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K.Sreekumar Professor (Finance & Control) FISAT Business School Angamaly Campus Cost Management – Retrospect and Prospect 1.

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Presentation on theme: "K.Sreekumar Professor (Finance & Control) FISAT Business School Angamaly Campus Cost Management – Retrospect and Prospect 1."— Presentation transcript:

1 K.Sreekumar Professor (Finance & Control) FISAT Business School Angamaly Campus Cost Management – Retrospect and Prospect 1

2 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 The Competitive Advantage of Nations 2

3 Indian Competitiveness: Where Does the Nation Stand? Prof.Michael E.Porter made a presentation on India in Mumbai on 21 st January

4 Porters Diamond Model for the Competitive Advantage of Nations 4

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] 5

6 Accounting Strategy Management 6

7 Industry environment -Share of Manufacturing in GDP Target – 35% in GDP by 2016 Prime Ministers message – 2006 Source: National Manufacturing Competitiveness Council s National Manufacturing Strategy document 7

8 Increased Competition: Example of Commercial Vehicle Segment Before 1990 After

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10 Four-Stage Model of Cost System Design System Aspects Stage I Systems Broken Stage II Financial Reporting Driven Stage III Systems Specialized Stage IV Systems Integrated Data Quality Many Errors Large Variances No surprises Meets audit standards Shared data bases Stand alone systems Informal linkages Fully linked databases and systems External Financial Reporting Inadequate Tailored to financial reporting needs Stage II system maintained Financial reporting systems Product/Customer Costs Inadequate Inaccurate Hidden costs and profits Several stand-alone ABC systems Integrated ABM systems Operational and Strategic Control Inadequate Limited feedback Delayed feedback Several stand-alone performance measurement systems Operational and Strategic performance measurement systems Cost and Effect -Robert S Kaplan and Robin Cooper,1998 (p.12) 10

11 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 doesnt start at year five of the current strategic plan. It starts right now! Gary Hamel and C.K. Prahalad, Annual Business Plan 11

12 Cost Management Kaleidoscope – Different Tools of Management Accounting RETROSPECT 1.Activity Based Costing 2.Value Chain Analysis 3.Target Costing 4.Quality Costing 5.Life Cycle Costing 6.Balanced Score Card 12

13 Contd…. PROSPECT (FUTURE) Business Analytics & Predictive Modeling– Big Data & Cloud Computing Business Model Reporting 13

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15 Typical Manufacturing Cost – in % Dominant Cost - Material 15

16 Typical IT Services Cost in % Dominant Cost : Employee 16

17 Chemical Industry State Sector Source : Review of Public Enterprises -CMD 17

18 Kerala Minerals and Metals Ltd Source : Review of Public Enterprises -CMD 18

19 What is the full form of SAP? Systems Applications and Products in Data Processing –Renamed in 1977 –Before 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) 19

20 SAP R/3 client server architecture evolved in year 1992 Which is the latest SAP product? – mySAP Business Suite 20

21 Flow Of Overhead in M. Affiliates Company General Production Variances Executive Mgement Projects Profitability Segment Service Cost Center Admin. C.Centers Utility Cost Center Prod. S. C. Center Production C. Center Production Order Over/Under absorption 21

22 Module SAP CO – Controlling Represents the flow of cost and revenue Instrument for organizational decisions Key elements of the CO application module include : Cost center accounting Product cost Planning Product Costing Profitability analysis Profit center accounting Activity based costing Enterprise controlling 22

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24 A similar story was seen between Ambassador cars and Maruti cars. Recently, Mahindra Scorpios 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% Particulars Actuals5% Cost Reduction 5% Volume Increase Sales Value Less: Variable Cost Contribution Less: Fixed Cost Profit % Increase in Profits15%10%

27 Particulars Actuals5% Cost Reduction 5% Volume Increase Sales Value Less: Variable Cost Contribution Less: Fixed Cost Profit % Increase in Profits5%7.5% EXAMPLE 2 VARIABLE COST 40%

