TCM TOOLS & TECHNIQUES

TCM PRINCIPLES Resource Focus Strategic Context Future outlook Integration with other Initiatives Learning and Innovation Enterprise wide Involvement Aligned to Policy Development(PD) Process Orientation Performance Orientation

TCM PROCESSES Securing Governance Structure IT Enabled architecture for capturing Cost Information Calibrating TCM competency skills amongst employees

WAYS OF COST ANALYSIS Functional costs-material, labour etc., Departmental costs Process methods Direct and Indirect Fixed and variable-marginal and semi variable Activity based costs Capital and Revenue Total costs Lifecycle Cost of Ownership Imputed and Indeterminate

TCM TOOLS Variance Analysis Target Costing Cost driver Analysis Cost of Quality Input Output Balance Kaizen Costing Total Cost of Ownership(TCO) Activity cost management Continuous Improvement Performance Cost Management Target Costing Risk Articulated Cost structures Lifecycle Costing Customer cost & Profitability reporting Value Chain costing Capacity cost management Capital cost analysis

TCM TOOLS TCM tools are deployed in a business to accelerate ‘cost competitiveness’ by generating desirable outcomes of costs, price, value and profit. Tools also involve technicalities of measuring resources in business with both accounting and non-accounting information Entire spectrum of ‘cost management’ architecture – measuring, managing, reporting, analyzing, controlling, course corrections, predicting and estimating costs across value chain of business – is enabled by an array of TCM tools. Contemporary businesses are largely driven by several market and customer dynamics – complexity and variety in business processes, product and customer portfolios. Businesses manage ‘costs’ associated with both current and future activities and application of TCM tools scopes its deployment accordingly. TCM tools can accordingly be classified into basic (operational) and advanced (strategic). Operational tools are used for Day-to Day simplistic analysis. Leadership vision of achieving future business goals is addressed through strategic TCM tools

TCM TOOLS - OPERATIONAL Application / Scope Business Context TCM Tool Benefits Resource control Business as usual Variance analysis Resource conservation Expense control Cost driver analysis Reduction of NVA Product/Customer quality Cost of Quality Minimizing quality deviations Resource balance Input-Output balance Yield improvement Product cost improvements Profitability challenges Kaizen costing Product profit improvement Total cost of buying Total Cost of Ownership (TCO) Reduced cost of inputs Operational cost Management Activity cost management Resource focus at activity level Product/Customer Profitability Challenges Continuous Improvement Market place, customer focused assured cost management journey Overall cost optimization Linking Talent to Strategy Performance costs management People , KRIs and efficiencies

TCM TOOLS - STRATEGIC Application / Scope Business Context TCM Tool Benefits New product design & development New product introduction Target costing Optimizing 80% of product costs at design stage. Aspirational cost structure BC Plan and cost implications Risk articulated cost structure Focused strategic initiatives in high risk / high cost areas of business Total Cost Visibility over product life cycle Gaining competitive advantage Life Cycle Costing (LCC) Economic analysis of alternatives that impact current and future product costs Customer profitability Wide customer portfolio Customer cost & profitability reporting Customer cost / profitability correction Value chain of business (Design to Selling) Creating cost and competitive advantage Value chain costing Mapping cost pressures across value chain for rectification Global cost review Competitive advantage Capacity Cost Significant inputs on strategic sourcing & capacity mgmt. Optimization of overall capital Long-term competitive advantage Capital cost Different capital movement

PRICING STRATEGIES Demand (Skimming) Pricing Introduction and growth of life cycle What the market will bear Works under conditions of no competition Demand (Skimming) Pricing Maturation stage of life cycle Minimum acceptable price Appeals to a mass market with objective of sales increase Cost-plus (Penetration) Pricing

PRICING STRATEGIES Survival Pricing Market share Pricing Price remaining capacity at marginal cost Survival Pricing Used to take market share from competitors Market share Pricing Forgoes sales and profits - puts society first Social Responsibility Pricing Formula - DM + DL + 40% Rule-of-Thumb (Myopic) Pricing Cover VC only Buy-in (Foot in the door) Pricing

MEASURES OF PRICE MANAGEMENT EFFECTIVENESS Types of measures include: Percent improvement of price paid over inflation Percent improvement of price paid vs. prior year Target prices achieved Ratio of actual price change improvement to comparable market index change Purchase cost improvement as % of cost of goods sold Total delivered cost reduction Inventory cost reduction Transportation cost reduction

SUMMARY A first step to cost management is understanding the total volume of sales and relationship to suppliers costs Suppliers use different pricing strategies which may not have any relationship to actual costs A price index is a good way to understand pricing trends Different approaches to reducing costs are possible

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