Total cost management encompasses strategy as well as operations, covers all functions, spans different dimensions, and subsumes everything and everywhere. Total cost management seeks to:
1. Design a product that can be manufactured at a low cost
2. Eliminate wastes and delays in the manufacturing process
3. Direct resources at simplifying the customers offering to precisely what the customers wants
4. Ensure that the right person is employed for the right job
5. Derive the greatest mileage from marketing ad advertising expenditure.
6. Minimize organizational overhead expenses.
The four ingredients of a system of total cost management are: total cost consciousness, total cost measurement, total cost responsibility and total cost improvement.
The need to manage costs across the entire organization in a holistic manner was perhaps first realized by Japanese Corporations keen on storming the US and European markets with unbelievably low priced products. Indeed, Japanâ€™s economic resurgence the 1970s was driven by its ability to manufacture high quality products at low cost, costs that were far lower than those of their Western counterparts. To achieve cost leadership, Japanese firms employed techniques like Kaizen, Kanban, and Just-in-Time.
For many years, cost management was not an important concern for corporate India. A sheltered economy, a cost plus pricing environment, limited competition, and absence of consumer power led to a neglect of cost management. The situation, however, has changed dramatically from themed 1990s and the need to manage total cost has been driven home powerfully for corporate India, thanks to heightened competition, both domestic and global, sluggish industrial growth, substantial addition to manufacturing capacities, and acute price sensitivity of Indian consumers. In this environment, cost management has become critical to corporate success. A BT-Gallup MBA survey conducted in 1998 revealed that the top one year priority of corporate Indian was to reduce costs.
An organization committed to total cost management should pay heed to the following guidelines of total cost management.
Understand Your Cost Drivers:
Daniel Riley, cost management guru, divides cost drivers into two categories: structural and exceptional. Structural drivers emanate from strategic choices relating to the scale of operation (the volume the company produces and sells), the scope of operation that is the degree of vertical integration, the technologies employed by the firm, and the complexity by the firm, and the complexity of its offerings (the variety in products and services). The executioner drivers relate to how well a company does and what it does. The key factors here are workforce involvement, total quality management, capacity utilization, plant layout efficiency, product configuration and value chain linkages.
Focus on the Entire Value Chain:
A cost leadership strategy must focus on the entire value chain, not just the segments in which the firm is involved. In collaboration with its suppliers and customers, the firm should work toward cost savings in upstream as well as downstream activities. A firmâ€™s competitive edge critically depends on its ability to manage its entire value chain relative to that of its rivals.
Marry Total Cost Management to Business Process Reengineering (BPR):
BPR is the fundamental rethinking and radical of business to achieve dramatic improvements in contemporary measures of performance such as cost, quality, service and speed. BPR is a logically of total cost management. The basic change demanded by the latter is provided by the former.
Do It right the first Time and every time as Total Quality management demands. The very essence of Total Quality Management is the process of getting it right the first time and every time, be designing a quality chain that uses the customerâ€™s needs to produce exactly what he needs, at a price that he is willing to pay, and in a way that enables the company to do this without rejection, rework and redundancy. You do it right the first time, the cost of poor quality, reflected in the cost of inspection, scrap, rework, and customer dissatisfaction will almost disappear.