Monday, May 11, 2009

Foreword

First off, anyone who still believes that standard cost systems are adequate for today's management decisions need not read on, but first see the Strategic Costing quotes on Words to Lead By or the example on The Leadership Chronicles.

Current targeted topics for this column are:


  • Why? What? How? CEOs always need to be examining, tweaking, and/or reinventing their business models. In order to do this, they need information about the cost structure and profitability of their products, customers and channels.

  • Integrate Strategic Cost Management into the existing ERP Standard Cost system or run a parallel system?

  • Taichii Ohno would say, "Costs do not exist to be calculated. Costs exist to be reduced."
    I heartfully agree with this quote, from an operational perspective. Strategically however, an organization cannot determine on which products, product lines, channels, customers, etc. to focus without accurate cost information.

    And with accurate I am not talking about cost systems delivering numbers to 1/100 of a penny. Current ERPs can do that, but while the math is correct, the inherent distortions are not even visible. Therefore Warren Buffett's advice applies to Cost Management:
    "It is better to be approximately right, than precisely wrong."


  • It's obviously not cheap to conduct Strategic Cost Management.
    But let's put it in perspective: How much did your company spend on the ERP implementation? The software fee, the consultants, the customization? And now all the people dedicated to keeping it running?

    And what portion is for financial reporting? And this portion adds what value to your products and services that the customer cares for?

    This lets you make which decisions about Customers, Channels, Products, Services? Keeping in mind that the underlying costing principles are geared towards financial reporting, it is more than likely that even if there are reports to support these decisions, there is significant cost distortion present, that can shine good light on bad decisions.

Getting down and dirty implementing Strategic Cost Management and how to model:

  • Cost assignments/flows
  • Macro structure
  • Maintaining the 'big buckets', so that you can reconcile and don't lose track.
  • Support Services - HR, IT, Maintenance, etc.
  • Resource Pools
  • Capacity Management
  • Cost of Quality
  • Cost of Capital
  • Time Driven/Consumption Related/Pull
  • Components vs. Finished Goods
  • Cost to Serve
  • Customers/Channels
  • Organization Sustaining Cost vs Full Absorption
  • How to deal with inventory. What was made each fiscal year is rarely what was sold that year.

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