Cost management is the procedure by which companies manage and arrangement the costs of doing business. Just about always one of the most significant strategies being concentrated on by scheme enlargement lineups is cost reduction in cost management. Cost management has a broad focal point and should not be interpreted to mean only for identifying how a company will get this done is what strategy is all about. There is no particular conventional definition for this term, because it has such broad appliances and implementation as well as probable and potential strategies. When it is appropriately executed, cost management will convert into reduced costs of production for products and services, as well as augmented price being conveyed to the customer.
Relation between Cost Management and Effective Strategies
Cost Management and Strategy Survival in modem business involves the development of a sustainable competitive advantage (Stewart, Wyskida and Johannes, 1995, p. 58). For a company's managing to be effective in general, cost management must be an fundamental characteristic of it. It is easiest to understand that how relates between cost managemet and effective strategies if it is explained in the context of a single project. Applying this approach to cost management will facilitate a company or corporation finding out whether they exactly anticipated operating cost at first, and will also assist them more intimately estimate operating expenses in the future days. Cost Management Strategy in modem business occupies the expansion of a sustainable competitive advantage. This requires as an initial effort a complete analysis of the industry in which company is operating (Stewart, Wyskida and Johannes, 1995, pp. 58-59). Cost Management as Strategy discusses how [effective or] good cost management can underpin business strategy, including delivering value via acquisitions, using pricing as a competitive weapon and discovering more new growth opportunities (Wileman, 2008, p. 6). But although good cost management is a necessary characteristic of a great company, it is not sufficient. Great companies need profitability now and platforms for future growth (Wileman, 2008, p. 10). For instance, before a project is started, the anticipated costs should be identified and measured. These expenses should then be approved before any purchasing occurs. During the process of completing a project, all incurred costs should be noted and kept in a record of some kind, to help ensure that the costs are controlled and kept in line with initial expectations, to the extent that this is possible. Cost Management as Strategy discusses how good cost management can underpin business strategy, including delivering value via acquisitions, (Wileman, 2008, p. 6).
Objectives of the Effective cost management strategies
Spulber (2004) postulated that “Total Cost Management works with suppliers to reduce costs and apply lean manufacturing techniques” (p. 78). And the effective cost management strategies will assist a group distribute a complete scheme within the due budget, whilst also construction it as important as potential to the company. If the project is wholly and undoubtedly definite, this determination makes possible effective management of the costs it will acquire. The ultimate cost-management strategy is to decrease consumer demand for services by increasing system support (Swansburg, 1997, p. 259). There is at all times the opportunity of unanticipated costs, but preparation in the outline of cost management will expected make them much easier to manage when they happen. Many thoughts do not necessitate instantaneous expansion and completion. Features such as what can be executed rapidly, economically and with the maximum consequences should be measured. Short-term successes can be celebrated on the way to long- term improvements as management employee attitude and relationships change. Cost management Strategy’s successes should be rewarded. Marriner-Tomey, 2004 provides that “Employees may hurriedly forget positive comments but remember any negative ones, so small token awards such as company pen or other items with the agency logo that may be used to hand out to customers can be used as a physical reminder of the manager’s apprication. Status rewards such as employee of the month, can be used to create role models and heroes. Money can be rewarded for proposing cost-reducing ideas, usually within a suggestion plan. An effective cost management strategy can take a long time to fully implement. Persistence is a quality of good cost utters. The long-run commitment to successful cost management strategies helps give the organization the competitive edge.” (p.247)
Effective cost management strategies
There is effective cost management and there is some dreadful cost management. For example, it would be dissipated to cut costs in an approach that augmented risk clientele, for staff or for society at large. Low-cost yatch transports cannot scrimp on vessels maintenance. Chemical manufacturers must receive industries safe and sound and dispose of risky and hazardous waste. Rail transports need to continue their tracks. But cost cutting in these fields would be unprincipled and really unprofitable: the probable cost of any catastrophe would overcome the immediate savings. It would be in close proximity to sighted and unintelligent not to set a high value on relationships and trust –between a business and its staffs. There are various cost management strategies were exist in the business sphere, such as (1) selective reductions in targeted cost categories, (2) cost reductions through improved efficiencies, (3) cost avoidance by shifting responsibilities to external parties, and (4) uniform reductions across all cost categories. Being capable to reduce the amount of financial spending is a factor many scheme administration procedures believe and intend to accomplish. An exact acquaintance of a scheme for expansion may agree to a more efficient arrangement and establishment of strategies for cost management. For illustration, carefully understanding the complete arrangement flow of any venture may make possible the progression of determining for the essential policy or system will be implemented with. Together with the achievement such may convey in cost management, it may also embrace connected view in the venture’s quality management.
