Presentation on theme: "Cost Management – Retrospect and Prospect"— Presentation transcript:
1 Cost Management – Retrospect and Prospect K.SreekumarProfessor (Finance & Control)FISAT Business SchoolAngamaly Campus1
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 Indian Competitiveness: Where Does the Nation Stand? Prof.Michael E .Porter made a presentation on India in Mumbai on 21st 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]
7 Industry environment -Share of Manufacturing in GDP Target – 35% in GDP by 2016 Prime Minister’s message – 2006Source: National Manufacturing Competitiveness Council ‘sNational Manufacturing Strategy document
8 Increased Competition: Example of Commercial Vehicle Segment Before 1990After 1990
10 Four-Stage Model of Cost System Design System AspectsStage ISystemsBrokenStage IIFinancial ReportingDrivenStage IIISystems SpecializedStage IVSystems IntegratedData Quality●Many Errors●Large Variances●No surprises●Meets audit standards●Shared data bases●Stand alone systemsInformal linkages●Fully linked databasesand systemsExternal FinancialReporting●Inadequate●Tailored to financialreporting needs●Stage II systemmaintained●Financial reportingsystemsProduct/CustomerCosts●Inaccurate●Hidden costs andprofits●Several stand-aloneABC systems●Integrated ABMOperational andStrategic Control●Limited feedback●Delayed feedbackperformancemeasurement systems●Operational andStrategic performanceCost and Effect -Robert S Kaplan and Robin Cooper,1998 (p.12)
11 —Gary Hamel and C.K. Prahalad, 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 1.Activity Based Costing 2.Value Chain Analysis 3.Target Costing Cost Management Kaleidoscope – Different Tools of Management AccountingRETROSPECT1.Activity Based Costing2.Value Chain Analysis3.Target Costing4.Quality Costing5.Life Cycle Costing6.Balanced Score Card
13 Contd…. PROSPECT (FUTURE) Business Analytics & Predictive Modeling– BigData & Cloud ComputingBusiness Model Reporting
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 ProcessingRenamed in 1977Before 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 Flow Of Overhead in M. Affiliates Company GeneralProductionVariancesExecutive M’gementProjectsProfitability SegmentServiceCostCenterAdmin. C.CentersUtilityProd. S. C. CenterProduction C. CenterProduction OrderOver/UnderabsorptionPrimary Cost Pools Cost Centers - collect primary expenses which are not attributed to a particular cost object e.g. Communication, Medical expenses, Rents, Insurance, Housing Maintenance etc. The accumulated primary cost will be distributed to the receiving objects on appropriate bases.Executive Cost Centers - includes the cost of senior management of the affiliate, legal office, internal audit, strategic planning and other expenses associated with these functions. Executive Overheads are assessed to appropriate Profit Centers (at Product group level per company Code) for PCA Reporting.Administrative Support Cost Centers - all administrative cost centers in the affiliates (except executives, legal, strategic planning, internal audit) are included in the product cost. The admin overheads are allocated to cost centers via indirect activity allocation based on appropriate basis.Service Cost Centers - examples are, Maintenance, Utility Facilities, Engineering etc, they usually exchange services between each others also. The direct service cost is allocated to receiver objects (e.g. cost centers, product cost collectors) based on unit of consumption or other appropriate bases via direct activity allocation.Production Support Cost Centers - are fully dedicated for production, but serve more than one production cost centers. The costs are allocated (distributed) in full to receivers based on unit of consumption or other appropriate bases.Production Cost Centers - include all direct overheads of the production unit that are not charged directly to product cost collector via production orders. The cumulated cost is charged to production order based on consumption, production volume via direct activity allocation.
