Business Analytics in Strategic Cost Management PDF

For Private Circulation Only. Page 1  Preface This Study Material has been prepared by the faculty of the Elite School of Professional Accountants. The objective of the Study Material is to provide teaching material to the students to enable the...

For Private Circulation Only. Page 1  Preface This Study Material has been prepared by the faculty of the Elite School of Professional Accountants. The objective of the Study Material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. All care has been taken to provide interpretations and discussions in a manner useful for the students. Permission of the Institute is essential for reproduction of any portion of this material. © ELITE SCHOOL OF PROFESSIONAL ACCOUNTANTS All rights reserved. No part of this book may be reproduced, stored in retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission in writing from the publisher. Revised Edition: August 2024 Course Curriculum Module 1 Chapter 1 Accelerating Strategic Cost Management with Business Analytics 4-5 Chapter 2 Strategic Cost Management: Beyond Traditional Methods 5-13 Chapter 3 Value Chain Analysis – The Third Component of SCM 14-17 Chapter 4 Porter’s Five Forces Model 18-19 Chapter 5 Total Quality Management (TQM) 20-22 Chapter 6 Theory of Constraints 23-26 Chapter 7 Kaizen Costing 27-28 Chapter 8 Target Costing 29-30 Chapter 9 Pareto Analysis 31-32 Chapter 10 Product Pricing Decisions and Strategies 33-36 Chapter 11 Application of Just-In-Time in Cost Management 37-40 Chapter 12 Business Process Re-engineering 41-42 For Private Circulation Only. Page 2  Chapter 1 Accelerating Strategic Cost Management with Business Analytics Business Analytics in Strategic Cost Management involves using data analysis and statistical techniques to understand and optimize an organization's cost structure. This integration helps companies make more informed decisions, enhance efficiency, and improve profitability by identifying cost-saving opportunities and understanding cost drivers. Here's a detailed breakdown: Important Terms Business Analytics Business analytics in strategic cost management refers to the systematic use of in Cost data, statistical and quantitative analysis, and predictive models to understand, monitor, and manage the costs within an organization. Management This approach aims to improve decision-making by providing insights into cost behaviours, identifying cost-saving opportunities, and enhancing overall efficiency and profitability. Strategic Cost The approach to managing a company's costs with a long-term focus, aligning cost Management management efforts with the overall strategy and goals of the organization. It aims to achieve competitive advantage and long-term profitability. Approaches of Business Analytics in Strategic Cost Management Business analytics in strategic cost management employs various approaches to optimize costs, enhance efficiency, and ensure sustainable growth. Here are some key approaches: Descriptive Analytics Big Data Analytics Diagnostic Analytics Analyses historical data to Analyses large, complex datasets Examines data to determine the root understand past cost trends and to uncover hidden cost-saving causes of cost inefficiencies. identify patterns. patterns. Predictive Analytics Prescriptive Analytics Benchmarking Uses statistical models to forecast Recommends the optimal course Compares a company’s cost future costs and identify potential of action and strategies for cost performance against industry cost-saving opportunities. optimization. standards to identify improvements. For Private Circulation Only. Page 3  Role of Business Analytics in Strategic Cost Management Business Analytics is integral to Strategic Cost Management as it provides the necessary insights and tools to manage costs effectively. By leveraging data, companies can make informed decisions, optimize resources, and enhance their overall financial performance. Here's a detailed exploration of its role: Why Business Analytics Important in Strategic Cost Management? Data-Driven Business Analytics leverages vast amounts of data to identify cost-saving Decision Making opportunities and inefficiencies within an organization. By analysing historical data, companies can forecast future trends, budget more accurately, and make informed strategic decisions. Cost Optimization It optimizes costs by analysing the cost-benefit of business processes. It identifies cost-effective strategies, reduces waste, and improves profitability through techniques like activity-based costing, benchmarking, and lean management. Optimization of Through predictive analytics, businesses can optimize their resource allocation. Resources This includes labour, materials, and capital, ensuring that resources are utilized efficiently and cost-effectively. Cost Identification Analytics helps in identifying direct and indirect costs accurately. This includes and Control understanding fixed, variable, and semi-variable costs, and pinpointing areas where cost overruns are occurring. By controlling these costs, businesses can improve their overall financial health. Performance Analytics provides tools to measure performance against set benchmarks. Key Measurement and Performance Indicators (KPIs) can be tracked to assess various aspects of cost management, such as cost per unit, cost variance, and return on investment. Management Supporting Analytics aids in strategic planning by providing insights into market trends, Strategic competitor analysis, and customer behaviour. This helps in formulating strategies Planning that align with cost management goals and overall business objectives. Budgeting and Business Analytics improves the accuracy of budgeting and forecasting processes. Forecasting By using historical data and predictive models, businesses can create more realistic budgets and forecasts, which are essential for effective cost management. Supply Chain In supply chain management, analytics plays a crucial role in managing costs by Management optimizing inventory levels, improving supplier performance, and reducing lead times. This ensures that the supply chain operates at minimal cost while maintaining efficiency. Risk Management Business Analytics identifies potential risks and provides strategies to mitigate them. By analysing risk factors and their potential impact on costs, companies can develop contingency plans to manage financial uncertainties. Enhancing Profit By analysing cost structures and operational efficiencies, Business Analytics helps Margins in identifying ways to reduce costs without compromising on quality. This directly impacts the profit margins, making the business more competitive. For Private Circulation Only. Page 4  Chapter 2 Strategic Cost Management: Beyond Traditional Methods Strategic Cost Management (SCM) is a crucial approach for companies to plan and control their expenses with a focus on long-term success and competitive advantage. Strategic cost management lays a greater focus on continuous improvement to deliver superior quality product to the customers. It's not just about cutting costs, but about making smart strategic financial decisions that align with the company's overall goals and strategy. In SCM, companies not only track and reduce expenses but also consider how these financial decisions impact their ability to compete, innovate, and grow. This approach ensures that every dollar spent contributes to the company's strategic objectives, making it a vital part of modern business management. By understanding and implementing SCM, businesses can make informed decisions about where to allocate resources, invest in new opportunities, and achieve sustainable growth in a competitive market. Understanding Traditional Cost Management Approach Traditional Cost Management System operates on the premise that minimizing costs and overheads will enhance an organization's profitability. It also include the cost control which focuses on keeping costs within a pre-determined budget or standard, ensuring that spending does not exceed what was planned. So, the initial step involves setting cost standards based on management's estimates. Earlier, Traditional Cost Management has long been the cornerstone of financial discipline in businesses, prioritizing immediate cost reduction without considering the broader implications on product quality, customer satisfaction, or long-term competitiveness. While effective in its own right, traditional cost management sometimes falls short in adapting to dynamic market conditions and evolving customer demands. However, as businesses increasingly face global competition and rapid technological changes, there has been a shift towards a newer approach of Strategic Cost Management approach which goes beyond mere cost-cutting; it integrates cost management with strategic planning, emphasizing innovation, customer value, and long-term sustainability. Strategic Cost Management encompasses both cost control and reduction, aiming to strategically plan, monitor, and optimize costs over time. First of all, let us understand the typical process of Traditional Cost Management i.e. Variance Analysis (Standard Costing) For Private Circulation Only. Page 5 Standard Costing: Key Element of Traditional Cost Management Standard Costing is a pivotal element of Traditional Cost Management, serving as a benchmark for evaluating financial performance. This method involves setting predetermined cost estimates, Standard Cost, based on historical data, management forecasts, and future production plans. By establishing these cost standards, organizations can effectively monitor and control expenses, identify variances between actual and standard costs, and implement corrective actions. Hence, Cost Variance Analysis plays a crucial role in assessing cost control effectiveness relative to budgeted figures. Steps in Cost Variance Analysis: Achieving Budget Alignment Calculate Variance: Determine the gap between actual expenditure and budgeted amounts. Investigate Causes: Analyse reasons for the differences identified. Communicate & Update: Present findings to management and update standards or budgets as needed. Develop Cost Alignment Plan: Create a strategy to bring costs closer to budgeted levels. Example of Manufacturing Cost Variance Standard Cost: The Company planned to produce 1,000 units at a cost of ₹50 per unit, totalling ₹50,000. Actual Cost: They incurred ₹55,000 to produce the same 1,000 units due to higher utility expenses. Manufacturing Cost Variance = Actual Costs - Budgeted Costs = ₹55,000 - ₹50,000 = ₹5,000 Explanation: The manufacturing cost variance shows the difference between what the company expected to spend (₹50,000) and what they actually spent (₹55,000) to produce the units. In this case, they overspent by ₹5,000 due to increased operational costs. This variance analysis helps companies understand the impact of cost changes on their production expenses, prompting adjustments in budgeting, production processes, or cost-saving strategies to maintain profitability. In response to manufacturing cost variances like increased utility expenses, a Traditional Cost Manager might focus on immediate measures such as: Short-Term Focus: Primarily focuses on immediate cost reduction measures like cutting expenses or negotiating lower rates, which may not address underlying causes. Limited Scope: Often overlooks long-term impacts on customer satisfaction, product quality, and competitive advantage. Static Approaches: Relies on fixed cost-cutting strategies without adapting to changing market conditions or technological advancements. Narrow Perspective: Does not prioritize innovation or process improvement, potentially missing opportunities for operational efficiency and growth. For Private Circulation Only. Page 6  Strategic Cost Management over Traditional Cost Management Systems In today's dynamic and competitive business environment, the limitations of traditional cost management systems necessitate a shift toward strategic cost management. Strategic cost management provides a comprehensive, value-focused, and forward-thinking approach that aligns costs with business strategy, enhances decision-making, and fosters continuous improvement and helps to achieve sustainable success. Here's an in-depth look at why strategic cost management is essential and how it overcomes the limitations of traditional cost management systems: Comparative Table: Traditional Cost Management vs. Strategic Cost Management Factors Traditional Cost Strategic Cost Management Management Enhanced Decisions based on cost alone. Balances cost with quality, innovation, Decision-Making and customer satisfaction. Adaptability and Rigid and static, focusing on historical Highly adaptable, responds swiftly to Flexibility data. market changes. Focus on Value Concerned with cost reduction and Enhances value for customers and Creation control. stakeholders. Integration with Operates in isolation, disconnected Integrates cost management with Business Strategy from strategy. overall business strategy. Analytical Relies on past performance data. Uses predictive analytics and scenario Approach planning. Holistic Focuses on individual cost centers or Considers interdependencies within the Perspective departments. organization. Continuous Periodic reviews and adjustments. Encourages a culture of continuous Improvement improvement. For Private Circulation Only. Page 7 Example: Asian Mattress Ltd. Let us understand, why Strategic cost management is necessary in the case of Asian Mattress Ltd. to ensure holistic decision-making that considers the interdependencies between product lines? Asian Mattress Ltd. is a manufacturer of quality mattresses and pillows for their customers. The following information is extracted from the financial statements of a company producing Mattresses and Pillows: (Rs. in Lacs): Particulars Mattresses Pillows Revenue 100 50 Manufacturing Cost 75 40 Gross Profit 25 10 Other Cost 5 12 Net Profit / (Loss) 20 (2) Market Research: If pillows are discontinued, mattress sales drop by 25%. Traditional Cost Management Decision: Discontinue pillows due to a Rs. 2 lacs loss. Strategic Cost Management Decision: Discontinuing pillows reduces mattress profit by Rs. 5 lacs (25% of Rs. 20 lacs). Net Impact: Rs. 3 lacs loss (Rs. 2 lacs savings from pillows and Rs. 5 lacs loss from reduced mattress sales). Conclusion: Traditional Approach: Stop pillow production. Strategic Approach: Keep producing pillows to avoid greater loss. Definition of Strategic Cost Management Strategic cost management is the preparation and analysis of management-related cost accounting information in terms of the optimum utilization of all resources of the enterprise and achieve the relative level of cash flow, market shares, quantities, prices and at strategically managed cost. It provides this information within the company and enables management to make the right decisions within the framework of long-term plans. In Strategic Cost Management (SCM), primary importance is given to constant improvement in the product to provide better quality to its target customers. For Private Circulation Only. Page 8 Four Stages of Strategic Cost Management Strategic cost management involves a structured approach to optimizing costs and enhancing profitability through four key stages: Stage 1 Formulating Strategies Develop cost management plans aligned with business goals. Stage 2 Communicating of Strategies in the Entire Organization Share the strategies with all stakeholders and ensure they understand and support the plans. Stage 3 Developing and Implementing Tactics to Execute Those Strategies Execute specific actions to put strategies into practice.. Stage 4 Developing and Implementing Controls to Track the Success Monitor and evaluate the effectiveness of the strategies. Components of Strategic Cost Management Strategic Cost Management (SCM) involves using cost information to manage and enhance a business's strategic position. From a business analytics perspective, the components of SCM can be more effectively leveraged through data-driven insights. Here are the key components of SCM with a focus on business analytics: 1. Cost Driver Analysis 2. Strategic Positioning Analysis 3. Value Chain Analysis These components are essential for businesses to align their costs with strategic goals, identify what influences their expenses, and optimize value creation processes For Private Circulation Only. Page 9 1. Cost Driver Analysis In traditional accounting, a company might divide manufacturing costs equally among all products based on how many units each produce. Imagine a Perfume Manufacturing Company makes a single product, Product X. To make one batch of 100 units of Product X, there are three main activities: setting up machines, handling materials, and testing quality. Let's say: 1. Setting up machines costs Rs.1,000 per batch 2. Handling materials costs Rs.500 per batch 3. Testing quality costs Rs.300 per batch Traditionally, all costs, Total of Rs.1,800, are split evenly among all Product X units made, regardless of which activity uses more resources. So, if 100 units of Product X are made, each unit would be allocated Rs.18 in manufacturing costs. But this traditional approach doesn't consider that some tasks or activities use more resources, like machine setup, special handling of materials, and testing quality for each batch of the final product. It's crucial to identify and analyse each specific activity separately using appropriate Cost Drivers. For instance, if Machine Setup costs $1,000 per setup and there are 10 machine setups, the Number of Setups on machine becomes the relevant Cost Driver. And we can find out the cost of each set up to Rs.100. By analysing each activity in depth, such as understanding ‘why 10 machine setups are necessary?’, and exploring ways to reduce each such machine setup costs. Focus of Cost Driver Analysis through Activity-Based Costing (ABC) In Strategic Cost Management, our main focus will be on Cost Driver Analysis, particularly through Activity- Based Costing (ABC), which:  Identifying exactly which activities drive costs,  Providing a more accurate picture of what activities consume resources and  How much cost incurred on each individual activity enabling more informed decisions on cost management and resource allocation to enhance efficiency and profitability. 2. Strategic Positioning Analysis Strategic Positioning in strategic cost management involves understanding where a company stands relative to its competitors in the market. Meaning: Strategic positioning is about deciding where your company fits best in the market and how it can stand out from competitors by offering uniqueness to ultimate customers. Essentially, it answers the question of how a company differentiates itself from competitors in the eyes of customers. For Private Circulation Only. Page 10 Lack of clarity on Strategic Positioning may result in misalignment of resources and efforts, impacting overall business performance and growth potential in the market. Therefore, implementing strategic positioning and a strong USP and UVP is crucial for businesses to effectively compete and thrive in their respective markets. What we need to achieve is a Competitive Advantage! It involves identifying and leveraging unique strengths that set a company and its products or services apart from competitors. This can include offering superior product quality, innovative technology, implementing efficient operations like distribution channels, commitment values, playing with pricing strategies, or exceptional customer service. Superior Product Quality Innovative Technology Efficient Supply & Distribution On-time Delivery Commitment Pricing Strategies Exceptional Customer Service Strategies for achieving Strategic Positioning through Competitive Advantage Strategic positioning strategies for achieving competitive advantage typically focus on Product Differentiation and Cost Leadership. For Private Circulation Only. Page 11 I. Product Differentiation Strategy: Product Differentiation involves offering unique features, benefits, or qualities that distinguish a product