Today's environment more competitive than ever. Competition is globalized and transparancy is more and more important both in business as in government. In this changing environment cost management has become a critical survival skill for many organisations. Simple cost reduction is not sufficient anymore; instead, costs must be managed strategically. Strategic cost management is the application of cost management techniques so that they simultaneously improve the strategic position of a firm and reduce costs. Strategic cost management can be applied in service and manufacturing settings and in not-for-profit environments.
Strategic Cost Management projects can be defined along 2 axes. One axis is the traditional cost reduction axis, the second is the value that the project brings to the strategy.
Strategic Cost Management projects are those projects that add value to the organisation's strategy while at the same time reducing the (unit) cost of products, processes or services. An example could be a bank that sets up a low-cost online banking channel.
A traditional cost management project would focus on cost reduction only, without making a change to strategic factors. A typical example would be a hospital restructuring it's invoicing process aimed at the reduction of manual activities in the process. It reduces the cost but leaves the strategic position essentially untouched.
A risky project category is the kind of project that focusses on cost reduction only, allowing for strategic disadvantages to happen. A typical project is a bank changing it's account mamagement process from a personal account manager towards a central call centre. Although there could be a cost reduction, the strategic position towards it's customers changes in a negative way, possibly followed by a large loss in customer base.
Strategic decisions based on Cost Management
Many decisions are based on an organisation's Strategic Cost Management system. At the core are the profitability analysis on the following bases:
- product-by-product
Analysis of product profitability, making it possible to make product portfolio decisions, introduce new products and terminate loss-making products
- customer-by-customer
The cost-to-serve may vary greatly per customer. Customer Profitability Analysis allows for the usage of different activities per customer. The analysis shows a broad range from very profitable customers to very profitable customers