An Introduction to Strategic Cost Management (SCM)

Vance Chan Associates www.vancechan.com

Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The challenge

Rising costs are everyones concern

Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The challenge

In todays economy, most companies must make fundamental changes to cost structure while trying to maintain growth
Slower revenue growth due to: Sluggish economy Maturing markets Increasing competition

Rising costs: Customers demand more value Materials and key components Logistics Need for regional and multinational marketing Salaries Time

To keep these lines from crossing, CEOs must identify the levers they can To keep these lines from crossing, CEOs must identify the levers they can use for maximum impact on cost and productivity use for maximum impact on cost and productivity
Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

Strategic Cost Management (SCM) is a way to address cost concerns while preserving the key parts of the business

Top management establishes focus, sets the tone and makes the commitment

Willingness and ability to think differently

Cost decisions are made in a strategic context

Results Results

Key employees recommend and implement the changes

Ingredients for Successful SCM

Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

The main prerequisite is the willingness and ability to think differently...

Old thinking, old excuses

This is what we do This is how weve always done it The boss says to do it this way Everybody else in the industry does it this way That solution wont work Our company policy has no exceptions I just do my job

The SCM mindset

Why do we do that? What is the value-added? Why do we have to do it that way? Is there a better way? Why cant we look at it differently? Why cant we be different? What lessons can we learn from other industries? How can we make it work? What do we have to do to best serve and keep our customers? How can my job provide more value to the company, to our customers, and to me?
Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

At the same time SCM relies on a combination of top-down and bottomup efforts to get the job done
Top Management: Top Management:
n Makes the commitment to the SCM n Makes the commitment to the SCM approach approach Philosophy of continuous, strategic Philosophy of continuous, strategic improvements improvements Resources Resources n Sets targets and guides the focus of n Sets targets and guides the focus of the effort the effort n Sets the tone and communicates the n Sets the tone and communicates the objectives and purpose objectives and purpose n Takes the actions to ensure the n Takes the actions to ensure the changes are made changes are made n Monitors progress and results n Monitors progress and results
Introduction to SCM

Key Employees: Key Employees:

n Work together as aacross-functional n Work together as cross-functional team team n Lead the analysis and formulate the n Lead the analysis and formulate the recommendations to top management recommendations to top management n Lead the implementation of the n Lead the implementation of the changes changes n Spread and sustain the SCM mindset n Spread and sustain the SCM mindset of continuous improvement of continuous improvement throughout the organization throughout the organization n Develop project and leadership skills n Develop project and leadership skills in the process in the process

1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

Which gaps can be closed -- and how does cost affect them?

Potential or target Potential or target

Current Performance Current Performance

The Share Gap

The Penetration Gap

The Mix Gap

The Geography Gap

Our share varies from market to market What lessons can we learn and apply among the different markets How to increase share without having to buy it?

Vast untapped potential in some markets and segments What can we do to get in first and pre-empt the competition?

Some product lines doing better than others in different markets What local market conditions can we control? What actions can we take?

Doing better in some countries than others But how well are we doing against potential? What resources do we need to deploy, and where?

This analysis should lead to tangible targets This analysis should lead to tangible targets and implementation plans -- SCM can be one of and implementation plans -- SCM can be one of them them
1998 Vance Chan Associates. Not to be reproduced without permission.

Introduction to SCM

The Strategic Cost Management concept

The SCM framework then provides a clear plan of attack for addressing costs --- and the decisions that affect them
Customer Customer delivery delivery functions functions Support Support functions functions

Core functions Core functions

Mission

Define the nature of the business Strategic planning R&D Product development

Deliver added value to the customer Marketing Sales Manufacturing Quality assurance and control Sourcing, procurement and logistics Engineering and maintenance Customer service and technical support

Provide resources for core and delivery IT Finance and accounting HR management General admin

Typical examples

Ripple effect of cost decisions

1998 Vance Chan Associates. Not to be reproduced without permission.

Introduction to SCM

The Strategic Cost Management concept

Nearterm savings come from the stepbystep analysis of workload and how work is done
Workload and cost Workload and cost structure structure Source of Source of Improvements Improvements Outcomes Outcomes

Identify low value work (rework, duplication, not necessary, etc) 80 / 20 analysis of functions, activities and processes What are the key activities and process steps? Identify low value issues distracting service providers from providing service Find opportunities to: - simplify - standardize - automate - eliminate - do faster - outsource - do less of - do more of Define information requirements to facilitate good decision making

Cost reduction and increased productivity

Service improvement

Introduction to SCM

1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

The SCM teams are taught specific analytical tools to find the key cost elements and to explore ways to reduce them. Typical examples include: n Cost driver analysis -- uses the 80/20 rule to focus on costs with high
impact and to trace the unit and volume components driving them.

n Root cause analysis -- a peel-the-onion technique for tracing the

underlying factors behind problems; combines with cost driver analysis to make a powerful search engine for identifying costs.

n Activity-based costing -- a way to quantify costs associated with work

(projects, processes, or ongoing activities) so that companies can determine the true cost of doing the work.

