Cost Management – Retrospect and Prospect

1. Cost Management – Retrospect and Prospect K.Sreekumar Professor (Finance & Control) FISAT Business School Angamaly Campus

2. The Competitive Advantage of Nations “The economic goal of a nation should be to produce a high and rising standard of living for its citizens. To do this a nation, or rather the industries of a nation, must become more productive .Hence the studies what makes an industry and then later an economy productive. Upgrading is the key. Improving factor productivity allows firms to compete in sophisticated industrial segments and new industries while maintaining full employment. A failure to upgrade results in slower productivity growth, declining Competitiveness and eventually unemployment. Porter uses these concepts to create a "diamond, "the four forces that determine success of an industry.” - Michael Porter

3. Indian Competitiveness: Where Does the Nation Stand?Prof.Michael E .Porter made a presentation on India in Mumbai on21st January 2004

4. Porters Diamond Model for the Competitive Advantage of Nations

5. "The essence of formulating competitive strategy is relating a company to its environment .” -Michael Porter [Competitive Strategy -1980] Michael Porter asks: Why do some nations seem to specialize in certain industries with lots of competitors, while other nations do not seem to know that an industry exists? [Competitive Advantage of Nations -1990]

6. Accounting Strategy Management

7. Industry environment -Share of Manufacturing in GDP Target – 35% in GDP by 2016 Prime Minister’s message – 2006 Source: National Manufacturing Competitiveness Council ‘s National Manufacturing Strategy document

8. Increased Competition: Example of Commercial Vehicle Segment Before 1990 After 1990

10. Four-Stage Model of Cost System Design

11. STRATECY GAP? We often come across companies that have set an ambitious long term goal, perhaps to double revenue and profits over five years, or to dramatically increase the proportion of revenues coming from new businesses, but have devoted almost no intellectual effort to thinking through the medium-term capability-building program that is needed to support that goal. In too many companies there is a grand, and overly vague, long-term goal on one hand . . . And detailed short-term budgets and annual plans on the other hand . . . with nothing in between to link the two together. . . . There seems to be, in many companies, an implicit assumption that the short term and long term abut each other, rather than being dovetailed together. But the long term doesn’t start at year five of the current strategic plan. It starts right now! —Gary Hamel and C.K. Prahalad, Annual Business Plan

12. Cost Management Kaleidoscope –Different Tools of Management Accounting RETROSPECT 1.Activity Based Costing 2.Value Chain Analysis 3.Target Costing 4.Quality Costing 5.Life Cycle Costing 6.Balanced Score Card

13. Contd…. • PROSPECT (FUTURE) • Business Analytics & Predictive Modeling– Big • Data & Cloud Computing • Business Model Reporting

14. 2000 +

15. Typical Manufacturing Cost – in % Dominant Cost - Material

16. Typical IT Services Cost in %Dominant Cost : Employee

17. Chemical Industry State Sector Source : Review of Public Enterprises -CMD

18. Kerala Minerals and Metals Ltd Source : Review of Public Enterprises -CMD

19. What is the full form of SAP? • Systems Applications and Products in Data Processing • Renamed in 1977 • Before 1977 : Systems Analysis and Program Development (German : Systemanalyse und Programmentwicklung) • When was SAP founded? • Founded in 1972 by Wellenreuther, Hopp, Hector, Plattner and Tschira (all ex-IBM employees)

20. SAP R/3 client server architecture evolved in year 1992 • Which is the latest SAP product? • mySAP Business Suite

21. Company General Executive M’gement Admin. C.Centers Prod. S. C. Center Service Cost Center Utility Cost Center Production C. Center Production Order Profitability Segment Projects Over/Under absorption Production Variances Flow Of Overhead in M. Affiliates

22. Module SAP CO – Controlling • Represents the flow of cost and revenue • Instrument for organizational decisions • Key elements of the CO application module include : • Cost center accounting • Product cost Planning • Product Costing • Profitability analysis • Profit center accounting • Activity based costing • Enterprise controlling

24. A similar story was seen between Ambassador cars and Maruti cars. Recently, Mahindra Scorpio’s weight reduced (by 60 kg) to 2140 kg and Maruti Swift (by 30 kg) to 970 kg. Maruti has saved Rs.147 crores by working on weight reductions on components – less fuel and less pollution, for consumers.

25. Why classification between fixed and variable? • If the Variable Cost of a product is more than 50%, it is better to reduce the cost than to increase the volume and when the Variable Cost is less than 50%, volume increase will result in higher profits.

