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Key Topics
Requirement
Strategic Cost Management
Solution
Introduction
In the competitive marketplace, all of the spending being done by the firms and organizations are seen as investments. The organizations are making efficient decisions on their spending on the basis of their internal and external capabilities and their strategic vision for delivering the value from the investment being made. Traditionally, it was seen that the firms were under intense pressure of cutting the costs without analyzing the integration and sustainable growth of the business strategy.
There is a need for the development of multifaceted cost competence due to increased regulation, increased global competition, changing demographics, etc. It was seen that the tactical solutions used traditionally had failed to deliver the cost reductions and did not produce effective results despite considerable consumptions of the resources. Various cases saw a substantial damage to the image, corporate structure, culture and morale of the company. Therefore, it is imperative of the organization to understand Cost as a strategic issue and should strive to optimize their spending in the context of the business model. Further, a balance must be maintained between the cost and the revenue growth of the company. There is a need to scrutinize the organizational processes so as to knock down all the departmental barriers and to understand the business of the suppliers in order to improve the process. Further, the cost management techniques have to be applied for improving the strategic position of the firm and further to reduce the cost. (Cooper, R., and Slagmulder, R., 1998).
This paper will discuss the various characteristics of strategic cost management and the techniques of the activity-based cost allocation system and benchmark relating it to Adidas and its functioning in the organization.
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Discussion
Strategic cost management is beneficial in developing a framework for the organization which will review the strategic allocation of all the resources across all the operational functions of the nosiness on the basis of their core business activities and processes. It is also beneficial in improving the business and its understanding of all the cost drivers so as to maintain an improved articulation of the strategic plans regarding the cost (Shank, J., and Govindarajan, V., 2004). The following section discusses the two primary techniques of strategic cost management along with discussing the usage of these techniques in Adidas.
Activity based cost allocation system
ABC can be considered as a natural outgrowth of the competitive and complex marketplace present today. It helps in providing an approximation of the product cost rather than providing by the traditional volume based costing method. This technique of strategic cost management follows the principles that the activities lead to costs, and in order to control the costs, all the activities must be controlled. In this technique of strategic cost management, all the activities are first identified and then expense associated with each activity is clubbed together for getting a detailed activity-based expense. Then a cost driver is selected for each activity, and product cost is worked out in the end. Whereas the traditional cost accounting used to measure the cost related to the task but ABC also was taken into account the cost of not doing the task. The system then monitors every activity closely by relating the activities to their costs and bringing upon the effectiveness of the cost. ABC helps in recognizing the activities relating to special engineering, machine setups, special testing and others which cause costs to the company by consuming the resources (Kaplan, R.S., and Atkinson, A.A., 2015). It is recognized as one of the most important techniques in the recent decades due to
Increment in the manufacturing overhead costs;
No relation to the manufacturing overhead costs with the direct labor hours or the productive machine hours;
Production of some products in large and small batches respectively and
The diversity of the demands of the customers and the products.
Advantage of ABC
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1.Identification of waste
Usually, the overhead costs are seen to include few wasteful products, and these can easily be identified with the help of ABC method of cost allocation. These wastes can be removed from the business to manage effectively. -
2.Improvement of overall Processes
With the help of ABC system, the activity based costing method can scrutinize all the processes and look into the depth. This way all the processes can be seen in the bigger picture, and all the processes can be improved. -
3.Pricing is organized
With the help of ABC, the cost associated with each and every activity can be identified, and various pricing strategies can be developed and marketed. This helps in organizing the spending in an efficient manner. -
4.Can Be Applied To The Entire Business
It can be seen to be an effective method for production costs along with reducing the overhead costs by using this method. Therefore, the system of allocating cost can be applied to entire organization so as to get desired results (DRURY, C.M., 2013).
Disadvantages of Activity Based Costing
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1.High Implementation Costs
Activity based costing is not the best method to be implemented in case the overhead waste is low in the organization due to high cost of the implementation of the activity based costing. Along with its implementation, other factors have to be brought in the system for this system to be highly effective. -
2.Reduction Is Not Always Possible
In case the overhead costs are extremely high due to volume issues, it is unlikely to have any benefit to the organization. Furthermore, it is not seen to be efficient if the system is representing the small portion of the costs. -
3.Time Involved
The period involved in this system is extremely long, and it takes the time to examine all the employee actions, production processes and other aspects of business for gaining a larger view on the business issues. -
4.Data Flaws
For successful implementation of ABC, all the departments and individuals must collect and then input the data. In the case of smallest flaw, the information can be damaged throughout the process and lead to tainting of the outcome. This can be seen as the biggest risks while implementation of the system (DRURY, C.M., 2013).