n Process re-engineering -- techniques for mapping and optimizing

throughput, and analyzing work flow

n Organization analysis -- techniques for spotting problems with structure,

span of control, accountability, or decision-making that have cost impact
Introduction to SCM

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1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

A typical SCM program:

n Can impact 2540% of the cost structure n Is likely to yield measurable savings or performance improvement of at least 20% n Can generate an overall profit improvement of 25% within three years n Should either improve or maintain quality of service n Should not disrupt the daytoday business

The 80 / /20 rule that 80% of improvements can come from The 80 20 rule that 80% of improvements can come from 20% of the opportunities should be aaguiding principle in 20% of the opportunities should be guiding principle in establishing the focus and setting priorities establishing the focus and setting priorities

Introduction to SCM

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1998 Vance Chan Associates. Not to be reproduced without permission.

The Strategic Cost Management concept

Typical SCM program steps

Continuous improvement Analysis and Analysis and recommendations recommendations for change for change SCM analytical tools, e.g. Cost driver analysis Activity-based costing Selective BPR Conjoint analysis Etc Action plan, I.e.: What Who When How Measured by

Focus Focus

Planning and Planning and training training

Fact-finding Fact-finding Data gathering Interviews Benchmarking Customer surveys Other

Implementation Implementation Define responsibilities and accountabilities Monitoring and corrective action systems How continuous improvement will be achieved

Review strategy Select and train team(s) Identify performance Set up project gaps management structure Set improvement Day-to-day targets work Develop plan of Steering and attack guidance Internal Ad hoc communications assistance

Introduction to SCM

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1998 Vance Chan Associates. Not to be reproduced without permission.

Requirements for success

The basics to remember about SCM: some Yin and Yang

n Strategic foundation ==> Structured approach to identify problems and build solutions n Solutions are often creative and first-in-industry n Requires a sense of urgency and unity of purpose ==> Teamwork at all levels n Must produce short-term results

n Requires new, creative thinking and willingness to consider and accept change n Solutions must be practical and accepted by those who have to implement them n Self-driven ==> Key employees are empowered to lead the way n Not a one-off exercise --must create lasting solutions and foster continuous improvement
Introduction to SCM

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1998 Vance Chan Associates. Not to be reproduced without permission.

Final thoughts

Food for thought --- questions to ask yourself

n If I asked 10 people in my company to describe our strategy, how many different answers would I get? How many of those answers would be accurate? Do management and staff see things differently? n How can I cut the fat without cutting into the muscle and bone? Where do I start? n Are there truly no new ideas left? Or are we just unable or unwilling to face them? n Have I made the most of my human resources? How can I get my employees more involved in a meaningful way? My suppliers? My distributors? My customers?

How can an SCM program can help you deal How can an SCM program can help you deal with these issues? with these issues?
Introduction to SCM

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1998 Vance Chan Associates. Not to be reproduced without permission.

About the author

VANCE CHAN works with multinational, regional VANCE CHAN works with multinational, regional and local companies to develop and implement and local companies to develop and implement change to business, product and technology change to business, product and technology strategies. He has more than twenty years of strategies. He has more than twenty years of executive-level consulting experience and has aa executive-level consulting experience and has broad base of experience in Asia that includes broad base of experience in Asia that includes industries as diverse as telecommunications, industries as diverse as telecommunications, electronics, consumer goods, computer products, electronics, consumer goods, computer products, airlines and transportation, energy, health care and airlines and transportation, energy, health care and pharmaceuticals, food and beverage, automotive, pharmaceuticals, food and beverage, automotive, and chemicals. and chemicals. Vance holds MBA and undergraduate degrees from Vance holds MBA and undergraduate degrees from Stanford University. He was formerly Director of Stanford University. He was formerly Director of Arthur D. Littles Technology and Innovation Centre Arthur D. Littles Technology and Innovation Centre in Singapore, and aaDirector of the Pacific Rim in Singapore, and Director of the Pacific Rim Consulting Group in Hong Kong and Singapore. Consulting Group in Hong Kong and Singapore. He began his career as aaprogram manager on the He began his career as program manager on the corporate marketing communications staff of corporate marketing communications staff of Hewlett-Packard in the US. Hewlett-Packard in the US. Vance and his family have lived in Asia since 1992 Vance and his family have lived in Asia since 1992 and are currently based in Singapore. and are currently based in Singapore.
1998 Vance Chan Associates. Not to be reproduced without permission.

A partial list of the clients Vance has served in A partial list of the clients Vance has served in Asia includes: Asia includes: Philips Texas Instruments Philips Nokia TetraPak Nokia General Motors Dun and Bradstreet General Motors Ford Seagrams Ford Cathay Pacific Qantas Cathay Pacific Bristol Myers-Squibb Pharmacia & Upjohn Bristol Myers-Squibb Clorox Tandberg Data Clorox Ericsson National University of Ericsson Singapore

vance@vancechan.com vance@vancechan.com Tel: +65-9816-9325 Tel: +65-9816-9325 Fax: +1-520-438-8448 Fax: +1-520-438-8448
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