or service from competitors. Strategic positioning involves choosing a unique market position to maximize customer value, closely tied to the Unique Selling Proposition (USP), and aligning activities, investments, and cost management efforts to enhance the Unique Value Proposition (UVP). Unique Selling Proposition (USP): It emphasizes what makes a product or service unique in comparison to competitors, often focusing on features or benefits that differentiate it in the market. Example for Unique Selling Proposition (USP) Polycab Electrical Wires' unique selling proposition (USP) lies in their unmatched fire and shock resistance features, setting them apart from competitors. Unique Value Proposition (UVP): It emphasizes the unique value and benefits that a product or service offers to customers, highlighting how it addresses specific customer needs or provides solutions that competitors may not offer. Example for Unique Value Proposition (UVP) Bellavita Perfumes uniquely offer fragrances similar to high-priced premium brands, with exceptional value for money and the same benefits at a lower price point of their competitors like Fog and Park Avenue. So, Product Differentiation Strategy aims to create perceived value among customers, making them prefer the differentiated product over alternatives. How can we achieve Product Differentiation Success? For a product differentiation strategy, companies need to focus on continuous innovation, maintaining high quality, creating a strong brand identity, offering exceptional customer service, and understanding customer needs through market research to maintain a competitive edge, command higher prices, and build customer loyalty. II. Cost Leadership Strategy Cost Leadership Strategy focuses on becoming the lowest-cost producer in an industry while maintaining acceptable quality standards. This approach allows companies to offer products or services at lower prices than competitors, appealing to price-sensitive customers. For Private Circulation Only. Page 12 Example: Sting Energy Drink employs a cost leadership strategy by offering energy drinks at lower prices compared to Red Bull and Monster, leveraging efficient production and distribution to provide affordability while maintaining taste and quality. This Cost-effective Approach allows Sting to price their energy drinks lower than many competitors, appealing to budget-conscious consumers without compromising on taste or effectiveness. This strategy has enabled Sting to capture a significant market share in the competitive energy drink industry by providing value through affordability. How can we achieve Price Leadership Success? For a price leadership strategy, companies need to focus on cost efficiency by streamlining operations and reducing production costs, achieving economies of scale to lower per-unit costs, enhancing processes with advanced technologies, negotiating better terms with suppliers, and managing overhead and administrative costs effectively. By excelling in these areas, companies can offer lower prices than competitors while maintaining profitability. 3. Value Chain Analysis The third component of Strategic Cost Management is Value Chain Analysis, which we will discuss in the next chapter. For Private Circulation Only. Page 13  Chapter 3 Value Chain Analysis – The Third Component of SCM We all know that the customer is king. He is the decision-makers when it comes to purchasing a company's product or not. Customers consider several factors before making a purchase, such as pricing, quality, after- sales support, customer service approach, brand reputation, brand loyalty, and most importantly, value for money. The question now is: What does VALUE mean to customers when they evaluate a company’s product, or services? Value to customer means, getting the most benefits and satisfaction for their money spent. It includes receiving high-quality products or services that meet their needs effectively, excellent customer support, a positive overall experience, and confidence in the brand's reliability and reputation. Customers also value fair pricing that reflects the quality and benefits they receive, ensuring they feel they are getting a good deal compared to alternatives in the market. Overall, value encompasses the entire experience and perceived benefits customers gain from choosing a particular brand, product, or service. The Value Creation Journey: From Innovation to Customer Satisfaction From the above discussion, the equation is clear: if a company offers products or services with desired value to the customer, the company will be able to sell their product and achieve their goal of maximizing profit. But in order to create such desired value in products or services, the company has to undertake multiple activities starting from product innovation, raw material acquisition, and manufacturing high-quality products, to efficient distribution and after-sales support. This entails a chain of consecutive activities that collectively contribute to the total value ultimately incorporated in the final product offered to the customer. For Private Circulation Only. Page 14 Meaning of Value Chain Analysis Value Chain in strategic cost management refers to the sequence of activities a company performs to deliver a valuable product or service to its customers. Analysing the value chain helps businesses identify where costs are incurred, how value is added at each step, and where efficiencies or improvements can be made to reduce costs while enhancing product or service quality and customer satisfaction. By understanding each step in the value chain, companies can identify areas for improvement, reduce costs, and enhance their competitive advantage. This approach enables companies to optimize their operations strategically, deliver greater value to customers and gain a competitive advantage in the marketplace. Decoding the Value Chain Analysis Process Value Chain Analysis is a process that involves examining all the activities a company performs to deliver a valuable product or service to its customers. This includes: Step 1: Identifying Value Adding Primary and Support Activities The initial step in Value Chain Analysis involves identifying and categorizing a company's primary and support activities. This process helps distinguish between activities that directly contribute to enhancing the value in final product or service and those that do not add significant value. For Private Circulation Only. Page 15 Primary activities are directly concerned with creating and delivering a product Primary Activities Support Activities 1. Inbound logistics: 1. Procurement: Receiving, storing and distributing the raw Purchasing of raw material, supplies and other materials to the production process consumables for the primary activities 2. Operations: 2. Human Resource Management: Transforming inputs into final product by Selection, recruitment, placement, training, machining, manufacturing, packaging, testing appraisal, rewards and promotion, healthy and equipment maintenance culture formation 3. Outbound logistics: 3. Technological Development: Distribution of final products to distribution Research & development, and implementation of centres, wholesalers, retailers or customers technologies, including hardware, software, and technical know-how to enhance production processes and innovation 4. Marketing and Sales: Advertising, promotion, supply chain, sales management and pricing policy 4. Firm Infrastructure: Activities providing Organisational Framework 5. Customer Services: including Planning, finance, accounting, legal, Installation, customer training, after sales government affairs and quality management. customer support, guarantees and warranties Step 2: Analysing Identified Activities for Cost Reduction and Enhancing Product Differentiation By recognizing and eliminating non-value-adding activities in Step 1, the management can streamline or refine their operations and focus resources on areas that drive product differentiation and customer value. It involves meticulously examination of refined chain of activities to ascertain how each task contributes to reducing costs or enhancing product differentiation. Further, it demonstrates a detailed assessment of operational efficiencies and unique product features that can attract customers and justify higher pricing, if any, ensuring profitability through strategic value creation. Steps for Achieving Superior Performance in Cost Reduction and Product Differentiation To achieve superior performance in analysing activities to reduce costs or increase product differentiation after step 1, follow these points: a. Detailed Cost Analysis: Conduct a thorough examination of costs associated with each activity to identify opportunities for reduction without compromising quality. b. Technology Integration: Implement advanced technologies to streamline processes, improve efficiency, and potentially lower operational costs. For Private Circulation Only. Page 16 c. Supplier Negotiation: Strengthen relationships with suppliers to negotiate better terms, reduce procurement costs, and ensure timely delivery of quality materials. d. Market Research: Understand customer preferences and market trends to enhance product features or services that differentiate the offering from competitors. e. Continuous Improvement: Foster a culture of continuous improvement by regularly reviewing and refining strategies to maintain competitiveness and meet evolving customer demands. The company needs to assess its entire value chain, encompassing functions such as production, marketing, research and development (R&D), customer service, information systems, materials management, and human resources. Each of these functions plays a crucial role in either reducing operational costs or enhancing the perceived value of its offerings through product or service differentiation. By strategically optimizing these activities, the company can improve its competitive position and profitability in the market. For Private Circulation Only. Page 17  Chapter 4 Porter’s Five Forces Model