Adidas and Activity based cost allocation system
Before the introduction of ABC system in Adidas, the company operated on the traditional accounting system where a large amount of manual bookkeeping work was seen to be performed in the organization. The process of accounting was driven by the external financial reporting purposes which lead to high amount of inaccuracy in the product costs.
Figure 1: Adidas' traditional accounting system
The inaccuracy caused due to the traditional costing information lead to impede the ability of the organization to compete on the basis of the pricing. Therefore, Adidas required a better costing system, which led to the commissioning of ABC system implementation. The organization wanted to get right product costs. The cost structure comprised of 15% direct labor and 85% direct materials, fixed and variable overheads. The organization had out of date planned material cost information and also lacked various working practices and lack of inventory control. Huge discrepancies were found between the accounting figures and the physical stock, and these were treated as monthly manufacturing overheads. Adidas also invested on computerization of material cost recording system for capturing the stock movement between assembly lines and warehouse and actual material and actual material quantity information. The organization also put in place, standardized procedures for inventory control and recording control and further enforced the personal key performance indicators (KPIs) of the employees. Four years were spent to implement it completely (Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013). All the operations managers who were from engineering background were seen to accept the system efficiently and quickly as compared to the accountants and adapted all the concepts of ABC and embraced its implementation for improvement of the operations. The management conveyed the concept of non-value added activities along with process mapping; this led to the identification of waste in the overall processes. The moving time was reduced due to the reorganization of the assembly line layout, and the top management was seen to become highly confident of the accuracy of their calculations and direct costs.
Figure 2: ABC System
Benchmarking
Benchmarking is considered as a process of evaluating services, products, and processes of an organization against the functions of another organization known to be leaders in one or more aspects of different business operations. It is an efficient tool for strategic cost management which help an organization in measuring the overall operational proficiency of an organization. It gives a significant understanding about how an organization compares itself with the similar function organization, even if they are in a different field or have different customers. In addition to it, benchmarking help an organization in recognizing systems, areas, and processes which require necessary improvements either dramatic or incremental improvements (Camp, R.C., 2013). Benchmarking can be of two types:
Technical Benchmarking
It is the benchmarking which is performed with the help of design staff to evaluate the capabilities of products and services, especially in comparison to products and services of the nearest competitors. If an organization is not able to gain hard data, the design efforts prove inadequate, and products and services may become a failure in comparison to the leading competitor.
Competitive Benchmarking
It is utilized by various organizations to analyze their existing position in the marketplace. Competitive benchmarking mainly compares the ability of an organization with respect to the growing competitive organization, especially with respect to more important operations, values or attributes related to the products and services of an organization. If the organization is not able to obtain the hard data, all marketing efforts prove misdirected and design efforts misguided.
Pros of Benchmarking
Performance Improvement: The main benefit of benchmarking is that it develops the base of performance improvement aimed at increasing competitiveness. By displaying how to improve competitors, benchmarking ensures the long-term survival of an organization. With the help of benchmarking the management of an organization able to identify the best practices of different business processes and determines what factors improve the existing performance.
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New Paradigms: A regular benchmarking program of an organization brings organization out of their comfort zones and offer various measurable and specific short-term improvement plans with which the organizations can significantly improve their performance. Most of the time organizations establish their objectives on the basis of established internal patterns and past trends. With the help of benchmarking, the organizations able to remove their paradigm blindness and can establish a fresh approach towards a settlement of goal. (Davies, J., ONS, D.E., Aston, J. and Sayal, H., 2015)
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Change: Benchmarking helps the organizations to focus more on creating change and also provide significant directions towards different change processes.
