Product Life Cycle Costing ( LCC ) considers the costs of a product throughout its life cycle . This includes profiling and managing costs from planning , research and development , production , replacement and disposal . E-business has one of the highest scope in achieving total visibility of costs . It is eliminating physical boundaries , through technology and business-tobusiness linkages and sharing of cost data . Adoption of technology is a sure way of achieving competitiveness due to speed , accuracy , completeness and relevance of cost data critical for supply chains . Managers can identify several other strategic cost management techniques for longterm sustainability and competitive advantage .
Assuming that managers have all the tools to support strategic cost management , there are some guiding approaches , though basic that support effectiveness . It is not just about understanding the costs , but also knowing where to allocate the limited strategic resources . And this could be to productive processes and products . They have to remember that they must make intelligent decisions to manage resources better and drive value consistently .
We have so far underscored the need to understand cost profiles and by extension linking the costs to revenue structure , which leads to defining profitability drivers . The fundamental question should always be , why does the cost exist , what is it that changes the cost , and how would that change affect the product , process and eventually the profitability of the company . Manages must question every expense and cost . From a revenue perspective , strategic cost management helps managers to understand the revenue drivers - simply put , where does the company revenues come from ? Would the revenue grow if the revenue structure was altered ? What will it take to alter the revenue structure and how can innovation support that ?
The next logical step to undertake is to simplify the processes and supporting workflows . Simple approaches to understand process complexities ( and costs ) include documenting workflows , in every detail and activity . In detailing the workflows , management becomes aware of all activities , and is able to determine which activities in the workflows ( costs ) are necessary . Once the workflows are mapped , then management will see the scope for simplifying the workflows , removing unnecessary hand offs , redundancies and even internal control weaknesses and failures .
Management must then share the knowledge developed from cost , revenue and process mapping with the entire organisation and specifically with the leadership teams . This can be achieved through training . This helps in having shared knowledge and approach in decision making that makes the business more profitable through strategic cost management . Staff should be trained on effective decision making , with reference to costs . The key focus is in driving sustainable profitability .
Training alone is not adequate . Staff must be involved in cost management processes , though brainstorming and feedback sessions . Staff have dependable insights that can be adopted in effective cost management . The staff can also be very creative and innovative . They should never be left behind .
Together , then management should move to choose costs that generate most profits . Further , reduction or elimination of unprofitable work must be done . It is very possible that the organisation is working extra hard on a product that is not even profitable . The mantra should be to reduce and eliminate these to grow in profitable ways . Further consideration can be put on outsourcing some business processes , which can be delivered at a cost-effective manner and profitably , e . g . customer service .
Strategic cost management cannot be effective without employing the use of technology . Technology changes so fast . But it is most important that the company deploys the right technology and knows when it is ripe to upgrade to new and relevant technologies . The right technology provides assurance for increased efficiency , effectiveness and profitability over time .
Management should be able to simulate and predict future costs . Rigidity has no place in strategic cost management . Exceptions and disruptions should be modelled and alternative reaction plans set in place . This can include business continuity planning and disaster management plans . Also , continuous research will support effective cost management . Research processes should be an integral part of the chosen strategic cost management regimes .
Budgetary reviews are a part of effective cost management . All actual costs must be questioned . Management should answer the question , what the costs are , why was it necessary to incur the costs , how do those costs relate to profits , and adjust budgets accordingly and on regular basis . Teams should have targets for managing costs and cost structure to stay on course and grow profits . Budgets ought to be flexible enough to align to the reality of the day .
Change is the only permanent factor in management . In embracing revamped cost management processes , organisation become alive to the fact that they will have to change . And the changes must be continuous to drive competitiveness and even relevance . The focus should always be to the future . But , most importantly , organisations must be able to learn from the past . They will be able to eliminate mistakes and improve on where they performed well . Past knowledge is an asset in becoming better in cost management .
Cost management may appear to be the worry of the accountant only . To the contrary , it is everybody ’ s business in the organisation . It is really the life and heartbeat of companies . Therefore , to grow and remain competitive , the company culture must infuse strategic cost management principles across board . It is easy to note that when organisation ’ s culture supports cost management , the company will be more profitable , even better than it could be envisaged in the numbers . Strategic cost management must involve all .
In totality , strategic cost management must always make reference to the overall strategic plan of the business . This is the road map , that the company has set to navigate through . The chosen strategic cost management initiatives must always remain aligned to the strategy . The choices must speak to the vision , mission and the business objectives . Always , keep your cost management , strategic !
CPA Michael Nzule is the Finance & Strategy Director of Mitchell Cotts Freight Kenya Limited , a leading total logistics services provider in Kenya . He holds an MBA in Accounting , with specialization in Marketing , and a Bachelors of Commerce ( Accounting Option Hons ) from the University of Nairobi . He is a member of the Institute of Certified Public Accountants of Kenya ( ICPAK ). Views expressed here-in are personal . You can commune with him via mail at : Mikemaithyanz @ gmail . com