Success of business organisation depends on not just creating great products, but also on outsmarting competitors and making informed decisions to sustain and grow your business. For every new start-up and existing business, it's essential to understand the products or services they offer and the competitors in their industry. Knowing your competition helps you improve your offerings, attract more customers, and stay ahead in the market. Meaning of Competition Competition in the business context refers to the rivalry between companies striving to achieve superior performance and attract customers within the same market or industry. Need for Understanding Competition and Competitors Understanding the dynamics of competition is essential for businesses to see own strengths and weaknesses compared to other players in the market, navigate market challenges, identify opportunities, and develop strategies that enhance their market position. By studying competitors' strategies, businesses can predict market changes, adjust their plans, and take advantage of new trends. Knowing the competition helps set realistic goals, make products or services stand out, and make smart decisions that boost competitiveness and profitability. Problems Facing New Entrants in the Market Imagine you're launching a new brand of water tanks, Plast in India, where Sintex dominates the market with strong customer loyalty and extensive marketing, making it tough for newcomers to attract attention and gain market share. New businesses face high marketing costs to differentiate their products and stand out in the market. They must overcome challenges like establishing distribution channels, competing on quality and price against economies of scale enjoyed by larger brands. Overcoming customer scepticism about unproven products is also a big challenge as it is also hard to convince customers to try something new. Like Plasto Tanks Pvt. Ltd. did, understanding these challenges helped them develop effective strategies to overcome barriers and successfully compete in a monopolistic competition market. They used strategies such as price leadership strategy, innovative marketing with a popular brand ambassador, and unique product differentiation in terms of weight, size, and durability. Additionally, they focused on building customer trust and loyalty by providing high-quality products with a guaranty period similar to Sintex. These approaches enabled Plasto Tanks to stand out in a crowded market and attract a loyal customer base. For Private Circulation Only. Page 18 Strategic Insights: Using Porter’s Model to shape Competitive Strategy One way to analyse your competition and understand your standing in your industry is using Porter’s Five Forces Model. This Porter’s Five Forces Model helps businesses assess the competitive dynamics within their industry by examining relevant factors affecting the competition strategy. Understanding these forces enables businesses to develop effective corporate strategies, differentiate themselves in the market, and make informed decisions that enhance their competitive advantage. Forces Strategic Insight Factors to be considered Threat of New The ease or difficulty with which  Initial capital required to start operations, Entrants new competitors can enter the  Economies of scale favouring existing firms market. High barriers to entry with lower costs, protect existing firms from new  Customer loyalty to established brands, competition.  Access to efficient distribution channels,  Govt. and Regulatory compliance hurdles,  Technological advantages like patents,  Product differentiation among competitors,  Customer’s brand switching costs, and  Industry's growth potential for new entrants Threat of The likelihood of customers  Availability and price competitiveness of Substitute finding alternative products or substitutes, services. High availability of  Brand Switching Costs for customers, Products or substitutes can reduce demand  Customer loyalty to industry products, and Services  Growth potential of both the industry and for existing products and affect substitute markets profitability. Rivalry among The intensity of competition  The number and diversity of competitors, existing among existing firms in the  Industry growth rates, industry. High rivalry can limit  Fixed costs affecting pricing strategies, competitors profitability and drive innovation.  Product differentiation efforts,  Exit barriers Bargaining The power suppliers have over  Number and size of suppliers, power of the price and quality of materials.  Supplier’s switching costs to firms, Strong suppliers can influence  Input importance, suppliers profitability by demanding  Availability of Substitute Inputs, higher prices.  Supplier differentiation on unique offering, and their impact on product quality, costs, and innovation within the industry. Bargaining The influence customers have on  Buyer volume power of the market. When buyers have  Brand Switching costs, many choices, they can demand  Price sensitivity, buyers lower prices, higher quality, and  Product importance to buyers, better service, which can impact  Information availability, and  Threat of backward integration where buyers the profitability. may choose to produce the product themselves For Private Circulation Only. Page 19  Chapter 5 Total Quality Management (TQM) In industries worldwide, Apple Inc. enjoys an elite reputation not just for its high prices and profitability, but primarily for its commitment to quality. By consistently delivering products that exceed customer expectations and offer exceptional value, Apple has secured remarkable customer loyalty and significant market share. In this chapter, we explore Apple Inc.'s cost management strategies, emphasizing their adherence to quality through a Total Quality Management (TQM) approach. By examining how Apple balances cost efficiency with maintaining high standards of product excellence, we uncover insights into how they sustain their elite status in the market while achieving substantial profitability. Let's start by understanding the term "Quality": "Quality" refers to the degree to which a product or service meets or exceeds customer expectations and requirements. Prioritizing quality not only differentiates companies from competitors but also builds customer loyalty, enhances brand reputation, reduces costs related to defects, and fosters sustainable growth. Now, what is mean by Total Quality? In the context of Strategic Cost Management, "Total Quality" refers to the comprehensive approach to organizational management that seeks continuous improvement of processes, products, and services with the active participation of all employees. Total Quality is not a one-time effort but a continuous journey that requires commitment from every level of the organization. It is about creating a culture that strives for excellence in every aspect of the business. Total Quality Management TQM's objectives are to eliminate waste and increase efficiencies by ensuring that the production process of the organization's product or service is done right the first time. By integrating Total Quality Management, organizations can achieve a balance between maintaining high standards and controlling costs, leading to sustainable competitive advantage. Understanding and implementing Total Quality Management (TQM) principles is essential for businesses seeking to achieve long-term success by meeting or exceeding customer expectations and enhancing overall organizational performance. For Private Circulation Only. Page 20 Key Principles of Total Quality Management (TQM) Customer Focus Process-Centered Integrated System Strategic Approach Prioritize meeting and Focus on improving Ensure all parts of the Align quality with the exceeding customer processes for better organization work company’s long-term expectations. quality. together towards quality goals. goals. Employee Continuous Data-Driven Effective Involvement Improvement Decisions Communication Engage all employees in Always seek ways to Use accurate data to Maintain clear and open quality improvement improve. guide decisions. communication across efforts. the organization. By adhering to these principles, organizations can achieve higher levels of quality, customer satisfaction, and operational efficiency. Strategic Insights: Cost of Quality Cost of quality is a way to measure both the costs a company spends to ensure products meet high quality standards, as well as the costs incurred when products fail to meet those standards. High-quality products may initially incur higher costs but can lead to lower warranty costs, fewer returns, and increased customer satisfaction in the long run. In Value Chain Analysis chapter we understood the process of identifying, scrutinizing every step from product design to delivery and refining activities within the value chain where quality improvements can reduce costs and enhance customer value. Total Quality Management involves the understanding and managing the costs associated with ensuring quality, including prevention costs, appraisal costs, and the costs of internal and external failures. Cost of Good Quality vs. Cost of Poor Quality Cost of quality has four main components between the two buckets of “good” and “bad” quality. For Private Circulation Only. Page 21 Here's a summarized table for the categories of Cost of Quality (CoQ): Prevention Costs Expenses to prevent defects, including training, quality planning, and preventive maintenance. Appraisal Costs Costs to evaluate and audit products, such as inspection, testing, and quality audits. Internal Failure Costs for defects detected before reaching the customer, like rework, scrap, and Costs downtime. External Failure Costs for defects found after delivery to the customer, including warranty claims, Costs returns, repairs, and lost sales. Cost of Quality = Prevention Cost + Appraisal Cost + Internal Failure + External Failure These costs are incurred to avoid quality problems. Taken together, the four main costs of quality add up to make up the total cost of quality. Overall Benefits of Total Quality Management  Enhanced Customer Satisfaction: Delivering high-quality products and services that meet or exceed customer expectations.  