Cesare Mainardi, managing director of Booz & Company, details how executives should cut costs–but often dont.

In times of uncertainty, organizations irrespective of size, are faced with the challenge to improve or maintain their margins, by focusing on operational cost efficiencies, cost analysis and profitability analysis.

  • Identifying costs that can be influenced is key to cost streamlining.
  • Refocus resources on really profitable products, customers and channels.

 

Akzo Nobel’s margin management programs were implemented throughout the company with a strong focus on cost management, and cash management, by closely monitoring working capital. Akzo Nobel also uses technology and innovation as key differentiators.
The results of the cost management program are being monitored closely, to ensure full benefit realization.

Oskomera, a steel fabricator,  worked on redesigning their business processes using lean production principles.
The result: a reduction of work in progress by 85%, a reduction in cycle time by 65%, an improvement of quality levels by 41% and an increase of productivity by 67%.

The lean principles that Oskomera applied were:

  • Quality is integrated in business flows
  • People are an integral part of the business process
  • Stocks are streamlined an waste eliminated.

 

NOTE : When using an integrated approach, such as Activity Based Costing  that works on causal relations to allocate costs, changes in the level of activity will not lead to a proportionate change in total costs.This in turn calls for the need to analyze costs according to a cost hierarchy, focusing at four levels: unit, batch, product, company:

* Unit: Unit level costs increase in proportion to the number of units produced (e.g. labour hours)
* Batch: Costs increase in relation to the batch of units being produced (e.g. set-up or purchasing costs)
* Product: Costs at this level are incurred irrespective of the volume of products or batches produced and might include costs like technical support, etc.
* Company: Costs at the company level are incurred and cannot be assigned to products directly (admin and management)

Finally, is worth noting that Kaplan differentiates between the cost of resources supplied and the cost of resources used: (the cost of resources supplied = the cost of resources used + the cost of unused capacity.)

And unused capacity is not entertained in a  Strategic Cost Management framework.

In this video Gerard Chick author of Case-Study 2.14 ‘Strategic Cost Management’ from the Case-Study Collection considers the merits of the Benefits of Strategic Cost Management utilized by Honda’s management team.