Cost Control Presentation

8/2/2019 Cost Control Presentation

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THE ROLE OF

HUMAN RESOURCE

DEPARTMENT INORGANISATIONAL COST

CONTROL AND REDUCTION

By Dr Aaron Koo


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All businesses are experiencing increasing

competitiveness as a result of one or a

combination of the following factors:

1)scarcity of resources,

2)sophisticated customer needs,

3)technological advancements,

4)social and economic factors.

Business competition


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To be competitive, a business has to build its

competitive advantage or core competency . . . .

and sustain it as well!

Business competition

Sustainable competitive advantage depends on

the company size in the targeted market, on

superior access to resources or customers, and

on restricted options of competitors.


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- is an environment characterised by intense and rapid

competitive moves, in which competitors must movequickly to build advantages and erode the advantages of

their rivals.

- Instead of creating sustainable advantages, strategists in

hypercompetitive environments should focus on

developing a series of temporary advantages. The

rationale behind it is that there is no sustainable

advantage competitors will move quickly to break andreplace the competitive advantage.

- Eg Microsoft, American Airlines (early stage)

*DAveni,Hyper Competitive Rivalries, 1995]

Hypercompetition


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Competitive Advantages

Lower Cost Differentiation

Broad Cost DifferentiationTarget Leadership

Competitive

Scope

Narrow Focus

Target

Types of competitive advantages (Porter)


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IT IS NOT A PROGRAMME!!!

Not an ad-hoc approach during economic

downturn!

It is a way of life to stay competitive and to stay

alive!

Planned long term approach and address in

strategic planning

Cost Control & Reduction


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It is the prevention of waste within the existing

environment.

It is the procedure whereby actual results are

compared against the standards so that waste can be

measured and where appropriate action can betaken to correct the activity.

It is the process of regulating the action so as to keep

the elements of cost within the set parameters.

This process is exercised by setting the norms,

targets based on past actual.

It is the process of utilizing the available resources

economically.

Cost Control


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Cost Reduction

This involves the examination of the purposes forwhich costs are incurred and, by a variety of means

eliminates or reduces the reasons for spending.

The existing standards are closely examined at the

broad and detailed levels with a view to

improvement.

It seeks ways to achieve a given result through

improved design, better methods, and newcoordinated set of contingent actions to achieve the

dual objective of reducing overall costs without

corresponding loss of efficiency.


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Importance of Cost Control

& Cost Reduction

Strengthen the competitive muscle by cutting away

fats

Better utilization of resources

To prepare for meeting a future competitive position

Reasonable price for the customers

Firm standing in domestic and export markets.

Improved methods of production and use of latest

manufacturing techniques which have the effect of

rising productivity and minimizing cost.

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Cont

By a continuous search for improvement creates

proper climate for the increase efficiency.

Improves the image of company for long-term

benefits. Improve the rate of return on investment.

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Cost Control v/s Cost ReductionCost Control Cost Reduction

1. It is the competitive analysis of actual

results with established norms.

This process finds out the substitute by

finding new ways or methods.

2. The variances are appraised and

reported and necessary course of action

will be taken to revise norms, standards

etc.

The necessary steps are taken for further

modification in the method.

3. It starts from established cost standards

and attempts to keep the cost of operations

of a process in line with those standards.

It challenges the standards forth-with and

attempts to reduce cost on continuous

basis.

4. The emphasis is on the present and past

behavior of costs.

The emphasis is partly on the present costs

and largely on future costs.

5. It attempts to achieve the best possible

results at the least cost under given

conditions.

Under this no conditions are considered to

be permanent where a change will secure a

lowest cost figure.

6. Cost control is a preventive function. Cost reduction is a corrective function.


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Cost Control Process

Steps involved in designing process of cost controlsystem:

Establishing norms: To exercise cost control it isessential to establish norms, targets or parameters

which may serve as yardsticks to achieve the

ultimate objective. These standards, norms or targets

may be set on the basis of research, study or pastactual.

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Cont..

Appraisal: The actual results are compared with theset norms to ascertain the degree of utilization of

men, machines and materials. The deviations are

analyzed so as to arrive at the causes which are

controllable and uncontrollable.

Corrective measures: The variances are reviewed

and remedial measures or revision of targets, norms,standards etc., as required are taken.

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Cost Reduction Process

The achievement of real and permanent reduction in

the unit cost of goods manufactured or services

rendered without impairing their suitability for the

use intended. Reduction in the cost of product must be brought

about by the elimination of wasteful and

unnecessary resources employed in its design,

manufacture, sale and distribution.

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Sequence of Steps in Cost Reduction

Process

1. Analysis

2. Examination -

a) Vital activitiesb) Secondary activities

3. Developing solutions

4. Selecting a Solution

5. Obtaining Agreement

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Cost Reduction

Cost can be reducedthrough

Reduction (prod time, waiting, inventory)

Elimination (waste, bottle necks, barriers)

Modification (system, design)

Innovation (Re-engineering, methods of

producing, equipment, tooling)


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Identifying Areas for Cost Control &

Reduction

1) Understanding cost concepts and behaviour

2) Analyse individual cost items systematicallyusing value chain

3) Identify areas to target for cost control orcost reduction


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Costs Concepts

Controllable vs non-controllable costs

Avoidable vs unavoidable costs

Discretionary costs - costs resulting from strategic and

tactical decisions of managers and has no directrelationship between the level of spending on an

activity and active production levels

Sunk costs - costs of resources that have already been

committed

Opportunity costs - the costs of foregoing the next best

alternative course of action


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Variable Cost Graph

Cost

Volume

Costs Behaviour


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Fixed Cost Graph

Cost

Volume

Fixed Cost

Relevant Range

Costs Behaviour (Contd)