Improved Efficiency and Productivity: Streamlining processes to eliminate waste and reduce errors.  Employee Engagement: Empowering employees and fostering a culture of continuous improvement.  Competitive Advantage: Building a reputation for quality that differentiates the organization in the marketplace.  Reduced Costs: Lowering costs associated with defects, rework, and non-conformance. Key Takeaway from TQM Chapter Total Quality Management (TQM) centers on continuous improvement, putting customers first, and involving all employees. By embracing these TQM principles, businesses can enhance product quality, cut costs, and strengthen their competitive advantage in the market. For Private Circulation Only. Page 22  Chapter 6 Theory of Constraints In strategic cost management, the efficient allocation and optimum utilization of resources are critical for achieving organizational goals. Resources are the inputs necessary to perform value- added activities, which in turn create products or services that meet customer needs. Proper management of these resources can significantly impact an organization’s cost structure and profitability. Types of Resources Needed to Perform Value-Added Activities Value-added activities require a variety of resources, each essential to different aspects of the production and service delivery process. Types of Resources Involved Value-Adding Activities Resources Financial Capital for investment, For all activities Resources operational funds, budgeting Human Skilled labour, management, Product Design and Development, Production, Resources support staff Customer Service, Marketing and Sales Material Raw materials, components, Procurement, Production Resources finished goods inventory Technological Machinery, equipment, IT Production, Product Design and Development, Resources systems Distribution and Logistics, Customer Service Information Data, research, intellectual Product Design and Development, Marketing Resources property and Sales, Customer Service Physical Facilities, infrastructure, real Production, Distribution and Logistics Resources estate This table more accurately represents the precise value-adding activities for each type of resource, illustrating their specific roles in strategic cost management. For Private Circulation Only. Page 23 Concept of Constraint of Resources A resource constraint is a limitation that restricts the capacity to perform value-added activities effectively. Constraint: A factor that limits the performance of a system. In a supply chain, this could be a machine, a process, or a resource that restricts the flow of goods and services. In the context of Strategic Cost Management, these constraints can lead to Bottlenecks that hinder the overall efficiency and performance of an organization. Examples of resource constraints include limited skilled labour, scarce raw materials, limited machine capacity, insufficient capital, out-dated technology, or limited demand for final product. For instance, let’s find out the constraint or bottleneck in given Cycle Manufacturing Process: A: Raw Material like Steel available to manufacture 100 units a day B: Other Component like tyres, mudguard available to assemble 100 units a day C: Chassis Manufacturing Capacity: 60 units per day D: Assembly Capacity: 100 units per day E: Daily Demand for Cycles is 100 units The bottleneck in chassis production limits overall cycle output to 60 units daily, despite other stages being capable of producing 100 units. This constraint results in a shortfall of 40 units daily, leading to customer waiting times and potential lost sales. Addressing this bottleneck is critical to meeting demand, reducing waiting times, and improving profitability. What is the Theory of Constraints? In value chain analysis, we identify value-adding activities and eliminate non-value-adding ones to refine operations and align resources for optimal performance. This ensures the optimum utilization of resources, allowing management to streamline operations and focus on areas that drive product differentiation and customer value. By eliminating non-value-adding activities, resources can be reallocated to enhance overall efficiency and effectiveness. For Private Circulation Only. Page 24 Similarly, in Strategic Cost Management, the Theory of Constraints (TOC) is a management philosophy focused on identifying bottlenecks in value chain activities and managing critical limiting factors (constraints) that impede an organization’s goals. TOC optimizes resource utilization by refining processes and directing resources to the most critical areas, thereby improving overall performance. Key Principles of TOC in Strategic Cost Management 1. Identify the Constraint: Determine the primary bottleneck that limits throughput or performance. 2. Exploit the Constraint: Make the best possible use of the constrained resource to maximize efficiency. 3. Subordinate Other Processes: Align other processes to support the optimal functioning of the constraint. 4. Elevate the Constraint: Take steps to increase the capacity or efficiency of the constraint. 5. Repeat the Process: Continuously identify and address new constraints as they arise. For Private Circulation Only. Page 25 TOC emphasizes the importance of exploiting the identified constraint, subordinating other processes to support it, and continually elevating the constraint's capacity. This systematic approach allows for the continuous improvement of resource allocation, ensuring that all resources contribute to value-adding activities. By focusing on constraints, management can enhance productivity, reduce costs, and improve customer satisfaction; thereby driving sustainable growth and competitive advantage. This approach not only helps in managing costs effectively but also ensures sustained growth and competitiveness in the market. For Private Circulation Only. Page 26  Chapter 7 Kaizen Costing Kaizen is the Japanese business philosophy launched by Masaaki Imai, which proved to be the key to Japanese competitive success. Meaning of Kaizen The significance of this concept is: KAI = Change and ZEN = for better, and the translation is “continuous improvement”, which implies that small, incremental changes routinely applied and sustained over a long period result in significant improvements. And here, Kaizen Costing is a cost management strategy that focuses on continuous improvement of processes, products, and services. Kaizen Costing involves making small, incremental improvements to processes and products to reduce costs continuously. It's not just about reducing costs but also improving quality and efficiency. Overall, Kaizen costing is a proactive approach to cost management that emphasizes on-going improvement rather than one-time cost-cutting measures. Case Study Toyota Motors, a Japanese company renowned for excellence, applies Kaizen costing across various areas to uphold its reputation: In product innovation, Toyota continually enhances car designs and features by integrating customer feedback and making incremental adjustments. Kaizen supports Toyota in meeting rigorous quality standards by continuously refining production processes, ensuring each vehicle meets high-quality benchmarks. Toyota also uses Kaizen to optimize assembly lines, enhancing efficiency and reducing waste throughout production. This commitment to Kaizen involves all employees, fostering a culture of continuous improvement that underscores Toyota's reputation for reliability, innovation, and delivering high-quality vehicles. For Private Circulation Only. Page 27 Principles of Kaizen costing Kaizen costing is based on several key principles that guide its implementation and effectiveness: 1. Continuous Improvement: Always find ways to make small improvements in how things are done. 2. Small Changes for Cost Reduction: Focus on making small changes regularly to reduce costs over time. 3. Involving Everyone: Encourage all employees to suggest ideas and be part of making things better. 4. Teams Working Together: Different departments work together to find and implement improvements. 5. Thinking Long-Term: Focus on improvements that will benefit the organization over the long term, rather than opting for short-term fixes. 6. Improving Quality: Along with cutting costs, aim to make products and services better. 7. Using Data to Improve: Measure progress and use feedback to keep getting better. By adhering to these principles, organizations can effectively implement Kaizen costing to achieve on-going cost savings, improve operational efficiency, and foster a culture of innovation and continuous improvement. Benefits of Implementing Kaizen Costing Implementing Kaizen costing offers numerous benefits for organizations: 1. Cost Reduction: Continuous small improvements lead to significant cost savings over time by eliminating waste and inefficiencies. 2. Enhanced Quality and Innovations: By focusing on incremental improvements, Kaizen helps maintain and improve product and service quality. 3. Increased Productivity: Streamlined processes and better resource management boost overall productivity. 4. Employee Engagement: Involving employees in the improvement process fosters a sense of ownership and motivation, enhancing job satisfaction. 5. Efficient Use of Resources: Kaizen maximizes the use of existing infrastructure and reduces the need for additional equipment and space. 6. Adaptability: Organizations become more flexible and responsive to changes in the market, customer needs, and operational challenges. 