Globalisation of industries and financial capital has forever changed the competitive landscape. Disruptive technologies and changing market demographics and preferences provide both opportunities and significant challenges to companies. Strategic management is designed to identify these opportunities and challenges and provide a basis for competitive strategies to successfully compete in global markets. A sub-set of this is Strategic Cost Management (SCM) and is an increasingly popular area of research. This paper provides a brief summary of the prevailing literature on Strategic Cost Management and offer insights to how, where as well as why the techniques underpinning SCM have been employed.
SCM is used as a strategy in the present extremely competitive environment where the management of cost has turned into a critical survival skills for many organizations. It is never efficient to merely reduce the costs; rather, cost management must be done strategically. Strategic cost management (SCM) describes the application of cost management techniques to concurrently enhance strategic position of the firm as well as decrease the costs. The SCM is applicable in service as well as manufacturing contexts and in no-for-profit surroundings. The SCM concept is demonstrated best by instance (Anderson and Dekker 2009).
The focus on SCM accounting system have been expanded to allow managers to better serve the customers’ needs as well as manage the business processes of the firm that are utilized in the creation of value to customers (Janji?, Karapavlovi? and Damjanovi? 2017). The SCM allows the firm to create a competitive edge via the provision of increasing customer value for reduced cost compared to its rivals. Managers seek to enhance time-oriented performance, efficiency and quality through SCM using accounting information.
As a strategy, SCM work in three-fold based on cost management initiatives: the ones strengthening the competitive position of the firm, the ones that have no effect on the position of the firm and the ones that weaken the firm. The 1st class of initiative can be demonstrated via a hospital that undertakes to redesign its admission process for the clients to become simpler, faster as well as less stressful on client to be admitted. Where the client has the latitude of choosing the hospital they shall enter, the novel process shall make hospital increasingly attractive to them. Therefore, strategic position of the organization has been in this sense strengthened.
The organizations do benefit by undertaking a swift audit of each cost management initiative they have already planned or are presently undertaking and observe how many really strengthen their strategic position. In case of a few answer, the organization needs to refocus on its cost management program. For instance, cost reduction programs that decrease cost ten percent across the board remain at the best strategically neutral as well as typically weaken the strategic position of the firm. For this same reason, among other considerations, the cost “savings” often disappear once the crisis ceases.
Strategic Cost Management can be used through various SCM techniques. These techniques include:
The technique remains a natural outgrowth of the present day competitive and complex surrounding. ABC give firms a closer approximation of cost of the product compared to that provided by traditional volume based costing method. The major principle of ABC posit that activities trigger costs as well as control cost, and hence activities have to be controlled. Under the ABC system, the identification of activities is done, the associated expenses to every activity become clubbed together to acquire activity-wise expense and the selection of a cost driver for every activity is done and eventually the product cost is worked out.
The traditional cost accounting undertakes to measure what it costs to undertake a task whilst ABC documents the cost of not doing as well. The ABC system monitors activities increasingly closely, relates costs to the activities as well as bring in effectiveness of cost. Such a system of costing makes substantial influence in service sector as well. ABC remains the primary source of info for the Activity Based Management (ABM). The ABM is primarily a top down strategy wherein top management exploits the info drawn from ABC and passes decisions to operational level towards enduring enhancement as well as excellence.
As the customer increasingly become demanding as well as seeking substantial value, significance of effective cost management becomes even more significance. Much of the Indian manufacturing in the previous was taking place in the cost plus surrounding, assisted by the elaborate government regulations. The operating practice was aimed at fixing a price as: Price equals cost plus profit. However, in the international market, the customer shall dictate price as well as characteristics being looked for. The TC is a novel attempt whereby cost becomes the variance between price anticipation of customers and margin anticipation of corporation entities. The cost is arrived at by examining the difference between prices less target profit. Management Accountant shall have to work in hand with design as well as engineering personnel to accomplish such a target.
It was developed initially in Japan and implemented successfully. Under JIT system, the organization has to maintain an extremely minimal inventory level and depend primarily on supplies for the provision of components and parts of the “just in time” to meet requirements for assembly. The philosophy of JIT remains dedicated to eliminate waste since stocks of raw materials as well as finished products remain reduced culminating in minimum holding inventory cost. Nevertheless, such a system might never be applicable in current Indian context due to unreliable arrangement in transport, non-excellent relations with suppliers as well as distance of supply sources from factories. The over stress on safety stock will present an obstacle for JIT implementation.
