Salient features in Total Cost Management

Do It Right the first 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 by designing a quality chain that uses the customer’s needs to produce exactly what customers need, at a price that they are willing to pay and in a way that enable the company to do this without rejection, rework, and redundancy. If you do it right the first time, the cost of poor quality, reflected in the cost of inspection, scarp, re-work, and customer dissatisfaction will almost disappear.

Exercise rigorous cost control at the Design and Product Development stage:

It is an empirical fact that nearly 80 percent of the costs are committed at the design and development stage. Hence bells and whistles should be eliminated at this stage because the customer will not pay for it. At Daewoo Anchor Electronics, there is a basic principle called Tankism which demands that all products be developed in conformity with customer needs, without any superfluities. The objective is to concentrate on the core product to meet the customers needs and nothing else. To do this, of course the company should carefully assess what the customer wants.

For example, when TVS-Suzuki commenced work on its 150 cc, 4 stroke scooter, the Spectra, it conducted direct interviews with hundreds of customers in key market areas besides analyzing the feedback provided by its sales force.

Team up with your Vendors:

The heart of supply chain management is the supplier vendor relationship. The closer and more dependent they are on each other, then better is the outcome. Despite the apprehension, single vendor relationships have proved fruitful.

To create the lowest possible cost structure the buyer and the supplier must work in a cooperative manner, share their capabilities and build an enduring mutually beneficial arrangement. The adversarial arm’s length transaction will have to be supplanted by a collaborative arm in arm relationship.

Benchmark against the best:

Compare your cost against the best performers in industry. This will help to measure the competitive gap, provide the spur for greater efficiency, explore areas for improvement, and steal the learning curve of others. Madura Coats, for example, benchmarks its process and manufacturing costs against of its parent, Coats Viyella, in 80 countries.

Resort to Flexible Manufacturing Systems:

To compete in future, firms will have to move to flexible manufacturing systems. Effective cost management calls for developing machineries, workflows, and worker skills that enable the firm to switch between products quickly while retaining the conventional economies of scale. Only flexible manufacturing can provide adequate responses to changes in the marketing environment. For example, Bharat Forge’s Machine Components Division uses a flexible manufacturing system to respond quickly to demand fluctuations. The required change is made in the operating sequence of the machine. Since most machines are based on Program Logic Controls, all this involves is transferring a new program to them from the PC.

Rely on Activity Based Costing:

The traditional system of costing accumulates indirect costs in too few pools and allocates them to cost objects using gross cost drivers. Case studies that the use of broad averages can unfairly burden high-volume products while treating very lightly low-volume products. The resulting cost information may lead to wrong product mix and pricing decisions. In today’s environment marked by high indirect costs, greater complexity in product offerings, and heightened competition, there may be strong case for switching to activity based costing, which is more refined and accurate than the traditional system of costing. —