Strategic cost management is a program established businesses use in order to regularly identify and analyze cost drivers to lower costs and maximize total value. This type of program is necessary for creating budget parameters and a structure for purchasing. By implementing a strategic cost management program, businesses can not only lower their costs but also create a strategic competitive advantage.
Applications of this type of management program include creating a strategic plan, setting priorities in operations and ensuring it is using limited resources appropriately. Developing strategies based on a cost management program helps businesses achieve its objectives while saving on costs. It also provides management enough information to determine if a new business model should be implemented.
Framework of strategic cost management programs generally include three components to be analyzed. The first component includes its core functions, in which management must define the nature of the business and its courses of actions for planning, product development, and research and development. The next component focuses on the added value of activities such as customer service, technical support, marketing, sales and manufacturing. The last component of the framework are the activities that support the core activities. These include IT, human resources, general administration, accounting and finance.
Steps for strategic cost management include reviewing the strategies of the business to develop a plan to encourage increased internal communication and identify any performance gaps. Afterwards, management should train team members to implement the strategic management plan. The management team should then dive into fact finding by gathering data, interviewing employees, conducting surveys and developing benchmarks. The findings should then be analyzed and recommendations for changes to be made. If changes are necessary, an employee should be made accountable for overseeing each change with responsibilities clearly defined, as well as for making sure there is a system in place for continuous improvement.
Tips for having an effective strategic cost management program include having the full support of top management, integrating information systems to streamline processes and implementing effective cross-functional teams. Management should understand the importance of the program and how their role adds value, otherwise they may be reluctant and uncooperative during the implementation and continuous improvement stages. Information systems are used for quickly gathering and analyzing data, as well as for making sure that the right information gets to the right people in a timely manner. Using cross-functional teams is beneficial when cost drivers affect more than one department, as these departments must work closely together to regulate them.