MAS D: STRATEGIC COST MANAGEMENT

STRATEGIC COST MANAGEMENT (SCM)  is the process through which activities or

cost drivers are identified and analyzed in order to lower costs and
maximize product value so that an entity would have a strategic
competitive advantage over other players
within an industry.

Three (3) generic strategies in order to achieve sustainable competitive advantage:

1. COST LEADERSHIP  to provide the same or better value to customers at a lower cost
than offered by competitors (example: a company might redesign product so that
fewer parts are needed, lowering production costs and costs of maintaining the
products)
2. DIFFERENTIATION  strives to increase customer value by increasing what the
customer receives (example: a retailer of computers offers an on-site service, a feature
not offered by other rivals)
3. FOCUS  a firm selects and emphasizes a customer segment in which to compete (i.e.,
market niche)

TERMINOLOGIES ASSOCIATED WITH STRATEGIC COST MANAGEMENT

VALUE CHAIN - a sequence of value-creating activities from purchase of raw
materials to the disposal of finished products by end-users
or customers; the value refers to the increase in the usefulness of the
product or service as a result of the customer
consumption.
PRODUCT LIFE CYCLE - a management technique used to identify and monitor costs
of a product throughout its life cycle, which can be decided
into the following stages:
 Production viewpoint: 1) research 2) planning 3)design 4)testing
5)production 6)logistics
 Marketing viewpoint: 1) introduction 2) growth 3)maturity 4)
decline
TOTAL QUALITY - a management technique that integrates all organizational
functions (marketing, finance, design, engineering,
MANAGEMENT (TQM) production, customer service) to focus on meeting
CUSTOMER expectation and business objectives; TQM requires
management to develop policies to ensure that products and services
exceed customers expectations; it is a formal
effort to ensure and improve quality throughout an entitys value chain.
CONTINUOUS - the constant effort to eliminate waste, reduce response time,
simplify the design of both products and processes, and
IMPROVEMENT improve quality and customer service. Continuous
improvement can be done in two ways: 1) kaizen 2) business process
reengineering.
KAIZEN - the gradual process of reducing costs during the manufacturing
phase of an existing product through small and
(gradual improvement)
continual improvements rather than through radical changes.
Reengineering, on the other hand, is a bit more drastic
often involving the complete redesign of a process in hopes of finding a
creative new way to accomplish an objective.
Reengineering often prescribes radical, quick, and significant change.
BUSINESS PROCESS - the series of steps that are followed to carry out business
activities.
BUSINESS PROCESS - involves redesigning business process to reduce costs and
eliminate inefficiencies and opportunities for errors. Common REENGINEERING (BPR)
features of BPR: 1) radical approach to improvement 2) business process is diagrammed in
details, analyzed and
completely redesigned 3) simplification of business process 4) elimination
of non-value added activities.
JUST-IN-TIME (JIT) - JIT is a demand-pull system where inventories are
purchased/produced only as needed for production/sale, reduced
to minimum level and, in some cases, reduced to zero (i.e., elimination of
non-value added costs).
 JIT Purchasing  raw materials are received just in time for
production; goods for sales are received just in time for delivery or
sale.
 JIT Manufacturing  manufactured materials are completed just in
time for production; products are completed just in time for
delivery.
JIT TRADITIONAL/CONVENTIONAL
Demand-pull system Push-through system
Insignificant Significant inventories
inventories
Small supplier base Large supplier base
Long-term supplier Short-term supplier contracts
contracts
Cellular structure Departmental structure
Multi-skilled labor Specialized labor
Decentralized services Centralized services
High employee Low employee involvement
involvement
Facilitating Supervisory management style
management style
Total quality control Acceptable quality level
Value-chain focus Value-added focus

BENCHMARKING - involves the following three (3) steps: 1) Identifying critical

success factors 2) Studying the best practices of other firms
based on identified success factors 3) Implementing needed
improvements to match or beat the performance of other
firms.
THEORY OF - considers the effective management of constraints as a key to
success in meeting business objectives; ToC is considered
CONSTRAINTS (ToC) as a process of continuous improvement.