Cons of Benchmarking
The key cons of benchmarking are that it helps the organization in evaluating the efficiency of their operational metrics, but it is not able to properly measure the overall effectiveness of such metrics. Due to which it provide the wrong outcomes about their operational performance. Benchmarking represents the principles and standards utilize by different competitors but does not consider the circumstances under which the competitors able to obtain such standards. If the objectives and goals of the competitors were flawed or prohibited due to any available factor, an organization by benchmarking able to runs the risk of trying to ape such standards. The most important cons of benchmarking are the danger of arrogance and complacency. This will reduce the overall performance of an organization (Camp, R. C., 1995).
Adidas and Benchmarking
The strong market position of Adidas in London, United Kingdom led the company to achieve great heights and the organization grew immensely and acquired various companies and a majority stake. It also diversified itself in terms of technology by acquiring various information technology techniques in the organization. Later on, the organization became increasingly vulnerable when it started facing intense competition from other strong brands like Nike. As per the analyst, the organization failed to provide a strategic direction to the company. The operating cost of the company was seen to be high and its products were seen to be of inferior quality when compared with Nike products. Further, it was seen to suffer from the centralized decision-making process which resulted in fall of assets, and the market share was also seen to come down sharply. The top management started emphasizing on reduction in the manufacturing costs giving a new thrust for improvement in the quality control (Hinton, M., Francis, G., Holloway, J., 2000). The organization now implemented a new program wherein the benchmarking program was incorporated in the company. This led to playing a major role in the company, and the implementation of the program led to reap various benefits in the company.
The company introduced a five-stage process which involved the following activities:
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Planning: the subject to be benchmarked it determined and the most suitable data collection technique is selected.
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Analysis: The strengths of all the competitors are assessed, and the performance of Adidas is compared with its competitors like Nike for determining the competitive gap and to gain the projected competitive gap.
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Integration: The necessary goals are established based on the data collected for attaining best performance wherein all the objectives and goals of the company are integrated. New goals and objectives of the company are determined which are communicated across the whole organization.
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Action: The action plans are established and then assesses periodically for determining the achievement of the company’s objectives. Any type of deviations from the selected plan are scrutinized.
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Maturity: The superior performance level of the company is determined. The chances of successful incorporation of the benchmarking process are also determined.
Figure 3: Adidas benchmarking model
Conclusion and Recommendations
Activity Based Costing and Benchmarking enables the decision-makers of the organization to assess the degree of improvements required so as to achieve the desired results and superior performance. The Activity Based Costing (ABC) help in looking upon each and every process involved in the operational functioning of the management, thereby controlling the pricing strategies. Whereas regular and frequent benchmarking help in creating measurable and specific plans on the basis of historical performance and current reality which helps in supporting step-by-step performance improvements. Both the techniques help in gaining competitive advantage and to turn a performance deficit directly into the performance leadership.
The organizations having little experience in ABC and benchmarking system are seen to discover the best performance but overlook the already existing successful internal factors presents in the organization. Additionally, inexperienced techniques in strategic cost management lead to failure of measuring the effects of the projects in terms of benefits and costs.
In the case of Activity Based Accounting, an activity analysis must be recommended by the organization for identifying the non-value added activities. This identification of the activity analysis will help in reducing the potential for any type of cost distortions. Additionally, in the case of benchmarking, there is a need for the organization to indulge in the detailed study before implementing benchmarking so as to select the appropriate type of benchmarking to be incorporated in the organization.
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1. Cooper, R. and Slagmulder, R., 1998. What is strategic cost management?. Strategic Finance, 79(7), p.14.
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2. Shank, J. and Govindarajan, V., 2004. Strategic cost management: the value chain perspective.
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3. Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
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4. DRURY, C.M., 2013. Management and cost accounting. Springer.
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5. Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013. Introduction to management accounting. Pearson Higher Ed.
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6. Camp, R.C., 2013. Benchmarking: the search for industry best practices that lead to superior performance. Milwaukee, Wis.: Quality Press; Quality Resources, 1989.
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7. Davies, J., ONS, D.E., Aston, J. and Sayal, H., 2015. A comparison of new and established benchmarking methods.
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8. Camp, R. C., 1995. Business Process Benchmarking: Finding and Implementing Best Practices, ASQC Quality Press, Milwaukee, WI;
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9. Hinton, M., Francis, G., Holloway, J., 2000. Best practice benchmarking in the UK, Benchmarking: An International Journal, Vol. 7 No.1, pp.52–61
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