Strategic Cost

Management 02
01

03 04
Objectives:
1. Explain what strategic cost management is
and how it can be used to help a firm create a
competitive advantage
2. Discuss value-chain analysis and the strategic
role of activity-based customer and supplier
costing
3. Tell what life-cycle cost management is and
how it can be used to maximize profits over a
product’s life cycle
4. Identify the basic features of J I T purchasing
and manufacturing
5. Describe the effect J I T has on cost
traceability and product costing
 Strategic Decision Making and Cost Management
Strategic decision making
❑ Process of choosing among alternative
strategies
❑ The goal is to select a strategy that
provides a company with reasonable
assurance of long-term growth and
survival

Strategic cost management

❑ Use of cost data to develop and identify
superior strategies that will produce a
sustainable competitive advantage
Strategic Positioning: The Key to Creating
and Sustaining a Competitive Advantage
❑ Competitive advantage - creating better
customer value for the same or lower cost
than offered by competitors
❑ Customer value is the difference between
customer realization and customer sacrifice
❑ Total product - complete range of tangible
and intangible benefits that a customer
receives from a purchased product
❑ Post-purchase costs - costs of using,
maintaining, and disposing of the product
 Strategies For Increasing Customer Value To
Achieve Competitive Advantage
❑ Cost leadership- looks to provide
the same or better value to
customers at a lower cost than
offered by competitors

❑ Differentiation- strives to increase

customer value by increasing what
the customer receives

❑ Focusing- places emphasis on a

market or customer segment
 Strategic Positioning
o Process of selecting the optimal mix of three
general strategic approaches

❑ Strategy- choosing the market and customer

segments the business unit intends to serve,
identifying the critical internal business processes
that the unit must excel at to deliver the value
propositions to customers in the targeted market
segments, and selecting the individual and
organizational capabilities required for the
internal, customer, and financial objectives.

❑ Role of cost management

- Reduce costs
- Strengthen the chosen strategic position
 Value-Chain Framework

❑ Industrial value chain: Linked set of

value-creating activities
❑ Firm must understand the entire value
chain in order to create and sustain a
competitive advantage

❑ Compelling approach to
understanding a firm’s strategically
important activities
❑ Recognition of complex linkages and
interrelationships among activities
within and beyond the firm is vital
 Linkages

❑ Internal linkages – refer to the

relationships among activities that
are performed within a firm’s portion
of the value chain

❑ External linkages – refer to the

relationship of a firm’s value-chain
activities that are performed with its
suppliers and customers
❑ Types - Supplier linkages and
customer linkages
 Firm’s Activities
❑ Firm’s activities can be used to
produce or sustain a competitive
advantage
❑ Help exploit a firm’s internal and
external linkages

❑ Classification of activities
• Organizational activities
• Operational activities
Organizational Activities and Cost Drivers
Types of organizational activities:
❑ Structural activities: Determine the
underlying economic structure of the
organization
❑ Executional activities: Define the
processes and capabilities of an
organization

Organizational cost drivers: Structural and

executional factors that determine the long-
term cost structure
Organizational Activities and Drivers
 Operational Activities and Drivers
❑ Operational activities: Day-to-day
activities performed as a result of
the structure and processes
selected by the organization

❑ Operational cost drivers: Factors

that drive the cost of operational
activities
Operational Activities and Drivers
 Value- chain Analysis

❑ Identifying and exploiting internal

and external linkages to strengthen
a firm’s strategic position
❑ Exploitation of linkages relies on
analyzing how costs and other
nonfinancial factors vary

❑ The objective is to control cost

drivers better than competitors
 Exploiting Internal Linkages

❑Relationships between
activities are assessed and
used to reduce costs and
increase value

❑Knowing the cost drivers of

activities is crucial for
understanding and exploiting
linkages
 Exploiting Supplier Linkages

