Information as a Competitive Advantage – Part 7, Cost Reduction

A cost cutting strategy is very popular in the business world, especially during recession or falling revenue periods. The Business which achieves to maintain the 'cost leader' position, has a major competitive advantage. The ability to sustain a low cost position, is a prerequisite for long term development in any highly competitive environment. To achieve that, a business has to develop core competencies in lean production, which can not easily be copied by Competition.

The use of financial and administrative accounting systems for production cost measurement and control, is a common practice.

Profitability monitoring is also enabled by accounting systems. The use of profitability ratios at the organizational level, at a profit-center level, or at the product level, is a common practice which is based on the effective recording and structured analysis of business information. Production cost analysis contributes to the product pricing strategy and profitability estimation. Use of cost accounting techniques like activity based costing, requiring monitoring the following facts:

  • Unit rate for each cost driver which is related to the production of a product or a service (eg man hour cost for a specific specialization is 35 Euro)
  • Actual consumption of each cost driver for the production of a unit of a product (eg 4 man hours are required for the drafting of a contract).

Cost drivers refer to direct production costs for which assignment is obvious, as well as indirect production costs for which assignment is done via calculations (eg estimation of a room space which is hosting a specific procedure). Beyond production cost, facts should be monitored on marketing resource consumption, logistics costs and technical support costs. Cost and revenue monitoring per Customer, allows per Customer profitability analysis. This way, priority can be given to profitable customers. Information on Customers with low or negative profitability, should be used to carry out a root-cause analysis. Use of aggregated information on production cost & revenue, instead of detailed information per product, business unit, even Customer, does not yield actionable insight on the production activity and the profitability. Many Businesses do not have sufficient information on the profitability of each product or customer group. On the other hand, detailed monitoring allows decision support for better product and customer management. The ability to capture integrated information like: speed and setup cost of each production procedure, production rates, time to conclude a production cycle, resource and activity cost, waste cost, is very important. Information capture should support the optimization and cost reduction of production processes.

Copyright 2006 – Kostis Panayotakis

We will be happy to hear your thoughts

Leave a reply