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Cost Management-final                                                                                                       8

determine its level of success or failure. For example, worker empowerment and flattened organisations are helping many firms in their continuous improvement efforts.

Few structural and executional cost drivers can be operationalised under existing management accounting systems in the cost analysis of the value chain. However, these cost drivers do offer an important reminder of the strategic decisions that firms need to make, o least acknowledge, in designing their value-generating systems. Increasingly, companies using activity-based costing to understand the resources/costs consumed by the activities and processes used in delivering their products and services.

4. Identify the links between processes : While individual value activities are consider* separate and discrete, they are not necessarily independent. Most activities within a value chain are interdependent. Firms must not overlook value chain linkages among interdependent activities that may impact their total cost.

For example, cost improvement programs in one value chain process may lower or increase costs and/or revenues in other processes. Transfers of goods and services from one value chain process to another increases cost. Eliminating these transfers reduces the costs purchasing, invoicing and other record keeping functions.

Tandem Computers eliminated its costs of purchase orders, invoicing and other functions by jointly developing a detailed bar code process with its suppliers. By improving its upstream design and engineering processes for the Taurus, Ford saved on downstream production and customer service costs. Using fewer floppy drives and motherboards in its PCs has enabled IBM to halve its delivered cost in two years.

As sources of competitive advantage, these relationships or linkages among activities can be as important as the activities themselves. Such linkages may also offer sustainable competitive advantage, because their subtle, complex nature makes them difficult for competitors to imitate.

5. Evaluate the opportunities for achieving relative cost advantage : In many organisations, cost reductions are made across the board (e.g., "eliminate 10 per cent from every department"). Because these firms do not reduce their costs strategically, this effort usually fails. More often than not, across-the-board cost reduction misconstrues the underlying problem. The point is not to become more efficient at insignificant activities, but to T meet customer demands.

Using the value chain approach, a company goes beyond simple across-the-board cuts and attempts to lower cost and improve efficiency within each value-creating process. For instance, a company might negotiate lower costs of process inputs such as wages or pur­rs, or evaluate make-or-buy options.

Reducing process input costs often means negotiating lower wages or moving production to countries with cheaper labour costs. Suppliers might be willing to drop their prices if the company negotiates long-term contracts. Companies also use buyer-seller partnerships to advantages in cost, quality, time, flexibility, delivery and technology.

Some processes may offer more opportunities for improvement than others. In order to get the most out of its cost reduction programs, a company should prioritise its value-creating process. Under the 80:20 rule, 20 per cent of the value-creating processes often account for 80 per cent of total costs.

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