It is a SCM technique that allows the communication as well as the evaluation of accomplishments of strategy of a firm. Norton and Kaplan developed this technique. It has been swiftly been embraced by rapidly growing firms as a means to assist effectively manage their corresponding strategy and performance. Balance Scorecard has been a solution to where traditional financial measures including RI, ROI, EPS, valued added, variance analysis dealing with past performance have proved insufficient for the evaluation of present info requirement of big growing organizations.
It has helped many organizations to survive in the market by coming up to customers’ expectations and deliver products without defects on time at affordable lower prices. Firms can now develop performance measures which consider expectations of customers. The balance scorecard has also enabled organization to cover both non-financial and financial measures that play significant role in the modern business environment in the achievement of success of financial terms. The mix of both measures has evolved thereby enabling firms to cope with customers’ requirements. The systems of performance measurement thus achieve a balance that backs progress against the already determined objectives.
According to the developers of balance scorecard, the past system that integrated non-financial measurement utilized ad hoc gathering of these measures more like the measures checklist for the management to keep the track as well as enhance instead of a comprehensive systems of associated-measurement. The need for integrating both financial and non-financial measures of performance culminated to the evolution of balance scorecard. As a performance metric utilized in strategic cost management, balance scorecard help in the identification as well as improvement of a range of internal functions as well as respective resulting external outcomes.
It efforts to measure as well as provide feedback to the firm to help in the implementation of strategies as well as objectives. It remains a set of the performance targets as well as outcomes linking to 4 dimensions or perspectives (customer, internal process, financial and innovation). The balance scorecard as a structure breaks vast goals down into vision, tactical activities, metrics and strategies in a successive manner,
In the contemporary business, cost management has shifted from the traditional role to the strategic one. Businesses are faced with endless reduction of cost as well as controlling cost that calls for SCM use. The noted trends in the contemporary businesses include shifts in competition basis, computer integrated manufacturing, time based competition, customer focus, growing service sector verses manufacturing sector, e-commerce, new product development, and IT advances (Špi?ková 2013). However, it has also emerged that it is never adequate to merely reduce the cost but rather such cost have to be strategically managed by applying the SCM techniques to simultaneously enhance strategic position of the organization and decrease costs (Janji?, Karapavlovi? and Damjanovi? 2017).
The organizations in the contemporary business environment have had to respond to both trends as well as alterations with newer as well as better approaches to manage their corresponding businesses (Ili?, Mili?evi? and Cvetkovi? 2010). Such new trends are under the implementation in organizations under such names as total quality management, business process engineering and balance scorecard among other key approaches. Such philosophies pose challenges to the organizations since they are needed to remain responsive, flexible as well as agile to profitably avail value-added commodities to their customers at the competitive prices (de Melo and Leone 2015).
Trends in contemporary business reveals opportunities such as the increasingly significant product cycle reduction emerging from technological innovations alongside the need to accomplish increasingly discriminating demands of customers have forced organizations in discovering that they have to manage a complex as well as swiftly altering environment without substantial cost that conventionally have attended such features (Cugini, Carù and Zerbini 2007). Firms have observed a substantial rebirth of novel accounting approach through SCM under these changing business environment.
Total Quality Management (TQM) has been a success technique in tackling the challenges facing contemporary businesses. TQM was coined initially by the United States Naval Air Systems Command for the description of its Japanese-kind management strategy to quality management. The TQM remains a set of the practices in management throughout organization, geared to make sure that organization continuously meets/surpasses the requirement of the customers. The TQM puts firm focus on the process measurement as well as the controls as a mechanism of enduring enhancement (Hsu and Qu 2012). The Total Quality remains a people-oriented management system which purposes at persistence rise in satisfaction of the customer at continually lower actual cost. In a TQM attempt, every member of the organization partake in enhancing processes, services, products as well as culture where they work leading to a greater success.
Benchmarking is another successful SCM techniques that drives the successful application of SCM in contemporary business practices. It helps businesses describes the process to determine who remains the very best, who standard setter is, and what such a standard denote. Benchmarking has helped many businesses to search for practices that are best which yields benchmark performance, with stresses on how business can apply process in the achievement of superior outcomes. Contemporary businesses have used benchmarking more often in the successful evaluation of performance (Blocher 2009). Through benchmarking, business are able to identify the “best practice” prevailing in the organization internally or externally.
