Cost M anagement for E ffectiveness & Efficiency

1. Cost Management for Effectiveness & Efficiency • By • D.Ojwang

2. Connecting

3. Effectiveness • Cost management targets being met • From the start setting out clear cost management objectives • Evaluating whether the cost management objectives have been met or not

4. Objectives of cost management • Spending timely…..corporate or project capital expenditure plan • Spending wisely …..planned unit of gain is achieved for each unit of expenditure • Spending correctly…..things that are obligated • Spending perceptively …..Ensure that spending versus achievement variance are identified,analyzed,corrected or trended • so that early warnings can enable timely actions.

5. Effective Cost Management is … • A process rather than a discipline • Integration of processes and knowledge from multiple functional areas • Performed by people not products

6. Principles of effective cost management • Clear consistent performance objectives • Reduce organizational complexity • Performance excellence-the only acceptable target • Provide knowledge and tools to succeed • Commit to broad based knowledge driven involvement • Management decisions impact on organizational cost

7. Efficiency • Inputs required for outputs. • Cost management sets benchmark for measurement of Input –Output relationship • Benchmark for measurement Inside & Outside. • Donot reinvent the wheel

8. Cost efficiency • Cost efficiency does not mean merely cutting costs... Cost cutting is normally done as a fire fighting measure when things go terribly wrong. • If cost efficiency is in built into the management system of an organization Then…. • The need for drastic cost cutting measures might not be necessary at all.

9. Cost management……(1) • Managing the cost of the resources consumed and the value of the out put delivered • Management of cost by collecting, analyzing, evaluating, and reporting cost information • For budgeting, estimating, forecasting, and monitoring costs.

10. Cost management…….(2) • Measuring performance , • Comparing against expectations, • Finding reasons for divergence • Optimizing performance • Prediction of final outcomes

11. Cost management…….(3) • Providing strategic recommendations • Why ,what it means and what can be done about it • Measure of accountability for business leadership

12. Where is the balance/Mix • Problematic-so many ways to obtain value e.g focus on • Providing specific output(effectiveness) for the least cost (cost management) • Maintaining a particular cost and producing the best output

13. .. how do we deal with this • Establish priorities of senior management (strategic focus) to facilitate balance • Balance is dynamic depending on the strategic focus and external factors too. • Therefore effective, efficient cost management is about provision of strategic recommendations • Why ,what it means and what can be done about it • So,CM is a strategy

14. “Strategy is a choice of how to compete.” -- Michael Porter

15. Michael Porter’s Strategic Positioning • Cost Leadership: outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer. • Differentiation: creating value for the customer through product innovation, product features, customer service etc that the customer is willing to pay for.

16. Competitive Strategies

17. Low-Cost, Low-Price Market Position • If strategy is a choice on how to compete, then being a low-cost, low-price provider /project/service is a choice, not a mandate. • Making this choice carries with it certain opportunities, risks, and obligations – pros and cons. • This is the strategic basis for aggressive cost management or cost reduction – the choice to position for, win, and deliver products/services/ projects at a low cost and for a low price.

18. My message? The single most significant strategy you can implement to improve profitability is to be clear in your company on the market position you wish to occupy.

19. If You Wish To Be a Low-Cost, Low-Price Leader…1 • How do low-cost, low-price leaders deliver products or services profitably? • They are fantastic at containing costs (i.e., rent their premises instead of owning it; use supplier credit to fund working capital, etc.). • They are operationally excellent and efficient (e.g., an example from Aravind Eye Hospitals, in India – largest supplier of cataract eye surgery in the world at $10/patientvs. $1,650/patient in the US).

20. If You Wish To Be a Low-Cost, Low-Price Leader…2 • They know “cheap” is not synonymous for “low quality” (e.g., Toyota). • They hang in there with loyal customers and suppliers even in the tough times. • They nurture a culture that abhors waste and is constantly aware of the need to control costs

21. Cost Management vs. Cost Reduction….(1) • Cost management = controlling costs. • An ongoing, healthy process of monitoring, analyzing, and accurately allocating costs and of promoting a culture of cost awareness. • Nothing wrong with this at all.

22. Cost Management vs. Cost Reduction…. (2) • Cost reduction = cutting costs. • We all need to do a little belt tightening now. But, this is different. Frequent cost cutting can adversely affect a company – quality may suffer, the reputation of the company can be hurt, customers, suppliers, and staff become unhappy. • Now is one of those times; the rare occasion where full-on cost cutting may be warranted in your company. But, it will be ineffective and temporary if done in isolation

23. Cost Management Strategies..(1) • DO • Reexamine your costs and expenses regularly. • Remember staff may have useful views of controllable costs. • Understand that cost control may have an impact on staff morale – which may be good or bad.

24. Cost Management Strategies..(2) DO • Recognize it is easier to control than it is to correct mistakes after the fact • Keep financial reporting systems up to date and publish financial targets regularly. • Circulate key statistics to managers and keep all staff informed.

25. Cost Management Strategies..(3) • Don’t: • Neglect quality in the pursuit of controlling costs. • Equate cost control with cost cutting. • Use increased sales to justify an unwarranted rise in prices.

26. Cost Management Strategies..4 • Check List of Actions…..keep in mind • Collect data on your costs. • Create cost awareness. • Investigate methods of cost allocation. • Identify your cost elements (fixed and variable)

27. Cost Management Strategies..5 • Analyze variable costs. • Monitor your costs and expenses regularly. • Understand the relationship between cost control and profitability. • Remember quality.

28. What Companies Really Need Is Strategic Agility, Not Just Cost Reductions • Whenever there is an economic crisis, management shifts to cutting costs. • This is only of benefit, if at the same time the opportunity is taken to build a more agile business platform. • There are five levels of cost management, from just talking about it, to taking the long-term view. • Most of these approaches have an impact on systems architecture.

29. What Companies Really Need Is Strategic Agility, Not Just Cost Reductions • Level Zero Cost Management: • Talking about it (… you have to start somewhere!). • Level One Cost Management: • Arbitrary cuts (…no more fresh fruit at meetings). • Level Two Cost Management: • Redesign business processes for today’s needs (…design costs out of the system for today).

30. What Companies Really Need Is Strategic Agility, Not Just Cost Reductions • Level Three Cost Management: • Redesign business processes for future needs (…design costs out of the system needed in the future – complete reengineering). • Level Four Cost Management: • Meeting unforeseen needs (… shape a process mentality in your culture that can adapt to changes). • Level Five Cost Management: • Self adaptive systems (…decouple processes into natural work teams who with the right incentives and controls modify the processes themselves).

31. Finally where are you in this pyramid

32. shukran

33. Thank you! D.Ojwang +254725208358 ojwang@kca.ac.ke