MULTIPLE CHOICE QUESTIONS

1. Which of the following is NOT among the three (3) strategies prescribed by Strategic
Cost Management?
a. Focus c. Market segmentation
b. Cost leadership d. Product differentiation
2. The value chain is the sequence of business functions in which
a. Value is deducted from the products or services of an organization
b. Value is proportionately added to the products or services of an organization
c. Products and services are evaluated with respect to their value to the supply
chain
d. Usefulness is added to the products or services of an organization
3. R&D, production and customer service are business functions that are all included as
part of
a. Value chain c. Marketing
b. Benchmarking d. Supply chain
4. Which among the following is a value-added activity?
a. Processing c. Storing
b. Moving d. Inspecting
5. There are four broad classes of activities in the value chain. Research and development
is part of
a. Activities related to getting ready to make the product
b. Activities related to making the product
c. Activities related to dealing with the customer
d. Other activities that support the first three activities
6. There are four broad classes of activities in the value chain. Storing work in process is
part of
a. Activities related to getting ready to make the product
b. Activities related to making the product
c. Activities related to dealing with the customer
d. Other activities that support the first three activities
7. There are four broad classes of activities in the value chain. Billing activity is part of
a. Activities related to getting ready to make the product
b. Activities related to making the product
c. Activities related to dealing with the customer
d. Other activities that support the first three activities
8. There are four broad classes of activities in the value chain. Accounting activity is part
of
a. Activities related to getting ready to make the product
b. Activities related to making the product
c. Activities related to dealing with the customer
d. Other activities that support the first three activities
9. The unyielding and continuing improving effort by everyone in the organization to
understand, meet and exceed the customer expectations and uses front-line workers to
solve problems systematically.
a. Just-in-time manufacturing c. Total quality management
b. Conventional manufacturing d. Total quantity management
10.Which of the following is at the core of the definition of total quality management
(TQM)?
a. Customer surveys c. Employee satisfaction
b. Continuous improvement d. Supplier inspections
11.The primary reason for adopting TQM is to achieve
a. Greater customer satisfaction c. Reduced delivery charges
b. Greater employee participation d. Reduced delivery time
12.TQM should be viewed as
a. Management entered and technology driven
b. Customer centered and employee driven
c. Policy centered and procedure
d. Goal centered and standard driven
13.A characteristic of TQM is
a. Quality by final inspection c. Education and self-
improvement
b. Management by Objectives (MBO) d. On the job training by other
workers
14.In which of the following organizations does total quality management (TQM) work
best?
a. Hierarchal c. Teams of people from the same specialty
 b. Specialist working individually d. Teams of people from
different specialties
15.Implementation of total quality management (TQM) in a firm:
a. Takes from three to five years
b. Must follow a rigid, predetermined process to be successful
c. Involves some lower-level managers and all senior executives
d. Is a bottom up process, with management involved only in the final phase
16.A traditional quality control process in manufacturing consists of mass inspection of
goods only at the end of a production process. A major deficiency of this traditional
quality control process is that
a. It is expensive to do the inspections at the end of the process
b. It does not focus on improving the entire production process
c. It is possible to rework defective items
d. It is not 100% effective
17.Under a total quality management (TQM) approach,
a. Measurement occurs throughout the process and errors are caught and
corrected at the source
b. Quality control is performed by well-trained inspectors at the end of production
process
c. Upper management assumes the primary responsibility for the quality of the
products and services
d. A large number of suppliers are used in order to obtain the lowest possible
prices
18. Which is NOT listed as a practice that successful TQM firms use to ensure having
quality suppliers?
a. Forming long-term relationships with suppliers as working partners
b. Setting measures that truly reflect the needs and expectations of suppliers
c. Reducing the supplier base
d. Selecting suppliers based on price and their capability and willingness to
improve quality, cost, delivery, flexibility, and for their dedication to continuous
improvement
19.The process of instituting procedures and then obtaining feedback to ensure that all
parts of the organization are functioning effectively and moving toward overall
company goals.
a. Decentralization c. Planning
b. Benchmarking d. Control
20.A tool that compares how tasks are performed internally against the best practices of
industry leaders is
a. Process value analysis c. Benchmarking
b. Reengineering d. None of the choices
21.It is an approach to developing new ways (i.e., radical redesign) to perform existing
activities is called
a. Process value analysis c. Benchmarking
b. Business Process Reengineering d. None of the choices
22.In Business Process Reengineering (BPR), the main objectives are to simplify and to
possibly eliminate
a. Value-added activities c. Constraint
b. Non-value-added activities d. Non-constraint
23. Which of the following statements is TRUE regarding BPR?
a. It requires a change in the companys products
b. It involves redesigning business and eliminating value-added activities
c. It involves completely redesigning business processes and it is often implemented
by outside consultants
 d. It empowers front-line workers to solve problems and it focuses attention on
solving problems rather than on finger-pointing