Contemporary businesses are also successfully solving their challenges through business process reengineering (BPR) SCM technique. Business that have fully implemented BPR have managed to decrease many clerical work and record maintenance. Purchasing material receipts, account payable procedures as well as documentation have virtually been eliminated. Annual contracts with reduced reliable suppliers to whom such payments for quantities consumed in production have been effected.
These improvement have been made feasible by swift advancement in information technology. The government backing as well as attitude of Business Executives at top level have determined the acceptance pace of such recent developments. These system and practices would culminate in entire enhancement in performance of the firm, production cost reduction alongside the productivity improvement.
Despite the significance role played by SCM and SCM techniques in the contemporary businesses, many businesses are yet to fully adopt the SCM into their operations. The implementation is derailed by such factors as need for many structural challenges in the organization that sometime require huge capital investments. There is also gap in the literature on effective application and implementation of SCM and SCM techniques. Future studies should focus on how best SCM can be implemented to enable business draw maximum benefits.
The SCM techniques already studied above provides a revelation that strategic cost management is a process that is able to control as well as track cost in the entire phases of product life cycle for reaching a lower cost with emphasis on analysis of external alongside internal environment thus providing commodities that meet customers’ satisfaction to enhance organization’s strategic position and competitive edge utilizing tools for cost control and tracking (Diehl, Miotto and Souza 2010).
The SCM is effective in the face of contemporary business environment in which both manufacturing and service sectors have witnessed dramatic alterations in corresponding business environment alongside novel management mechanisms as well as manufacturing technologies that have come into existence in fierce competitive surrounding whereby global enterprise attempt their survival (Guni 2014).
Businesses can only compete successfully in the contemporary extremely competitive international environment firms by making satisfaction of customers an unwavering preference (Daher, de la Sita Silva and Fonseca 2006). Business must have to adopt novel management approaches, alter their systems of manufacturing as well as invest in novel technologies (Ratnatunga and Balachandran 2009). Such changes pose substantial influence on systems of management accounting that can only be mitigated through SCM (Jafari 2014).
The strategic management has sought to develop the competitive position whereby the organization’s competitive edge offers enduring success. Firms now have to effectively have a set of goals as well as specific action plans that, if accomplished, shall offer desired competitive edge through strategic management by identifying as well as implementing such goals as well as action plans (Fu 2007). Firms must understand that effective strategic management is vital to firm’s success.
With the global competition pressures, technological innovation as well as alteration in business process, strategic cost management has been made much more useful as well as dynamic than ever witnessed before (Ballou and Heitger 2008). The conventional cost management stress on utilizing unit-oriented drivers, narrow and rigid product costing, allocation-intensive, cost management, few activity info, individual unit performance maximization, utilizing performance financial measures, internal orientation as well as short-run perspective and strategic management (Nowak 2016).
Business now have effective opportunity to use SCM which focuses its application and focus on utilizing unit and non-unit-oriented drivers, vast product costing, tracing-intensive, activities management, detailed activity info, system-vast performance maximization, utilizing both non-financial and financial performance measures, both external and internal orientation (Weerd?Nederhof, Petra, Wouters, Teuns, and Hissel 2007). SCM is useful since it is not only cost management but further can raise revenues, enhance productivity as well as satisfaction of customers, and at concurrently, enhance the company’s strategic position (Anderson and Dekker 2009).
SCM views the cost by simultaneously examining the value they offer. Simply put, SCM remains a strategic success-driver of the organization thereby contributing to future company shape. The businesses that take the advantage of the opportunity presented by SCM to have their cost management system being increasingly dynamic to speak to the more swiftly altering environment as well as increasing manufacturing process and products diversity (Galletti, Lee and Kozman 2010).
Conclusion
The SCM remains useful for accounting as well as management that treats the cost from strategic viewpoint, specifically the traditional cost tools’ failure to manage the cost to support competitive edge as well as raise value of firms (Santana and Afonso 2015). SCM goes beyond utilization of cost by the management for the decision-making and cost management. SCM remains a significant technique to the firms since it goes past focusing on costs. SCM appreciates that cost will never be the single most significant variable in the 21st century successful companies. Accordingly, SCM help business understand that revenue and value must be regarded as critical variables in success of the organization. SCM remains a philosophy, attitude and a set of techniques that contribute to shaping of the future of the companies to create a competitve edge to sustain ever changing business environment.
References
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