1 MBA 710 Strategic Cost Management Introductory comments on business, managerial information and cost control

2 Business Made Simple Managers need to know  What do the customers want?  What will they pay for it?  What will it cost to provide it? Costly mistakes can be avoided with this information.

3 Information is the Key to Success “To manage in the future, executives will need an information system integrated with strategy, rather than individual tools that so far have been used largely to record the past”  Information should answer the key question What should I do?  Not What are the results of what I’ve already done?

4 Information is the Key to Success Must develop an integrated cost / quality / functionality measurement system  Traditional accounting information is not sufficient Backwards looking Fails to measure important items Much important information is not quantitative Designed to meet reporting requirements, not management needs

5 Types of Information Foundation information  Basic diagnostics May indicate something is wrong, but not why Basic financial ratios Benchmarked Productivity information Productivity of key resources Concern should be for total productivity Benchmarked

6 Types of information Competence information Indicates where a business has a leadership advantage Innovation is the most important core competence  To win, you have to be the best at something Resource allocation information How to best use the resources available What if it fails to produce the intended results? What if it is more successful than we imagined?

7 Effective Cost Management Cost management is most effective at the development stage  About 85% of costs are committed to at the development stage It is too late to effectively manage costs at the production stage All links in the value chain must be managed  Suppliers you customers

8 Cost Commitment and Incurrence Cumulativecost IdeaR & D Pre- production Production Post- production Cost incurrence Cost commitment

9 Return on Management Management effort is a vital resource Return on management Organizational productivity Management time and attention invested  Stay focused on strategy Do not diffuse talent over too many opportunities

10 Return on Management  Channel energies into the correct projects Detrimental capital budgeting  Pick important measures Should reflect critical success factors Avoid measures that are interesting but not useful  Can managers recall their key measures? Maximum of seven measures

11 Return on Management  Does everyone watch what the boss watches? Are there common goals within the organization?  Conflicting goals may be beneficial “Stretch” goals with adequate resources Stimulate creativity  Reduce paperwork and the processes that tie managers down Distinguish between useful and interesting information