❑Managing linkages in order

for the company and the
external parties to receive
increased benefits

❑Suppliers provide inputs and

can have a significant effect
on a user’s strategic
positioning
Managing procurement costs using activity-based costing
Purchasing managers should choose suppliers
whose quality, reliability, and delivery
performance are acceptable
Requirements:
❑ Suppliers should be evaluated based on total
cost and not just purchase price
❑ Supplier costs are assigned to products
using causal relationships
Activity-based costing
❑ Defines suppliers as cost objects and traces
costs related to purchase, quality, reliability,
and delivery performance to suppliers
❑ Defines products as cost objects and traces
supplier costs to specific products
 Managing Customer Cost
❑ Failure to assign customer-servicing costs
accurately will prevent sales representatives from
managing the customer mix effectively
❑ Customer-related costs allow the firm to classify
customers as profitable or unprofitable
❑ Once identified, actions can be taken to
strengthen the strategic position of the firm
Product Life Cycle
❑ Product life-cycle refer to a
product class as a whole, to
specific forms, and to specific
brands or models
• Revenue-producing life: Time a
product generates revenue for a
company
• Consumable life: Length of time
that a product serves the needs
of a customer

❑ Viewpoints are marketing-

oriented and production-oriented
 Product
Life Cycle:
Marketing
Viewpoint
 Product
Life Cycle:
Production
Viewpoint
 Consumable Life-Cycle Viewpoint

❑ Related to activities that define the stages of purchasing,

operating, maintaining, and disposal
❑ Emphasizes product performance for a given price
• Price is the costs of ownership that includes purchase,
operating, maintenance, and disposal costs
❑ Total customer satisfaction is affected by purchase price and
post-purchase costs
 Life- Cycle Management
❑Consists of actions taken that cause a product to be:
Designed and developed
Produced, marketed, distributed, and operated
Maintained, serviced, and disposed
❑Helps maximize life-cycle profits by taking
advantage of revenue enhancement and cost
reduction opportunities
 Typical Relationships of Product Life-Cycle Viewpoints
Marketing Product Life Cycle:

Production Life Cycle:

 Typical Relationships of Product Life-Cycle Viewpoints
Consumable Life Cycle:
 Revenue Generation and Cost Reduction Strategies

❑ Revenue-generating strategies depend on marketing life-cycle

stages and customer value effect
• For viable revenue enhancement, customers must be willing to
pay a premium for any improvement in product performance

❑ Cost reduction strategies

• Actions taken in early stages of the production life-cycle can lower
costs for later production and consumption stages
 Revenue Generation and Cost Reduction Strategies

❑ Careful product design and process design can help reduce:

Manufacturing costs
Logistical support costs
Post-purchase costs

❑ Activity-based costing information is critical for life-cycle cost

reduction decisions
Produces information about activities and cost drivers
Encourages good life-cycle planning
 Target Costing
❑ Useful tool for establishing cost reduction goals during the design
stage
• Target cost: Difference between the sales price needed to
capture a predetermined market share and the desired per-unit
profit
• Requires close interaction between the firm and its suppliers
❑ Cost reduction methods
• Reverse engineering
• Value analysis
• Process improvement
Target-Costing Model
 Just- In Time Manufacturing
❑ Demand-pull system
❑ Objective is to eliminate
waste by producing a product
only when it is needed
❑ Assumes that all costs other
than direct materials are
driven by time and space
drivers
❑ Improves quality, increases
productivity, reduces lead
times, inventories, and setup
times, and lowers
manufacturing costs
 Just- In Time Manufacturing
❑ JIT manufacturers emphasize
long-term contracts
❑ Help reduce the uncertainty in
demand for the supplier and
establishes the mutual confidence
and trust
❑ Reduce the number of orders
placed
❑ Helps drive down ordering and
receiving costs
❑ Reduce the cost of parts and
materials
❑ Ensure reasonably stable
demand for a supplier’s products
 JIT Purchasing

❑ Requires suppliers to deliver parts and materials just in time to be used

in production
❑ Utilizes supplier linkages by:
• Negotiating long-term contracts with a few suppliers located close to the
production facility
• Establishing more extensive supplier involvement

Vital considerations
❑Performance
❑Commitment
JIT vs Traditional Manufacturing & Purchasing
JIT vs Traditional Manufacturing & Purchasing
 Backflush Costing

❑Uses trigger points to determine when manufacturing

costs are assigned to key inventory and temporary
accounts
❑Varying the number and location of trigger points
creates different types of backflush costing
❑Trigger points - Events that prompt the accounting
recognition of certain manufacturing costs
 Thank you! ☺

Assembly Customizing

Production Quality