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Today, it is obvious that the customer is king. Perhaps even more telling is the fact that customers have the right to choose among those who

probably create value for them; and never like to be dominated. Earlier, the downside was that the customer paid for the inefficiencies of the manufacturer. In the present day, however, it is a totally different scenario where the manufacturer’s survival depends on how efficiently he can fulfill the customer value. That indeed has been a long journey in time.

Cost management, can thus be viewed as creating relentless customer value. Besides focussing on economic value creation, cost management uses methodologies at various stages of value creation - from design to decline, womb to tomb or cradle to grave.

Changing cost perspective Stage 1: Cost reimbursement perspectiveLife used to be simple, until Alexander

Parkes introduced a new material called Parkesine in 1862. Since then, we have come a long way - from Parkesine to bakelite to plastics; and from PVC to polymethyl methacrylate to Kevlar. Though the product range became narrower; competition was prosaic, and profit making too simple. Further, the cost was passed on to the customer, where apart from reimbursing the costs, he bestowed the manufacturer with profit.

Here, the cost perspective was: cost + profit = sales

Thus, not only did the hapless customer reimburse the cost, but he was also made to pay for the manufacturer’s inefficiencies. But no sooner than later the party was over. As competition intensified, more and more suppliers gained entry into the marketplace, and sales price got out of control. Having got used to a level of ‘extravagance’, the cost too was out of sync. This resulted in a lower margin or even loss. As a result, this led to stage 2.

Stage 2: Cost reduction perspectiveNow, the cost perspective changed to: sales - cost = profit / lossConsequently, the pressure to keep the cost

under check, led to cost cutting, cost control and cost reduction.

Cost cutting is related to as, ‘Not having more than three cups of tea per day, and sharing half a cup among three employees - that too once in three days’. R&D, training, advertisement & sales promotion and employee welfare were the areas, considered easier to ‘cut’ cost. Though it leads to perceptible quick results in the short-run, the long-term implications are negative. Thus, cost cutting is all about cutting corners. Although, it seems to yield great results in the short-term, it tends to get ‘brutal’.

Cost control is known to be more scientific. There are many routes to control cost; but the methodology is a typical feedback loop (Figure 1). Cost control is conformance to plan. As long as the actual performance is within the set standards, things are deemed to be under check. This methodology is appropriate for micro-level control. It brings stability to the approach towards

Cost management

A perspectiveOver the years, many different methods have been developed for analysing and solving problems in manufacturing.

In the process, organisations have designed aggressive cost management practices to maximise their Return On

Investment (ROI). The first article of our series on cost management explores the perspective of cost management with

respect to the plastics and polymers industry. Practical examples of cost management in plastic processing together

with flow charts have also been included. The subsequent series will accentuate the focus as well as methods of cost

management. Read on…

M Hariharan

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cost. However, it leads to two dangers: One tends to get complacent, “Do

not disturb the status quo, and when things are under control, why tweak it?”

One also tends to get localised and gets into a micro-level analysis; but loses sight of the overall picture. The macro picture of the business thus gets lost in the process

Cost reduction, on the other hand, is questioning the base itself. It thus overcomes the complacency of cost control. However, for effective cost reduction, there should be a mechanism of cost control in place. Cost reduction calls for relentlessly questioning the purpose of incurring a cost. There are several quality tools that facilitate cost reduction to a great extent. Approaches like 3M (Muda, Mura and Muri), 5Ws & 1H (5 Whys and 1 How follows), or any waste elimination / waste reduction methods can provide enormous cost reduction. Cost reduction, too, is more scientific, and has dangers to it as well. These include:

A tendency to get localised. Just as in the case of cost control, one tends to get into too much of a micro-level analysis and lose the overall business perspective

A thin line of difference between cost reduction and cost cutting. If it loses the ‘science’ it becomes ‘brute’ cost reduction.

In short, all the three approaches lose the macro view of the business perspective.

Stage 3: Cost management perspective

Here, the competition is further intensified. As more firms enter the market, it leads to a further decrease in selling price. Competitors too start offering superior functionality and quality, but at the same price level or reduced prices. In such a scenario, one needs more money to invest in operations as well as to upgrade and compete. And, when resources become scarce, one approaches

the capital market to tap the limited resources available with the investor. Plastics and polymers is not the only industry that approaches the investor. In fact, competing firms from different industries also reach out to them.