7. Customer Satisfaction: Improved quality, efficiency, and responsiveness lead to higher customer satisfaction and loyalty. Overall, Kaizen costing creates a culture of continuous improvement that drives long-term success and operational excellence. For Private Circulation Only. Page 28  Chapter 8 Target Costing In competitive markets, businesses face limitations on setting prices they can charge for their products or services. So, in order to achieve a desired level of profit, companies must manage their costs effectively. Management's objective is to maximize profits, and one of the most effective ways to do this is by reducing costs without compromising quality. This approach, known as Target Costing. It involves setting cost reduction and cost control targets to ensure higher profitability and long-term sustainability. Steps in Target Costing vs. Cost-Plus-Profit Method Target Costing Method  Starts with the market price and desired profit margin.  Sets cost reduction and control targets to produce the product within cost constraints.  Focuses on market demand and profitability from the outset. Cost-Plus-Profit Method  Begins with the product development without a cost structure in mind.  Adds a profit margin on top of the production cost to determine the final price.  Often results in higher costs and prices that may not align with market expectations. Target costing is the opposite of the cost-plus-profit method. While target costing ensures profitability by managing costs to meet market prices, the cost-plus-profit approach can lead to products that are too expensive for the market due to unchecked cost structures. Understanding Target Costing Target costing is a strategic management tool used by companies to plan and control costs, ensuring that a product can be produced at a cost that allows for a competitive selling price and desired profit margin. The process begins with determining the market price of the product and then subtracting the desired profit margin to arrive at the target cost. Target Cost = Market Price of the product - Desired Profit Margin The goal is to design and produce the product within this cost constraint and ensures desired profit margin. For Private Circulation Only. Page 29 Principles of Target Costing Following are the principles of target costing that ensure effective cost management and profitability: 1. Market-Driven Pricing: The target price is determined based on what customers are willing to pay, considering market conditions and competition. 2. Focus on Profitability: Desired profit margins are set from the outset and subtracted from the target price to ensure profitability. 3. Cross-Functional Collaboration: Various departments, such as engineering, marketing, and finance, work together to meet cost targets and design a product that meets customer needs. 4. Cost Management Through-out Lifecycle: Costs are controlled and reduced at every stage of the product lifecycle, from design to production and beyond. 5. Continuous Improvement: On-going efforts are made to find innovative ways to reduce costs and improve processes without compromising quality. 6. Customer-Oriented Approach: The product is designed with the customer's needs and expectations in mind, ensuring it delivers value and meets market demands. 7. Proactive Cost Planning: Cost targets are set early in the product development process, allowing for proactive planning and decision-making. 8. Alignment with Strategic Goals: Target costing aligns with the overall strategic goals of the company, ensuring that financial and market objectives are met. Benefits of Target Costing Following are the benefits of target costing that contribute to a company's competitive advantage and financial success: 1. Enhanced Profitability: By focusing on cost control from the outset, businesses can achieve higher profit margins. 2. Improved Product Quality: Target costing encourages companies to find innovative ways to maintain or improve product quality while reducing costs. 3. Market Competitiveness: Products priced competitively are more likely to succeed in the market, increasing the company's market share. 4. Long-term Sustainability: Sustainable cost management practices ensure the business remains profitable and competitive over the long term. For Private Circulation Only. Page 30  Chapter 9 Pareto Analysis Pareto Analysis, also known as the "80/20 Rule", introduced by Italian economist Vilfredo Pareto in 1896, a decision-making tool used to identify the most significant factors in a dataset. Pareto principle has been widely applied across various fields, including economics, business management, quality improvement, and even personal productivity. This principle suggests that in many situations, approximately 80% of the effects or outcomes result from 20% of the causes or inputs which help businesses and individuals focus first on the most impactful tasks or issues. For example, in business contexts, it might be observed that 80% of a company's sales come from 20% of its customers. Here's the list of cases demonstrating the Pareto Principle: 1. 20% of the products generate 80% of the profits 2. 20% of products generate 80% of the production costs 3. 20% of suppliers providing 80% of the value of raw materials to a company 4. 20% of quality defects, errors, or causes of breakdowns lead to 80% of the rejects, failures, or delays, etc. Example – Quality Control of Lenskart.com The following data outlines the types and frequencies of defects during a production period at Lenskart.com, a spectacle manufacturing company: Frequency Table for constructing a Pareto Chart for defect types at Lenskart.com, follow these steps: For Private Circulation Only. Page 31 The company should prioritize eliminating scratches on the surface, addressing rough edges of lenses, and ensuring uniform grinding of lenses, as these issues collectively account for 80% of all reported defects. Prioritize addressing the top 20% of problems or tasks that will deliver the greatest positive impact. By concentrating efforts here, you can achieve significant improvements with less effort. By focusing efforts on identifying the most critical factors that contribute the most significant results, organizations can optimize their resources and achieve greater efficiency and effectiveness in problem-solving and decision-making processes. Benefits of Pareto Analysis Pareto Analysis identifies the most impactful problem areas or tasks, ensuring efforts are focused where they will yield the highest returns. The tool offers several benefits, including:  Prioritizing and addressing critical issues efficiently.  Optimizing workload organization.  Enhancing productivity and efficiency.  Maximizing profitability and resource allocation. For Private Circulation Only. Page 32  Chapter 10 Product Pricing Decisions and Strategies Are your Sales Revenues growing, but you can’t seem to turn a profit? Or maybe you’ve got a great product but sales just aren’t picking up? It could be you have a problem with your pricing strategy. If the company wants to survive, its products have to be profitable. However, you can’t just slap any price on a product as your company doesn't work alone; it operates in a market. Setting the right price for its products is a key task for any business. If the price is too high, there may not be enough customers. If it's too low, the company might not cover its costs. So, deciding on the right price is a crucial decision for any business. A good strategy to setting prices is dynamic, and it reflects changing conditions on the market while following what the competition is doing. Pricing under different Market Structures The price of goods and services in a firm depends on factors like demand levels, cost conditions, and competition. The process of determining the optimal price can be examined under the following market structures: Perfect Competition: In a perfectly competitive market, there are many sellers offering the identical products using identical production processes, and all of them have perfect information about the market and prices. Because the products are the same, no single seller can influence the market price. Instead, the price is determined by supply and demand. Sellers in this market are price takers, meaning they accept the market price and focus on minimizing costs like try reducing jewellery making charges etc. to maximize profits. In the jewellery market, gold prices show that jewellers can't set prices; they must accept global rates set by supply and demand. Individual jeweller does not have the power to influence this price because the market is too large and competitive. Monopoly: A monopoly exists when a single company controls the entire market for a product with no close substitutes. Because there is no competition, the monopolist can set the price at any level they choose. Monopolists are the price makers. They often set prices to maximize profits, balancing between higher prices and sales volume. Apple's market influence is marked by its strategy of setting premium prices aimed at high-income consumers. The ecosystem of Apple products and services, including iPhones, iPads, MacBooks, and software like iOS and MacOS integrated system. Their customers rely on seamless compatibility and interconnected features across devices and make it challenging for competitors to lure Apple's customer base away. For Private Circulation Only. Page 33 Monopolistic Competition: In monopolistic competition, there are many sellers, but each offers a slightly different product. This differentiation allows sellers to have some control over their prices. Pricing decisions are based on product features, brand reputation, and customer preferences. Companies try to find a balance between setting prices high enough to cover costs and earn profits while remaining attractive to customers. In the market of Asian Paints, Nerolac, and Berger Paints, we see monopolistic competition at play. Each company offers slightly different paints, allowing them some control over pricing. They differentiate their products through features like durability, colour range, and application ease, building brand reputations based on customer preferences. This dynamic reflects how companies in monopolistic competition navigate product differentiation, marketing strategies, and pricing to maintain their market positions and appeal to consumers. Oligopoly: An oligopoly is a market structure with a few large firms dominating the market. In this situation, the