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The main objective of Cost Management is the creation of a unified and efficient structure of business and cost management models.Cost Management and Optimization has always been acknowledged as a way to increase profitability. Yet, the efficiency and the coherence of cost management techniques and approaches are not easily ensured in a constantly evolving economic and financial environment.Cost efficiency is one of the key opportunities for organizations seeking to gain competitive advantage in a predominantly slow growth economy. But to achieve this, organizations need to ensure that their efforts are turned into a sustainable lifestyle change. Cost Management and Optimization is a methodology to identify and understand cost drivers of an organization in order to get better control over key processes.The cost optimization techniques include the following process Assessment of the current cost structure within the organization General management of the Cost Management program Definition of cost drivers and cost ownership Cost discipline in the company's culture Prioritization and articulation of Cost Management initiatives Redesigning financial activities and processes Transformation of the supply chain Redefining sourcing structure and strategy Minimization of administration costs and overheads Identification of opportunities for shared service centers and in- or outsourcing
Involves constant monitoring and evaluation of both fixed and variable costs per each activity with the view of optimising them
Cost Optimization is a proactive, strategic approach to costs. Few of the Techniques can be -
Prioritize your cost initiatives by business outcome
Finding/exploring the ways/procedure to get the product /things with the minimum cost as much as possible without affecting the quality and the time of purchase/delivery.
Cost Optimization is finding the most economical way to accomplish the business objectives. Best in class - technology or process, minimum wastage & maximum output. In different scenarios the approach could be different and means of achieving cost optimization could be different.
Cost Optimization Techniques :
To start with cost optimization activity,
First step is the identify and prepare proper costing,
Adapt towards the specific industrial needs by considering all factors like capacity utilization, calendar time, availability, yeild, productivity, indircet cost consist of (maintenance cost, overhead cost, fixed cost (could be distributed by units produced or time consumed at various activity), deprciation cost (could be spread by units produced or time based)), follwed by direct cost (also recommended to devide by time consumed at various activity or units produced basis, depends which ever will give a edge in the market to reap benifits and towards company goals and targets
Note : Above time based method is used in 2 of my pervious jobs and made significant turn around in company results loss making in to profit making companies.
Cost Optimization techniques in simple words is a way to reduce the cost by reducing the wastage or unwanted cost.
Various Techniques are adopted to identify the negative contributors to the cost. Once those nrgative contributors are identified an implementation plan shall be in place to mitigate the wastage cost.
To find & implement some methods to minimize the cost incurrence in current projects is called Cost Optimization Techniques.
Ideally for every cost there is a benchmark nationally / internationally, depending on that benchmark how great/good or worst an organisation is against each cost optimization. Ideally lesser you spend on the benchmark you are excellent, more is the concern, but if you are at optimum of that benchmark then you are right there exactly.
Profit margin = Price - cost, this simple equation reveals that profit margin can be improved either by increasing the price of product or by reducing the cost of product. In this competitive market scenario, where market pressure is tremendous company can not think of increasing the prices therefore the option which is left to increase margin is to cut the cost.
As fundamental concept, you can target any process for optimization if you know the scope for improvement. The scope of improvement can be identified by way of benchmarking may be internal or external. Once you identify the gap or area of improvement them you may deploy various available technique for cost optimization.
The available techniques are as under
1- Six sigma methodology
2- TPM
3- 5S
4 - Lean manufacturing.= - Elimination of non-value adding activity.
5- Reviewing the admin and HR policies
6- Budgetary control controlling the overheads
7- Automation & use of technology for eliminating the labor intensive job.
8- Reverse auction for efficient procurement.
These are techniques used to optimize the cost depending on the nature of process.
Identifying the weakness and the strengths of the system is the ZERO point of departure.
A price has a couple of components:
Direct: materials, labour, rents, investments, etc
Indirects: marketing, brand awareness, brand ambassadors, etc
Subjective: the psychological message your product transmits(the way the public perceive the product), etc...
The cost optimization intends to reduce to the minimum production costs in order to maximize profit, or to ease the production by maintaining the same price. All components should be treated very seriously using a linear technique, which means that we should analyze all components in order to identify methods and saving opportunities within our production system, on all levels.
COT should be used as soon as the company starts, big or small, giving the opportunity to the CO team to interfere from the beginning. There are solutions that are intended to work on short term, and solutions that can be planned on long periods of time.
The sequence should be like: discover the needs, identify the possibilities, design the strategy that should be applied, implement of the decision, maintain it and follow up for further grow.
The strategy is a different discussion :), cash flow analysis, past performance, procurement, chain of supply, operational efficiency...
Unfortunately, not all the companies decide to start a business with a CO department...and they pay the price!
