Cost Analytics & Strategies

This is my new 'go-to-market' term for all things financial analytics - be it Activity-Based Costing/Management, Strategic Cost Management, Strategic Costing, and so on.

I know the date on blog posts can easily be fudged, but October 1, 2010 (100110) is my official copyright/trademark claim for "Cost Analytics" and "Cost Analytics & Strategies".

Hopefully, cached google versions and backups can lay proof to the claim date.

Would you Buy a Can of Coke or Pepsi for $1 Million?

http://leadershipchronicles.blogspot.com/2009/04/would-you-buy-can-of-coke-or-pepsi-for.html

Activity-Based Costing / Management

A great approach and process for Strategic Cost Management can be based on the Activity-Based Costing methodology.

The term 'Activity-Based Costing' has fallen victim to critical sentiment and I do agree with some of the criticism for certain implementations and approaches. However, thought-leaders and advanced practitioners have taken the basic approaches to completely new levels.

Examples are incorporating capacity management, cost of quality, or applying concepts to value-stream costing.

Even Robert S. Kaplan and Steven R. Anderson - 'fathers' of the original approach - have added the concept of 'Time-Driven Activity-Based Costing'. In reality, that kind of approach long existed before the paper on it was even written.

While the great fad might be over and many failed implementations seemed to have contributed to the bad reputation, there is a surprisingly high number of practitioners and applications of Activity-Based Costing in the business world today reaping the benefits and positioning their organizations more strongly than their competition.

In order to avoid misconceptions and preconceived notions, this blog utilizes the terms 'Strategic Costing' or 'Strategic Cost Management' to reflect advancements in Activity-Based Costing approaches.

Critical Information to use NOW more than EVER!

Current economic developments require operational and strategic decisions:

How well do you understand your cost structure and how do you keep up with rapid changes?

• What’s happening to your raw material prices?
• How are your product volumes changing?
• What impact should your capacity utilization have on cost?
• Which assumptions are embedded in your standard cost accounting?
• How are your lean process improvements affecting your direct labor and cost structure?

How are you reflecting volume and product mix changes in your cost information?

How many quotes are you losing? What issues are surfacing in the RFQ process?

What is your process to develop pricing and pricing strategies?

Which products have you identified to invest in, and which should be discontinued?

What is your process to develop pricing and pricing strategies?

What proactive decisions are you making to accommodate for the rapid change?
In regards to, Products, Overhead, Capacity, and/or Management Support

What happens to your standard cost as volumes change? What about your pricing?
Are you increasing pricing? What would happen to your market share?

Strategic Cost Management. Why? What? How?

CEOs, Presidents, Owners, etc. are constantly examining, tweaking, and/or reinventing their business models towards maximum profitability. In order to do this, they need information about the cost structure and profitability of their products, processes, customers and channels.

It is crucial to know which parts (customers, channels, products, etc.) of the business are more profitable than others. Some parts may actually be removing profit from the bottom line. If all parts are considered to be adding to the bottom line, which parts add less profit than others? Because resources for these parts are underutilized and could be applied to more profitable parts.

Unless the company has a highly sophisticated ERP system with dedicated IT and analytical resources, this information is not readily available. Some companies have to rely on what they can get out of their standard cost systems, but these systems are typically designed for financial reporting, not strategic management decisions.

So, do you have the necessary detail, to confidently make these decisions?

• If you are sophisticated enough to have the information to make these decisions:
  - Is the information based on standard cost?
  Would you mind sharing your tweaks on the standard cost system to avoid averaging and cost distortion, and how you achieved the necessary level of detail?
  - If it is not based on standard cost, what types of analyses did you perform to arrive at the information?


• Your sophistication level is top of the line:
  - What actions has your team taken in the last 90 days based on the information you gather around customers, channels, products, and processes?
  - What other types of decisions do your team members make based on the data and information you have?
  - Are you able to attribute an increase in profitability to these actions and decisions? How would you quantify this?
  - If you decided not to make a certain change, what were your reasons for that decision?
  (for instance, why did company x NOT discontinue product line 5?)
  - How do you manage/incentivise/direct your sales force to go after the most profitable business?
  - How do you monitor changes in product mix and/or profitability? And how do you change your organization's behavior in light of any shifts?