Taking a strategic approach to cost suppression entails a widespread outlook of costs of the company without being partial to express, assessable costs. Albert Einstein said,” Not everything that counts can be counted, and not everything that can be counted counts” (Brinker, 1996,p. D4-1). This approach exploit a whole cost standpoint that comprises a wide variety of substantial and insubstantial operating and strategic costs. A cost adult is also vital in the creation of a cost management strategy. The audit imparts an appraisal of the company cost arrangement, evaluate it with participant, and weighs up it for prospect effectiveness. This agrees to appraisal of the organizations current cost management methods. Some accounting employees may require to be trained about management information requirements. Defining what reports are needed is important. Managers and staff need to be maintained in cost containment labors with data that are focused rather than be beleaguered with data that bury the critical data. Accountant’s capabilities should be coordinated with the needs of management and staff. “Managers need to change their view of cost reductions from a negative exercise to something that can be creative and exciting. Then they should involve employees in the challenging and exciting process. Effective management communication is needed to increase employee awareness for and understanding of cost management. Having more employees involved in the task can create the greatest leverage” (Marriner-Tomey, (2004, p.247).
Company or firms or organizations seeking to enhance s sustainable competivetive opportunities promote business strategy designed to set up themselves in a particular position or iche within their industry. Common strategies are (Stewart, Wyskida and Johannes, 1995, p. 59). :
- A low-cost strategy;
- A differentiation strategy. (Stewart, Wyskida and Johannes, 1995, pp. 58-59).
Apart with those two categories it may be Logistics optimization strategy. “Logistics optimization strategy is the most traditional supply chain strategy. It seeks to lower overall supply chain costs, including operating costs and capital cost, through operational effectiveness and efficiency. Companies with a lower-cost supply chain gain greater pricing flexibility” (Gattorna, Ogulin and Reynolds, 2003, p. 303). Gattorna, Ogulin and Reynolds (2003) opines that “[t]his strategy ties in well with cost–driven or low-pricing strategies. To address operating cost issues, this strategy focuses intensely on continuous improvement and efficiency. For capital assets, the focus is on maximizating utilization” (p. 303). In contrast to revenue-enhancing supply strategies, the logistics optimization strategy primarily works the cost lever of the value framework. This strategy focuses on reducing overall supply chain costs, allowing higher margins at lower selling prices (Gattorna, Ogulin and Reynolds, 2003, p. 303). The differential strategy concentrates on generating products or services that the distinctive customer perceives as an exclusive for offering higher quality, new features, fills brands loyalty and outstanding service.
Developing learning organizations, maximizing employee satisfaction, and simplifying and improving performance measures can be cost management strategies (Marriner-Tomey, 2004, p. 248). To attain cost leadership (low cost in relation to competitions), a company would commence cost management comes close to in these reasons. (Stewart, Wyskida and Johannes, 1995, pp. 58-59). Economies of degree in manufacture, amplifying skill curves, determining tight cost controls and minimizing cost in key overhead cases such as, R&D, Sales force, advertising and service. Any overspending can also be monitored in this way, and either eliminated in future projects or specifically approved if the expense was necessary. “Brainstorming can be done with employees at all levels, who can then contribute to cost reduction. Short presentations about what actions are necessary, what employees can do, and rewards for results are key ingredients. Personal talks videotaped presentations, newsletters, bulletin boards, staff meeting and the grapevine can be used for communication. Meeting and discussions with employees can help alleviate fears and uncertainties about cost management” (Marriner-Tomey, 2004, p.247).
Cost management cannot be used in isolation; projects must be organized and tailored with this strategy in mind. Individual schemes should have modified cost management plans, and companies as a whole also incorporate cost management into their in general business representation.