sizes and quick setups,
uniform plant loading, flexible resources, and streamlined layout TQM creates an organizational
culture that defines quality as seen by the customer. The concepts of continuous improvement
and quality at the source are integral to allowing for continual growth and the goal of identifying
the causes of quality problems. JIT considers people to be the organization’s most important
resource. JIT is equally applicable in service organizations, particularly with the push toward
time-based competition and the need to cut costs. JIT success is dependent on inter-
functional coordination and effort.
-END-
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MIDTERM
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LADY OF LOURDES HOSPITAL & COLLEGES OF CAYBIGA, INC.

Strategic Cost Management