What can enable businesses to achieve the winning leap to world-class excellence? TCM (Total Cost Management), answers A. N. Raman, Member, TCM Working Group of the Confederation of the Indian Industry (CII), Chennai. The TCM division has been propagating to Indian business ‘cost management through a structured framework,’ he informs during the course of an afternoon interaction with Business Line on December 11, 2009.
“This framework benchmarks the current practices of a company in the context of a competitive environment against best practices which can render a sustainable competitive advantage.”
As example, Raman mentions that a company which tracks trends in product and process technology relevant to its business strategy and converts it into a long-term cost structure as a part of its TCM framework will be better equipped to drive its cost structure and will be high on a maturity model. “This will also be a good risk management practice. Of course this should be done without losing the handle on the current cost structure.” Our conversation continues over the email.
Excerpts from the interview.
How did the global slowdown impact cost management practices?
The upside of the slowdown phase was the learning by many companies that cost management is a philosophy, not merely the initiatives on frugal spending. As a result, cost management practices are now getting embedded as a business process in companies, with a board-to-floor focus rather than as an accounting sojourn.
During lean times companies have learnt to sensitise their employees to cost management by forming large cross-functional teams, making mission-like statements supported by oath-taking ceremonies, conducting exhibitions on waste elimination projects, gate meetings on costs, slogan and poster competitions on costs, and so on.
Is cost management getting adequate attention in the boardrooms?
The Boards are certainly demanding outcomes and results such as cost positioning of the companies and what benefits have been quantified through cost reduction ideas. But they are not driving the sustainable processes of cost management with reference to business strategy and its link with operations.
For example, they are not asking as to how the eco and CSR (corporate social responsibility) issues are factored into the financial metrics of decision making and balanced with economic viability. TCM framework is all about this.
What skill sets are required within an organisation for the purpose?
The key skill is the translating of the business strategy into the strategic cost focus, followed by an operational cost emphasis for executing the strategy.
For example, a company with a very high value-addition and a low material cost base set in a product variety would require to focus on value and cost drivers of the operational process. A company having a high material cost base, and that too coming from the volatility of the commodity prices, will need a very watchful system of monitoring price trends which seamlessly feeds into an output cost structure forecasting system. The volatility tracking should create cost management plans in advance.
Yet another example can be of a company with a high degree of customisation as a business strategy. Execution of the strategy will require an intense skill set of designing products/ services to cost, which goes by the name of target cost management. The target cost management process would mean equipping design engineers with ability to innovate products at prices the customers can afford.
Coming up with the design of products for the larger segment of the Indian customers at affordable prices towards achieving inclusive growth can be the boiling pot of challenges for target costing. This is where, perhaps, the Chinese are better, designing products suited to the home market.
Can Indian businesses compete with China, on cost?
Too simplistic assumptions are being made about China on the relationship between cost and quality. At a macro level, the infrastructure-led growth in China has made the cost of logistics predictable and manageable; they are miles ahead of India on this.
At a firm’s level is there any authentic survey or information sector-wise, on the cost structure of Chinese goods? Is scale the only advantage, or is the relatively higher level of control on commodity prices giving the Chinese advantage? Is the Chinese cost accounting system measuring costs reliably, or are there fundamental flaws in that?
It is reliably learnt that the research division of the Institute of the Management Accountants of the US has carried out an extensive research on this. (Dr Raef Lawson who carried out the research on the Chinese cost domain will be speaking at the 8th Cost Congress of CII scheduled in Chennai on December 17 and 18.)
Would you like to talk about the myths that are prevalent in cost management?
We have found that the following three major beliefs/disbeliefs need to be worked on for a true understanding and application of the TCM architecture:
• Adopting the Japanese management concepts such as kaizen, TPM, lean manufacturing is more than sufficient as a cost management focus.
• Continuing the practice of any traditional cost accounting framework which had flourished as an extension of accounting process with some minor tweaking is good enough to address the needs of a globally competitive context.
• Simply automating the minimum functional application of financial accounting and budgeting of ERP systems is good enough for cost management.
Do enterprises, including SMEs, show interest in TCM?
A simple indicator of enterprises’ interest in TCM is the manifold increase in the number of companies asking for the rating of their cost management systems, a service provided by the CII. I expect the TCM movement to gain further momentum when linkages are established with the sustainability assessment mechanism brought in as a good practice by the International Federation of Accountants (IFAC) on their sustainability framework.
The landscape in India is dotted with a large population of small and medium enterprises (SMEs), and they are sought to be inducted into the TCM movement through clusters. Accordingly, the CII has adopted SME clusters in various locations such as Coimbatore, Delhi, and Chandigarh, where training in TCM practices is given at a scale relevant for SMEs.