pricing decisions of one company affect the others. Firms in an oligopoly often avoid price wars, which can hurt everyone involved. In the market for washing machine powders, brands like Ariel, Surf Excel, and Tide operate within an oligopoly. These companies dominate the market with a few large players controlling pricing and product offerings. Despite some differentiation in terms of formulation, fragrance, and packaging, these brands engage in strategic pricing and marketing campaigns to maintain their market shares. Pricing decisions are often coordinated among competitors to avoid price wars and ensure profitability, reflecting the interdependent nature of firms in an oligopolistic market. Product Pricing Decisions and Strategies Product pricing decisions and strategies are influencing sales, profitability, and market positioning. Companies must carefully consider several factors when setting prices. You need to have a Price Strategy that will tell your consumers what kind of value you’re providing through your products. Pricing Strategies differ based on various factors like industry, target customers, and even cost of goods. When you look at it from a different perspective, the Marketing Mix for any company is basically the same. It always consists of 4 Ps – Product, Price, Place, and Promotion. The Price is the most relevant P in this case, as it directly affects the company’s bottom line. Firstly, understanding customer demand elasticity is essential—how sensitive are customers to price changes? Pricing too high may reduce sales, while pricing too low could impact profitability. For Private Circulation Only. Page 34 Competitive analysis is another key consideration. Companies assess competitors' pricing strategies to position themselves effectively in the market. Pricing may also reflect the product's unique value proposition—premium pricing for high-quality offerings or penetration pricing to gain market share quickly. Pricing Methods The Pricing Methods are the ways in which the price of goods and services can be calculated by considering all the factors such as the product/service, competition, target audience, product’s life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a whole. Basically Costs, Demand, and Competition define different pricing methods that a firm may adopt. Let us understand these methods: Cost-plus Pricing Cost-plus pricing is a straightforward method where a business calculates all production costs—like materials, labour, and overhead—and then adds a desired profit margins to determine the product's price. This ensures that the company covers its expenses and makes a profit. In Monopoly, where a single entity dominates the market, cost-plus pricing can be used to set prices without direct competitive pressure. The monopoly firm calculates costs and applies mark-ups to maximize profits while considering demand elasticity and market power. Competition-based Pricing Competition-based pricing is a strategy where businesses set prices based on what their competitors are charging for similar products or services. This approach involves monitoring and analysing competitor pricing strategies to stay competitive in the market. In perfect competition, numerous firms offer identical products, and no single firm has the power to influence market prices. Here, businesses must set prices based on the prevailing market rate to attract customers without losing market share. In Monopolistic Competition market structure, where many firms offer differentiated products, competition- based pricing allows businesses to adjust prices based on their product's unique features and customer perceptions. In an oligopoly competition, where a few large firms dominate the market, firms monitor and react to competitors' pricing strategies to avoid price wars and maintain market share. In all above market structures, competition-based pricing enables businesses to respond flexibly to market conditions, customer preferences, and competitor actions, ensuring they remain competitive while maximizing profitability. For Private Circulation Only. Page 35 Dynamic Pricing The most basic way of describing dynamic pricing is that your price is not static and instead changes based on other factors. These factors can be for example segments or time. Dynamic Pricing in Segments: Companies like Uber and Ola use dynamic pricing based on geographical segments. For example, they adjust fares higher in areas with high demand, such as near IT parks during rush hours or in busy city areas. They utilize algorithms to analyse data and set prices accordingly. Dynamic Pricing by Time: Insurance companies offering competitive prices throughout the financial year and discounted offers towards the end of March month to attract more customers during financial year period and boost sales before the new financial year begins. Penetration Pricing (STRATEGIC PRICING METHOD FOR NEW PRODUCTS) Penetration pricing is a strategy that is used to capture market share by setting product prices at a below- market level to gain customers. Once the company gets a sizable market share, they readjust the pricing accordingly. Reliance Jio adopted penetration pricing when it entered the telecommunications market in India. Initially, Jio offered free or heavily discounted services to attract a large customer base quickly. This aggressive pricing strategy aimed to rapidly gain market share and disrupt existing competitors. After acquiring a large customer base quickly, Jio gradually increased its prices while continuing to offer competitive rates compared to rivals like Airtel. This change helped Jio move from starting with low prices to setting sustainable competitive prices. They kept their customers while competing strongly in the tough telecom market. Skimming Pricing (STRATEGIC PRICING METHOD FOR NEW PRODUCTS) Skimming pricing is often observed during the launch of innovative product lines with new unique features or new releases from established brands. This strategy targets customers who are willing to pay more for innovation or early adoption and are willing to pay premium prices regardless of the product's actual value. This strategy helps the company make the most profit from early buyers. Gradually, as competition increases or more customers buy the product, the company may lower prices to attract a broader market. This approach allows the company to maximize profit from early adopters before gradually expanding its customer base with reduced prices. You should always be ready to adjust your pricing based on economic, market, and geographical conditions. As long as you learn and implement these pricing strategies, you won’t go wrong. For Private Circulation Only. Page 36  Chapter 11 Just-In-Time System in Cost Management Introduction Just-in-Time (JIT) is a production and inventory management philosophy that originated in Japan, primarily developed by Toyota. JIT’s core idea is to produce only what is needed, when it is needed, and in the quantity needed, thereby minimizing waste and enhancing efficiency. JIT was designed to address issues of overproduction, excess inventory, and long lead times that plagued traditional manufacturing systems. By focusing on streamlining processes, JIT helps organizations reduce storage costs, improve product quality, and respond quickly to market changes. Over time, JIT has evolved from a manufacturing strategy to a broader management philosophy, applicable in various industries beyond automotive became the integral part of strategic cost management, as it enables businesses to streamline operations, reduce inefficiencies, and achieve cost optimization. This chapter explores the application of JIT within strategic cost management, demonstrating how it can drive profitability and sharpen competitive advantage in today's fast-paced business environment. Meaning of Just-in-Time (JIT) System The central concept of JIT is to have the right materials, products, or services available precisely at the moment they are required in the production process, thereby minimizing excess inventory, reducing storage costs, and improving overall operational flow. The Just-In-Time (JIT) System is defined as a production and inventory management approach in which goods are produced or materials are ordered and delivered only when needed for immediate use, rather than in advance or in large quantities. It integrates principles of lean management, emphasizing continuous improvement, waste reduction, and customer satisfaction. It is widely used in industries like manufacturing, retail, and automotive sectors, where managing inventory and operational efficiency are critical for competitiveness. Objectives of Just-in-Time (JIT) The goal of JIT is to reduce inventory levels, minimize waste, and enhance efficiency by aligning production schedules with real-time customer demand. However, this system relies on precise timing, strong supplier relationships, and continuous process improvements to achieve cost savings and operational optimization. For Private Circulation Only. Page 37 Application of Just-in-Time (JIT) System in Inventory Management Just-in-Time (JIT) system has widespread applications in various areas of strategic cost management, enabling businesses to optimize costs while enhancing operational efficiency. JIT Inventory JIT Inventory emphasizes maintaining minimal stock levels by ordering materials and components just in time for production. The goal is to reduce or eliminate excess inventory that incurs storage, insurance, and management costs. Meaning of Inventory: Inventory refers to goods that are in various stages of being made ready for sale, including:  Stock of Finished goods (that are available to be sold)  Work-in-progress (meaning in the process of being made)  Stock of Raw materials (to be used to produce more finished goods)  Stock of Packing and Packaging Materials  Stock of Repair and operating supplies. (to be used in regular repair and maintenance of machinery) What is mean by Excess Inventory? Excess Inventory refers to a situation where a company holds more stock than is necessary to meet current and anticipated demand. This surplus inventory can lead to several issues like:  Increased Holding Costs: Costs related to storing, managing, and insuring excess inventory can add up.  