24.BPR
a. Affects employees in a way that boosts their morale
b. Is less likely to result in employee resistance than total quality management
c. Is more likely to result in employee resistance than total quality management
d. Does not affect employees, hence, no resistance from employees is expected when
it is applied
25. Which of the following quality tools is another term for gradual yet continuous
improvement?
a. Theory of constraints c. Six-sigma
b. Kaizen d. Lean manufacturing
26. The just-in-time manufacturing (JIT) system is also called the
a. Job in training system c. zero cost system
b. Job in transit system d. zero inventories system
27. JIT purchasing can be used by
a. Retailers c. Manufacturers
b. Wholesalers d. All of the choices
28.In JIT, the flow of goods is controlled by a pull approach. It means that:
a. Work is initiated only in response to customer orders
b. Customers are pulled to buy more units to reduce the companys inventory
c. Warehouses should always be full to be sure that customer demands are always
met
d. Production officers see to it that there is always something to do keep everyone
busy
29. All of the following are characteristics of a just-in-time manufacturing environment.
EXCEPT:
a. Frequent deliveries of materials c. Little or no inventory of
finished product
b. Manufacturing cells d. Longer production cycle
30. Just-in-time purchasing (demand-pull system) requires
a. Smaller and more frequent purchase orders
b. Larger and more frequent orders
c. Smaller and less frequent purchase orders
d. Larger and less frequent purchase orders
31. A just-in-time manufacturer is more likely than a conventional manufacturer to
a. Receive more frequent deliveries of materials
b. Hold large inventories to serve as buffers
c. Spend less money on advertising
d. Need workers with fewer skills
32. A conventional manufacturer is more likely than a just-in-time manufacturer to
a. Have a short production cycle c. Hold large inventories to serve as
buffers
b. Produce goods in small batches d. receive more frequent
deliveries of materials
33.Which of the following is a characteristics of just-in-time (JIT) inventory management
systems?
a. JIT users determine the optimal level of safety stocks
b. JIT is applicable only to large companies
c. JIT does not really increase overall economic efficiency because it merely shifts
inventory levels further up the supply chain
d. JIT relies heavily on good-quality materials
34. All of the following are potential financial benefits of JIT, EXCEPT
 a. Reducing the risk of obsolescence
b. Reducing manufacturing lead time
c. Lower investments in inventories
d. Lower investments in plant space for inventories
35. Which of the following do just-in-time (JIT) operations try to eliminate?
a. Discretionary fixed costs c. Avoidable costs
b. Non-value-adding costs d. Direct costs
36.Well-implemented just-in-time production and purchasing techniques
a. Result in large stockpiles of inventory to keep production running
b. Strengthen a companys ability to complete in the marketplace
c. Increase a reliance on long-term customer forecasts
d. Reduce a companys competitive edge
37. Under Theory of constraints (ToC),
a. No company has constraints
b. Improvements efforts should be focused on non-constraints
c. Efforts that would improve output of a workstation shall be focused on the
constraints
d. A company that wants to improve its operation shall focus on workstation with
the highest production capacity

SUGGESTED ANSWER:
1. c 11. a 21. b 31. a
2. d 12. b 22. b 32. c
3. a 13. c 23. c 33. d
4. a 14. d 24. c 34. a
5. a 15. b 25. b 35. b
6. b 16. b 26. d 36. b
7. c 17. a 27. d 37. c
8. d 18. c 28. a
9. c 19. d 29. d
10. b 20. c 30. a