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CHARACTERISTICS OF A WORLD CLASS COST MANAGEMENT

Friday, June 17th, 2011

CHARACTERISTICS OF A WORLD CLASS COST MANAGEMENT

A.N.Raman   Cost Accountant   Chennai

        India is already on the forefront of cutting edge competitiveness in manufacturing sector and is an emerging giant in so many manufactured products. Glancing at the growing list of the companies entering the platinum and gold list of manufacturing excellence in Frost and Sullivan awards year after year the country is certainly poised for a great leap not only in services sector but in manufacturing field as well.  One reason which has been well documented in this journey is the success stories of many companies introducing lean and flexible manufacturing practices with the Zero defect approach. The next frontier of excellence to sustain the edge will be a world class cost management which travels beyond operational excellence. It may be worthwhile to draw a list of characteristics which can be the cornerstones of a world class cost management framework.

     The attempt to enlist the characteristics of a World Class Cost Management (WCM) draws  on the Cost Management maturity Model framework propagated by the Confederation of the Indian industry  juxtaposed with some of the finest principles of excellence framework in manufacturing practices centred around the Deming’s  PDCA Cycle . The following key characteristics may be considered as the hall mark though it can be a growing list gradually as we evolve with experience :

·         Top Driven Tone

·         Policy Deployment Integration

·         Strategic and operational differentiation

·         PDCA Cycle Centric

·         HRA processes integration

·         Sustainability based

·         Amenable for assurance processes(governance)

·         Systems driven

The above features need elucidation for a better understanding of the emphasis underlying.

A WCM will be always top driven.  The tone at the top should be strongly conveying the criticality of cost management as a core process for achieving the entity strategies. This would be significantly important for a business strategy  strongly flavoured by cost leadership ideas.  The top management communication should be constantly emphasizing on the process of cost management rather than emphasizing on cost out comes alone. Quite often one may find that desired outcomes of cost advantage required are articulated and the processes are left to the strategy executing teams. But in a WCM environment the tone at the top will also articulate on structured cost management processes.  This will give enough drive even to the HRA processes to constantly examine the skill gaps on cost management and take counter measures to fill the gap.

A WCM will be always integrated with the Policy deployment architecture. Typically a company which is process driven with a high level of empowerment at all levels one can always notice an extensive practice of policy deployment .Whether it is financial or non financial , the policy deployment framework brings in lot of role clarity and alignment with the business strategy or the annual business targets. WCM will be inextricably linked up with such an environment and thus the Cost Planning as a functionality  will be cascaded down into targets and sub targets with a high degree of alignment across the business along with a review mechanism. For example if a new product for a customer at a target price is a part of the business strategy, a WCM company will deploy this strategy even to let us a say a vendor sourcing group with a deployed target of locating the source of a particular raw material of a given quality at a given price aligned with the new product  strategy.

A WCM will clearly differentiate between strategic and operational cost focus. Traditionally, the subject of cost had always been operations  focused due to the overwhelming influence of the cost accounting  framework. The primary objective of the cost accounting systems  is to generally  unitize all expenses to a unit of output . The bias of operations is discernible. However , a WCM dominant enterprise will articulate the operational cost issues differently from strategic  issues. As a result you will find in such companies even costs lying outside the system in an extended value chain being considered integral  as a part of the holistic cost focus. Further , considerations of business strategy such as target product segments and customer segments, segment specific strategic initiatives, long term strategic processes will get a different emphasis instead of  examining costs purely from operational perspectives. As a result of this perspective comparison of costs between periods may have operational significance  whereas cost comparison between two strategic scenarios will be more overarching in terms of decision making. This differentiation will play a large role in the WCM architecture.

A WCM practice will clearly have the Deming cycle of Plan – Do- Check—Act at  its centre. The practice of PDCA cycle from shop floor to top floor has become the hall mark of world class excellence. The same is applicable even for a WCM enterprise. Generally cost has always been treated as an outcome .The tendency in many enterprises operating under a continuous improvement environment  is to perform all the improvement activities and see cost savings as an out come of waste elimination efforts. Very often these cost estimates tend to be wrongly estimated and not reflected totally in the bottom line inviting sarcasm and reprimand from finance team members. But in a WCM company this would not be the practice. In WCM companies the cost information would appear in the beginning as a part of the PDCA cycle. Reliable cost information as a planning point and a check point would authenticate the continuous improvement process. The PDCA cycle would be firmly in place both at strategic and operational decision making environment of the business thus giving a perfect financial reliability to the decision making process. 

A WCM populated enterprise will have a HR interface distinctly different. At the outset , the most fundamental aspect will be to see cost management as a management process and not as a function of a finance executive reporting to the CFO or the head of finance.  Visualising cost management as process in itself has challenges of HR processes as the enterprise will have to identify skill gaps on cost management at all levels of organization and at all functions.  The skill matrix prepared by HR function at an enterprise level will also have to map the cost management skills required for the cost management process. A continuous review of skill gap on cost management from top floor to shop floor and imparting training on the same so that a robust PDCA cost management cycle is in place will be a major objective of the HRA function in a WCM environment.  Besides the internal focus on skills of cost management, if the HRA function is also driving quality management process in an enterprise dealing with vendors they  should also perform this skill gap analysis on cost management with the tier one vendors to start with.

A WCM oriented company would have embraced sustainability philosophy. The WCM process in the current context should also reflect sustainability concepts in the form of sustainable cost structures connected to environmental and socially responsible values. The PDCA cycle should reflect the resources outlay on environmental issues in all processes. The PDCA cycle at a strategic level should reflect concerns of environment and social issues and the related resources impact. The cost structures will be so articulated which will transparently reflect the environmental footprints of the enterprise. For example a company making paper should so transparently articulate its cost structure in a strategic analysis as to what extent the environment protection or degradation  to forest wealth has happened. Such an analysis should be even visible to governing body so that strategies can be suitably modified to make them sustainable. Similarly, business strategy itself can be so formulated in India so that it takes care of the society in design of products or processes. The related cost issues will be articulated explicitly in a company with a WCM practice.

A WCM enterprise will make its cost management processes amenable to governance assurance.  The world class governance framework goes beyond compliance and balances it with performance. A governing body in such an environment goes beyond issues like audit committee, independent directors composition etc and demonstrate a high oversight on strategic performance of the entity governed. A WCM process will align itself with such a governance framework and brilliantly highlight the performance issues to an enlightened board. Towards this, the cost reporting framework will be  conforming to standards such as cost accounting standards or management accounting principles and will be capable of being subject to a process of assurance. Such a WCM process does not confine itself to only an audit trail of cost accounting but will also embrace review of cost based decision  taken records through the PDCA cycle. The decision making processes and risk management practices will have an explicit link with the cost management system thus strengthening the governance mechanism.

A WCM company will be supported for its information from established systems. A quick scan of the most of the companies which have implemented the ERP systems will reveal that most of them have largely underutilized the cost management modules. But a WCM company would have significantly exploited the cost management modules of such ERP systems. Either by using the built in functionalities or by using the Analytics tools linked to the ERP WCM companies make an extensive use of the system based information to perform the PDCA cycle. Such a full exploitation in fact can return the investments made in such systems normally claimed by the vendors.

In the above write up we have tried to capture some of the cornerstones of a world class cost management framework. This is a constantly evolving field and by having a maturity model on cost management companies can benchmark themselves and constantly improve to retain the competitive advantage besides the manufacturing excellence.  While the efforts on improving quality and delivery have become structured in the Indian business a great deal of effort is still required on cost management front.