Risk of Obsolescence: Products may become out-dated or expire, resulting in potential losses.  Tied-Up Capital: Capital invested in excess inventory could be used more effectively elsewhere.  Reduced Cash Flow: Large amounts of unsold inventory can limit cash flow and hinder financial flexibility. By keeping only essential inventory on hand, businesses reduce the risk of holding out-dated or unsold goods and can respond more flexibly to changes in demand. JIT Purchase JIT Purchase refers to procuring raw materials and components from suppliers only when they are needed for production, rather than stockpiling large inventories. This helps reduce holding costs, minimize wastage from obsolete or expired items, and improves cash flow. Strong supplier relationships and reliable delivery schedules are crucial for the success of JIT Purchase, as it requires timely delivery of materials to avoid production delays. For Private Circulation Only. Page 38 JIT Purchase: D-Mart Retail Store 1. Customer Demand: D-Mart identifies specific inventory needs based on current customer demand and sales data. 2. Order Processing: D-Mart processes inventory requirements for items like groceries and household products. 3. Supplier Communication: D-Mart sends orders to suppliers for the exact quantities of items needed. 4. Timely Delivery: Suppliers deliver the products just in time for restocking the shelves. 5. Stocking: D-Mart stocks the shelves with the received items. 6. Customer Purchase: Customers buy the products from D-Mart's shelves. Pre-Requisites for Success of JIT Purchase 1. Strong Supplier Relationships: Build reliable partnerships with suppliers for timely deliveries of products. 2. Effective Communication Systems: Use technology for real-time order information sharing with suppliers. 3. Accurate Demand Forecasting: Predict demand precisely to align orders with actual needs. 4. Reliable Logistics and Transportation: Ensure prompt delivery partners. 5. Inventory Management: Keep minimal inventory of products and manage stock effectively. 6. Employee Training: Educate staff on JIT principles and practices. 7. Flexible Order Processing: Adapt efficient order placement process quickly to changing orders. JIT Production JIT Production focuses on manufacturing goods in response to actual customer demand, rather than based on forecasts. Products are made only when orders are received, aligning production with real-time demand. This approach reduces overproduction, minimizes work-in-progress inventory, and shortens lead times. It ensures that resources are used efficiently and avoids unnecessary storage of finished goods. JIT Production: Dell Computers 1. Customer Order: A customer places an order for a customized computer configuration. 2. Order Processing: Dell processes the order to determine the exact components and specifications needed (e.g., processor, memory). 3. Production Planning: Dell schedules the assembly of the computer based on the specific order details. 4. Timely Assembly: Dell assembles the computer using the components delivered just in time for production. For Private Circulation Only. Page 39 5. Quality Check: The assembled computer undergoes quality checks to ensure it meets customer specifications. 6. Customer Fulfilment: The finished computer is shipped to the customer. Pre-Requisites for Success of JIT Production 1. Accurate Demand Forecasting: Precisely predict customer demand to align production schedules. 2. Flexible Production Systems: Design adaptable production processes to handle varying order volumes and specifications. 3. Strong Supplier Relationships: Establish reliable partnerships with suppliers for timely delivery of raw materials and components. 4. Efficient Inventory Management: Maintain minimal work-in-progress inventory while ensuring necessary materials are available. 5. Effective Communication: Implement systems for clear, real-time communication between production teams and suppliers. 6. Reliable Logistics: Develop dependable logistics and transportation networks to support timely delivery and production. 7. Employee Training: Train workers on JIT practices and production techniques for efficient operations. 8. Continuous Improvement: Foster a culture of on-going evaluation and process enhancement to optimize JIT production. Principles of Just-in-Time (JIT) System  Demand-Pull Production: JIT is driven by customer demand, meaning products or components are produced in response to actual orders, not forecasts.  Zero Inventory Mind-set: By reducing the amount of stock held, JIT minimizes the costs associated with storage, insurance, and handling.  Continuous Process Improvement: Kaizen, or continuous improvement, is at the heart of JIT, where companies consistently seek ways to enhance efficiency and eliminate waste. Challenges in Implementing JIT  Supply Chain Dependence: JIT requires a highly responsive supply chain. Any delays or disruptions in the supply of materials can lead to production stoppages and financial losses.  Initial Investment: Implementing JIT requires investment in technology, supplier relationships, and workforce training, which may present initial cost barriers for businesses.  Risk of Stock-outs: With minimal inventory levels, businesses run the risk of stock-outs if there is an unexpected spike in demand or a supply chain disruption, which can affect customer satisfaction. For Private Circulation Only. Page 40  Chapter 12 Business Process Re-engineering Originating in the early 1990s, Business Process Reengineering (BPR) emerged as a response to the limitations of incremental process improvements and the need for dramatic changes in response to evolving business environments. Business Process In Business Process Reengineering (BPR), a Business Process refers to a set of structured activities or tasks performed within an organization to achieve a specific business goal or deliver a product or service to customers. These processes involve a sequence of steps, resources, and roles, and are fundamental to how an organization operates. Reengineering In general, reengineering refers to the process of fundamentally redesigning and restructuring an organization’s systems, processes, or products to achieve significant improvements in performance and efficiency. Meaning of Business Process Reengineering (BPR) Business Process Reengineering (BPR) refers to the fundamental rethink, redesign and transformation of existing business processes to achieve substantial improvements in performance, efficiency, and quality. The core idea of BPR is to fundamentally redesign core business processes from the ground up, rather than making incremental changes to existing processes. BPR often involves leveraging technology, rethinking organizational structures, and focusing on customer needs to drive change. It consists of analysing current workflows, identifying bottlenecks and inefficiencies, and redesigning processes to optimize performance and enhance customer satisfaction. The objective is to achieve breakthroughs in productivity, cycle times, and quality, leading to substantial gains in business performance. Successful BPR initiatives can lead to transformative improvements in how a company operates, enabling it to compete more effectively in the market and deliver greater value to its customers. For Private Circulation Only. Page 41 Key Principles of BPR  Radical Redesign: Focuses on making fundamental changes to processes rather than small, incremental improvements.  Process Orientation: Emphasizes redesigning core processes to better align with customer needs and strategic goals.  Customer Focus: Aims to enhance customer satisfaction by delivering better quality, faster service, and more value.  Technology Utilization: Leverages new technologies to streamline and optimize processes. Steps in BPR  Identify Processes: Select key processes that need improvement based on their impact on organizational performance.  Analyse Existing Processes: Evaluate current processes to identify inefficiencies, bottlenecks, and areas for improvement.  Redesign Processes: Develop new, optimized process designs that eliminate waste, reduce cycle times, and improve quality.  Implement Changes: Execute the redesigned processes, often requiring changes in technology, organizational structure, and employee roles.  Monitor and Review: Continuously assess the performance of new processes to ensure they meet objectives and make adjustments as needed. Challenges in BPR  Resistance to Change: Employees and management may resist significant changes due to fear of the unknown or loss of control.  Complexity: Redesigning processes can be complex and require significant resources and time.  Integration Issues: New processes must be integrated with existing systems and practices, which can pose logistical challenges.  Cultural Barriers: Shifts in organizational culture and mindset are necessary for successful BPR implementation. Case Study: Tata Motors Tata Motors faced several challenges with early car models like Indica, Nano, Manza, Marina, and Safari, which suffered from issues related to quality, durability, and technological advancements. To overcome these failures, Tata Motors undertook several strategic actions under BPR Implementation:  Production Efficiency: Overhauled manufacturing processes to improve quality and reduce defects.  Product Development: Adopted a customer-centric approach to design and development.  Technological Advancements: Invested in new technologies and innovation.  Quality Control: Implemented stricter quality standards and enhanced after-sales support.  Employee Training: Focused on up-skilling employees to adhere to higher standards. Results: By addressing key areas, Tata Motors enhanced its reputation for quality, durability, and technology, leading to improved market performance and customer satisfaction. For Private Circulation Only. Page 42