28 mySAP Industry Solutions (Some Examples) SAP for Aerospace & Defense SAP for Media SAP for Automotive SAP for Mill Products SAP for Banking SAP for Mining SAP for Chemicals SAP for Oil & Gas SAP for Consumer Products SAP for Pharmaceuticals SAP for Engineering, Construction & Operations SAP for Professional Services SAP for Healthcare SAP for Public Sector SAP for High Tech SAP for Retail SAP for Higher Education & Research SAP for Service Providers SAP for Industrial Machinery & Components SAP for Telecommunications SAP for Insurance SAP for Utilities 28

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 firms 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. 29

30 40% 3% 20% 5% 10% 3% Raw Material Sales & Marketing Distribution Manufacturing Engineering R & D Stocking Purchasing 6% 13% Internal Value Chain Analysis – Manufacturing Value Added Managing with Dual Strategies – Derek F.Abell 30

31 Value Chain for the Petroleum Industry 31

32 VALUE CHAIN COMPARISON BETWEEN PEOPLE EXPRESS AND UNITED AIRLINES COST PER Seat Miles People Express United Airlines $1,000 Advertising & Publicity $1,300 Ticketing Offices Ticket Counter Operations $9,000 $13,200 Gate Operations Baggage Handling $4,900 Fleets Maintenance $6,700 $11,600 Aircraft Operations $15,600 On-board Service $1,500 $4,700 $28,000 $41,500 32

33 CMA Competency Map 33

34 PROSPECT (FUTURE) Business Analytics & Predictive Modeling– Big Data & Cloud Computing Business Model Reporting 34

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 Model Cost Structure Revenue Model 35

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 risks Understand how your business model interacts - within the organisation - with the external environment 36

37 Integrated Reporting Framework Creation of Value Over Time through Cost Management Source :CIMA Presentation 37

38 Building Resilience into your Business Model Short-term actions + long-term aspirations Cost leadership Durable supply chain Satisfied customers Innovation Motivated staff 38

39 PROSPECT (Future) of Cost Management Business Analytics & Predictive Modeling– Big Data & Cloud Computing In 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 Peoplesoft Resilient Business Models 39

40 Whats Driving IT Priorities? Cloud BPM 83% 74% 68% 60% 58% Security Intelligence Analytics Mobility 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:IBM 40

41 What Business Executives Expect From Next Gen Analytics 41

42 Cloud Computing Cloud 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.computingnetworkInternet cloud 42

43 There are many types of public cloud computing Infrastructure as a serviceInfrastructure as a service (IaaS) Platform as a servicePlatform as a service (PaaS) Software as a serviceSoftware as a service (SaaS) Network as a serviceNetwork as a service (NaaS) Storage as a serviceStorage as a service (STaaS) Security as a serviceSecurity as a service (SECaaS) Data as a serviceData as a service (DaaS) Desktop as a serviceDesktop as a service (DaaS - see above) Database as a service (DBaaS) Test environment as a serviceTest environment as a service (TEaaS) API as a serviceAPI as a service (APIaaS) Backend as a serviceBackend as a service (BaaS) Integrated development environment as a service (IDEaaS) Integration platform as a service (IPaaS), see Cloud-based integrationCloud-based integration 43

44 Cloud Computing – Logical Diagram 44

45 Do you currently have a cloud computing initiative or strategy in place within the organization? Manage with Cloud:- Cloud adoption continues to accelerate 47% 52% 13% adopters 44% adopters/ planners 2010 Source:-Forrsights Strategy Spotlight: Cloud In Asia Pacific Excluding Japan, Q Base: IT and business decision-makers from companies with 20 or more employees 45

46 Future of Cost Management 46

47 Data is the New Oil Ann Winbald, Co-founder Hummer Winbald Venture Capital In its raw form, oil has little value. Once processed & refined, it helps power the world. 47

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