22 Module SAP CO – Controlling Represents the flow of cost and revenueInstrument for organizational decisionsKey elements of the CO application module include :Cost center accountingProduct cost PlanningProduct CostingProfitability analysisProfit center accountingActivity based costingEnterprise controlling
24 A similar story was seen between Ambassador cars and Maruti cars 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 1 VARIABLE COST 60% ParticularsActuals5% Cost Reduction5% Volume IncreaseSales ValueLess: Variable CostContributionLess: Fixed CostProfit100604020574323105634222% Increase in Profits15%10%
27 EXAMPLE 2 VARIABLE COST 40% ParticularsActuals5% Cost Reduction5% Volume IncreaseSales ValueLess: Variable CostContributionLess: Fixed CostProfit1004060203862421056343% Increase in Profits5%7.5%
28 mySAP Industry Solutions (Some Examples) SAP for Aerospace & DefenseSAP for MediaSAP for AutomotiveSAP for Mill ProductsSAP for BankingSAP for MiningSAP for ChemicalsSAP for Oil & GasSAP for Consumer ProductsSAP for PharmaceuticalsSAP for Engineering, Construction & OperationsSAP for Professional ServicesSAP for HealthcareSAP for Public SectorSAP for High TechSAP for RetailSAP for Higher Education & ResearchSAP for Service ProvidersSAP for Industrial Machinery & ComponentsSAP for TelecommunicationsSAP for InsuranceSAP for UtilitiesIndustry solution is the latest value proposition of SAP to customer. Industry solutions are aimed at addressing the specific business process areas of different industries differently, hence pre-customizing the package for generic industry purpose. Through its industry solutions, SAP addresses the unique core processes of more than 25 distinct industries. Combined with industry-specific applications and best business practices, all industry solution sets use and build upon mySAP™ Business Suite solutions, powered by the SAP NetWeaver™ platform. SAP currently around 27 Industry solutions. Some of the key verticals are listed below:1. Manufacturing IndustriesSAP for AutomotiveSAP for ChemicalsSAP for Consumer ProductsSAP for Engineering, Construction & Operations (SAP for EC&O)SAP for High TechSAP for Oil & Gas (SAP for O&G)2 Service IndustriesSAP for MediaSAP for Professional ServicesSAP for RetailSAP for TelecommunicationsSAP for Utilities3 Public ServicesSAP for Healthcare and SAP for Public Sector4 Financial ServicesSAP for Banking, SAP for Financial Service Providers and SAP for Insurance
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 PurchasingR & DManufacturingSales & Marketing40%3%5%10%3%20%6%13%Raw MaterialStockingEngineeringDistributionValue AddedManaging with Dual Strategies – Derek F.Abell
32 $28,000 $41,500 People Express $1,000 $1,300 $9,000 $13,200 $4,900 VALUE CHAIN COMPARISON BETWEEN PEOPLE EXPRESS AND UNITED AIRLINESCOST PER Seat MilesPeople ExpressUnited Airlines$1,000Advertising & Publicity$1,300Ticketing OfficesTicket Counter Operations$9,000$13,200Gate OperationsBaggage Handling$4,900Fleets Maintenance$6,700$11,600Aircraft Operations$15,600On-board Service$1,500$4,700$28,000$41,500
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 ModelCost StructureRevenue 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 risksUnderstand how your business model interacts- within the organisation- with the external environment
37 Integrated Reporting Framework Creation of Value Over Time through Cost ManagementSource :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 ComputingIn 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 PeoplesoftResilient 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:IBM83%Analytics74%Mobility68%Cloud60%BPM58%SecurityIntelligence
41 What Business Executives Expect From Next Gen Analytics
42 Cloud ComputingCloud 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
45 Manage with Cloud:- Cloud adoption continues to accelerate “Do you currently have a cloud computing initiative or strategy in place within the organization?”47%52%13% adopters44% adopters/ planners2010Base: IT and business decision-makers from companies with 20 or more employeesSource:-Forrsights Strategy Spotlight: Cloud In Asia Pacific Excluding Japan, Q3 2011
47 “Data is the New Oil” In its raw form, oil has little value. Ann Winbald,Co-founder Hummer Winbald Venture Capital“Data is the New Oil”In its raw form, oil has little value.Once processed & refined, it helps power the world.