Further, the common investor is least concerned about the type of industry - be it steel, dot com, etc. Rather, he invests in ‘that’ firm in ‘that’ industry that promises return, rise as well as realisation with acceptable associated risk (four Rs of investment). Unless the best combination of four Rs is given, one cannot tap the limited money on offer. Further, unless one promises ‘that’ level of profit, one cannot survive.

Now, the cost perspective changes to: sales - profit = costHere, the cost is ‘allowable’ cost. It is no

more a cost reduction game but a profit management game. And, to manage the profit, cost has to be contained within the range of sales and profit.

Definition of cost management

Cost management is any cost improvement that creates and sustains value for the customer better than the competitor (Figure 2).

Perspective of cost management

Customer is at the centre

of cost management. The perspective of cost management is to create customer value. A firm has to find ways of creating more value for the customer at lesser cost.

The following is a perfect example of this concept. Refrigerators, till recently, had handles to open the door. And, in most homes, a dirty cloth used to be wrapped on the handle so that the enamel does not peel off. In the current models, however, the handle is absent. Instead, there is a groove. This calls for a change in the mould, which in turn amounts to additional cost. But, have you thought about the cost reduction that can happen through the chain from manufacture to after-sales service.

Material cost: Handle cost is eliminated

Vendor-related cost: Vendor is no more required; no more meetings, no more follow-ups, no more purchase orders

Machining cost: Part is eliminated; so no need to machine

Process waste: Drilling, attaching the handle, breakages, spilling of chips, collecting the chips, etc are eliminated

Cycle time reduction: Set of processes to move the material, attach, move the work in process, line stock, inspection, etc, are eliminated

Stock keeping (RM and WIP): RM stock and the WIP stock (after and before handle fixing) is eliminated

After-sales service (process and stock):Customer calls, complaints, visits by service personnel to the customer and stocking the handles at service centres are eliminated

Base - Standard, Target, Norm, Budget, Plan

Feedback of actuals

Comparison

Variance analysis

Corrective action

Figure 1: Cost control - feedback loop

Cost management is any cost

improvement that creates and

sustains customer value bettr than the

competitor

Perspective

Customer value

propostion

Economic value

creation

Enablers of cost

management

Focus Methods

Figure 2: Definition of cost management

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Packing cost: As the handle protrudes; it had to be packed safely to protect the handle. Now, the extra packing material to take care of the uneven front side of the fridge is eliminated

Warehousing: 4 cm per fridge. A lot of space can be saved by keeping 100 rows of them in a warehouse

Improvement in automation: A circuitous process is eliminated, which in turn facilitates automation

Aesthetics: It does look a tad better

Thus, one can have a product with the same value proposition (may be higher - if the aesthetics is considered seriously) at a much lesser cost. As far as the customer is concerned, he pays for the value, which he derives from the product/service.

His perspective is: value > price But, if one has to survive, the reality

has to be value > price > cost Simply put, cost improvement is

not cost reduction. Rather, it is value creation. And, there are five means of cost improvement. These include:

Keeping costs constant and increasing customer value; for example, finding

alternative uses for the same product Reducing cost and keeping customer

value constant; for example, the refrigerator handle

Increasing cost a bit and increasing the value a bit more; for example, LG Golden Eye -the cost incurred for the product versus the value proposition for the customer

Reducing cost and increase Value; for example, alternative packing materials

Reducing cost more and reducing value a little. This is normally not acceptable. However, it is appropriate if one seeks to segment the market and plans to serve a lower segment of the market

Perspective of cost management for plastics & polymers

A competitor is not necessarily the one who manufactures goods similar to what his counterpart manufactures. On the contrary, a competitor is anyone who provides the same or similar value to the customer. That is why polymers have become a fast expanding field, as it drives out other materials like steel, glass, cement, etc.

Supply chain: Any initiative taken by the firm should have a cost management perspective. While choosing the technology for processing, the focus has to be on creating customer value, but at the least possible cost. For example, PET bottles are manufactured in two ways:

One-step method: In this method, the entire process - from PET granule to finished bottle - is completed on one integrated machine. The injection-moulded preform is then withdrawn from the injection cavity while still hot enough to be stretch blown to form the bottle.

This method is appropriate where the market is localised, but large. Further, as the geographical reach is lesser, the filled bottles are transported within a manageable radius.

Cost management perspective: The processing cost is lesser, while the transportation cost does not pinch. Hence, the total cost of a bottle of water delivered is lesser.