26. EXAMPLE 1VARIABLE COST 60%

27. EXAMPLE 2VARIABLE COST 40%

28. SAP for Aerospace & Defense SAP for Media SAP for Automotive SAP for Mill Products SAP for Banking SAP for Mining SAP for Chemicals SAP for Oil & Gas SAP for Consumer Products SAP for Pharmaceuticals SAP for Engineering, Construction & Operations SAP for Professional Services SAP for Healthcare SAP for Public Sector SAP for High Tech SAP for Retail SAP for Higher Education & Research SAP for Service Providers SAP for Industrial Machinery & Components SAP for Telecommunications SAP for Insurance SAP for Utilities mySAP Industry Solutions (Some Examples)

29. The Value Chain Defined The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer value accumulates along a chain of activities that lead to an end product or service. Porter describes the value chain as the internal processes or activities a company performs “to design, produce, market, deliver and support its product.” He further states that “a firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.”

30. Internal Value Chain Analysis – Manufacturing Purchasing R & D Manufacturing Sales & Marketing 40% 3% 5% 10% 3% 20% 6% 13% Raw Material Stocking Engineering Distribution Value Added Managing with Dual Strategies – Derek F.Abell

31. Value Chain for the Petroleum Industry

33. CMA Competency Map

34. PROSPECT (FUTURE) • Business Analytics & Predictive Modeling– Big • Data & Cloud Computing • Business Model Reporting

35. What is a Business Model ? A system of inputs, value-adding activities and outputs that aims to create value over the short, medium and long term. Source: CIMA Integrated Reporting Prototype Framework (2012) Business Model Cost Structure Revenue Model

36. Understanding your Business Model The Business model must answer the following questions: How does the organisation create value? How does it deliver value? How does it preserve some of the value for its owners? Know where value is being created or destroyed - helps to identify opportunities and risks Understand how your business model interacts - within the organisation - with the external environment

37. Integrated Reporting Framework Creation of Value Over Time through Cost Management Source :CIMA Presentation

38. Building Resilience into your Business Model • Short-term actions + long-term aspirations • • Cost leadership • • Durable supply chain • • Satisfied customers • • Innovation • • Motivated staff

39. PROSPECT (Future) of Cost Management • Business Analytics & Predictive Modeling– Big Data & Cloud Computing • In a sense, a key economic driver for IT would be the use of remote capacity popularly known as cloud computing (elasticvapor.com)/(onestopclick.com). • IBM has already come out with Smart Cloud Enterprise Services. • (COGNOS,SPSS) • Oracle Hyperion and Peoplesoft • Resilient Business Models

40. What’s Driving IT Priorities? BPM is a discipline that leverages software and services to provide total visibility into your organization. Discover, document, automate, and continuously improve business processes to increase efficiency and reduce costs. Source:IBM 83% Analytics 74% Mobility 68% Cloud 60% BPM 58% Security Intelligence

41. What Business Executives Expect From Next Gen Analytics

42. Cloud Computing Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the Internet). The name comes from the use of a cloud-shaped symbol as an abstraction for the complex infrastructure it contains in system diagrams. Cloud computing entrusts remote services with a user's data, software and computation.

43. There are many types of public cloud computing Infrastructure as a service (IaaS) Platform as a service (PaaS) Software as a service (SaaS) Network as a service (NaaS) Storage as a service (STaaS) Security as a service (SECaaS) Data as a service (DaaS) Desktop as a service (DaaS - see above) Database as a service (DBaaS) Test environment as a service (TEaaS) API as a service (APIaaS) Backend as a service (BaaS) Integrated development environment as a service (IDEaaS) Integration platform as a service (IPaaS), see Cloud-based integration

44. Cloud Computing – Logical Diagram

45. Manage with Cloud:- Cloud adoption continues to accelerate “Do you currently have a cloud computing initiative or strategy in place within the organization?” 2010 44% adopters/ planners 52% 47% 13% adopters Base: IT and business decision-makers from companies with 20 or more employees Source:-Forrsights Strategy Spotlight: Cloud In Asia Pacific Excluding Japan, Q3 2011

46. Future of Cost Management

47. “Data is the New Oil” Ann Winbald, Co-founder Hummer Winbald Venture Capital In its raw form, oil has little value. Once processed & refined, it helps power the world.

48. THANK YOU