Two-step method (Figure 4): Here, the preform is first injection-moulded, and then reheated and blown on the second. Further, it uses two separate machines: an injection moulding machine for making the preforms, and a reheat blow moulding machine to reheat the preforms from cold and blow the bottles.

This method can be incorporated in places where the market size is small locally. Therefore, one has to reach a wider geographic area to attain a critical size of market.

Cost management perspective: The processing cost is higher, while the transportation cost is much lower. As the preform is made in one place, it is transported to another local area where the second stage happens. Further, transporting preforms is much cheaper than transporting full-blown bottles.

If the cost management perspective is not considered, one could end up using the wrong technology for the wrong market. Besides, whatever was saved on the processing cost using the one-step method, would have been blown up through high transportation costs.

Thus, it is essential to choose the right method, and provide the same value for the customer at a lower supply chain cost.

Civil engineering: The customer perception is that civil engineering traditionally looks to reducing material costs. As it considers plastics and polymers costly, it prefers traditional

Figure 3: Small change in the design leading to higher cost savings through the chain

Figure 4: Two-stage PET bottle making (Kanplas)

Figure 5: Decks made of wood-plastic composites. Source: Trex Co Inc

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materials such as concrete and steel with low material cost.

Cost management perspective: Though the traditional materials have lower material cost, these have high processing and installation costs as well as limited possibilities of processing. On the other hand, plastics components can bring lower ownership costs - initial cost of purchase coupled with processing cost at the customer’s end. Also, the installation and maintenance costs are less compared to the traditional materials. Further, these have features like better productivity, lightness, greater design freedom compared to that of wood & other similar materials, corrosion resistance, insulating properties, etc.

Hence, if polymer has to break into this domain, the customer has to be sensitised to the cost management perspective.

Decor: Customers perceive plastics and polymers to be cheap, as well as low on aesthetics.

Cost management perspective: Unlike wood, composites of wood and thermoplastics are resistant to rot & insects, and require very little maintenance. Unlike extruded plastics profiles, wood composites are stronger and more rigid.

Composites can be fabricated with aesthetically pleasing surfaces and colours.

The architect can find higher value in composites of wood and thermoplastics than simply plastics or wood. Composites can also find wide acceptance in strong and durable outdoor decks and fences, window and door profiles, spas and marina boardwalks (Figure 5).

Aerospace: In this industry, customers have several impending questions about the flame- or chemical-resistant properties of plastics. In reality, plastics is creep- and fatigue-resistant over a wide temperature range, as the materials are relentlessly exposed to extreme temperatures. Plastics also has dimensional stability and is resistant to abrasions.

Cost management perspective: Plastics, along with flame retardant additives can be considered to be solutions. But, they tend to get under the scanner due to suspected environmental and health hazards. Polymers like PEEK, PEI, PPS, PPSU, PES, PVDF and LCPs are inherently flame retardant. PEEK, for example, provides all the stated qualities. However, these materials are usually more expensive than non-inherently flame retardant plastics and the additives.

These can provide the cost management solution to aerospace, wherein the application requires both high performance and low flammability (Figure 6).

White goods: Polymers help in the integration of functionalities, with substantial reduction of part number. This leads to assembly cost reduction. Bulk colouring and in-mould decoration also leads to reduction of the finishing costs. Further, tooling costs are lower than that of metal. In fact, weight reduction, ease of production and noise reduction at a lesser cost, creates tremendous customer value. Plastics and polymers have replaced quite a bit of metal from the white goods. Thus, the cost management impact is quite high in this industry.

ConclusionTo summarise, cost management is all

about relentless customer value creation.

Further, it focusses on creating economic value for the investor. It also validates the perspective of cost management in terms of bottomline improvement.

Cost management uses various methodologies, tools and techniques that integrate seamlessly to facilitate the perspective and focus of cost management. It is a never-ending journey, which calls for the survival of the fittest.

“In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment”

- Charles Darwin, The Origin of Species, 1859

M Hariharan is the Director of Savoir Faire Management Services, Mumbai. He has been helping firms across sectors in identifying

their core problem, aligning their processes according to customer needs and enable sustenance of the efforts. He preaches what he practices and has successfully trained more than 5,000 executives on these aspects. E-mail: sfgroup@vsnl.com

Figure 6: These interior components provide a weight reduction of approximately 50% and reduced part costs of up to 75% compared with the replaced aluminium parts. Source: Victrex PLC