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Mixed Cost Graph

Cost

Volume

Cost

Volume

Costs Behaviour (Contd)


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Identifying Areas for Cost Control

or Cost Reduction

If avoidable, to reduce. If unavoidable, to control

Assign cost control or reduction activities to those

individuals who have direct control over them

Minimise discretionary costs, and forget about sunk

costs

Weigh and focus on opportunity cost

Generally, variable costs are easier to reduce than fixed

costs. Therefore, reduce variable costs and control

fixed costs

P V l Ch i


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Porters Value Chain

PRIMARY

ACTIVITIES

Infrastructure

HumanResource

Management

Technology

Development

Procurement

Logistics Operations Marketing/

Sales

Service

SUPPORTACTIVITIES

Cost control through comparing actual to standard

Cost reduction through reduction, elimination, modification or innovation


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Product improvement (value analysis and re-

engineering) especially at design stage (design for

manufacturing) Product standardisation and rationalisation

Cost of quality and quality improvements

Process improvement and do it right the first time

approach Use of technology to improve processes or reduce

labour usages

Financial and working capital management to

minimize cost of borrowings

Some Techniques and Areas for

Cost Control & Reduction


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1. Freeze in hiring .

2. Personal awareness to cost cutting.3. No bonuses or pay hikes.

4. Night home drops and pick ups are charged.

5. Reducing off-shore trainings.


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1. Reducing work hours for trainees.

2. Delay in freshers joining the company.

3. Paycut of 5%.

4. Annual shutdown of a week extended to a

fortnight


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1. Shutting down older fabrication units.

2. Freeze in hiring.

3. Reduced travel expenses, using video chats & voice

chats as alternatives.

4. Reducing/reusing inventory.

5. Increasing personal awareness.

6. Avoiding discretionary expenditures.


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1. Introduction of new cost effective technology.

2. Process re-aligning.3. Re-engineering of product.

4. Restructuring of workforce.

5. Rationalising input costs.


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Precautions in Implementing Cost

Control and Reduction

Cost control and reduction must be appropriate and

reasonable to the organization.

Their introduction and implementation must beplanned soundly.

Resistance by employees to control and reduce costs.

Usually because the nature and purpose have not

been properly explained to them, and they feelthreatened by the change.

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Cont

The success in one area is not severely hindering or

damaging other aspects of the business or that

success in one area is not being eroded by failure in

another area.

The cost control and reduction measures should not

have any undesirable effects on external parties e.g.,

suppliers of raw material, buyers of finished productsetc.

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the most important resource of any nation

must be the talents, skills, creativity and the will

of its people . . . . . Our people is our ultimate

resource. Without a doubt, in the 1990s andbeyond, Malaysia must give the fullest emphasis

possible to the development of this ultimate

resource.

Tun Dato Seri Dr Mahathir Mohamad , 28 February

1991, after unveiling the blueprint for Vision 2020

The Importance of Human Resource Function


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HR functions consisted of mainly 3 sections :

Human resourcing which includes the planning,

recruitment, selection and termination of human

resourcesEmployee development which encompasses the

training, career development, performance

measurement, compensation and rewards of human

resourcesEmployee relations which deals with issues like

discipline, unions, employees welfare and health and

safety of workplaces

Human Resource Functions


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HR costs are related to these 3 functions:Human resourcing

- cost of hiring (advertisements and recruitments)

-job fit (cost of wrong person on wrong job, wrong person

on right job, and right person on wrong job)

-cost of bad hires (loss of productivity, cost of rejects and

wastages, cost and time in training and counselling, cost

of removal and replacement, cost of lost opportunitiesand lost customers, etc)

-other than cost of hiring (unavoidable, hence to control),

others are avoidable and can be minimised by using

psychometric profiling tools!

Cost of Human Resources


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Human resourcing (Contd)

- Many psychometric profiling tools, eg Myers Briggs,

Thomas International, The Big 5, Unique Profiling etc

- Be aware of the pitfalls of most tools:

a) instrument is based on one or two theoreticalconstructs

b) Putting a number on the typology of personality

c) Assuming that our behavior pattern is constant

and is not affected by the environmentd) Classifying human differences using polar traits,

type nouns and adjectival descriptors



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Human resourcing (Contd)

e) Assuming that human being is simple and their

behavioral pattern is recognizable, predictable and

is consistently persistent across situations and

over timef) Limit its interpretation of personality to positive

traits

g) The report of psychometric instrument is not free

from human bias- Overall Unique Profiling has an edge over the rest and

is reasonably objective and accurate. Cost is much

lower than the rest.



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Employee development

- Cost and time of identifying performance gaps and

training needs

- Time and cost of training

- Time and cost of designing and implementingperformance appraisal, compensation and rewards of

human resources

- All unavoidable, hence can control only

- May use certain psychometric profiling tool to assistin identifying training and especially individuals

growth needs

Human Resource Functions (Contd)


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Financial perspective

To succeed financially,

how should we appear

to our shareholders?

Customers perspective Internal businessTo achieve our vision, Vision & processes

how should we appear Strategy At what business

To our customers? process must we excel?

Learning & growth

To achieve our vision,

how will we sustain ourability to change and

improve?

Balanced Scorecard - Kaplan & Norton


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Employee relations

- Cost ofemployees welfare

- Cost and time of unhealthy employees

- Cost of safety of workplaces

- Above costs can be categorised as statutory orvoluntary

- Statutory requirements: EPF, SOCSO, OSHA, annual

leave, maternity leave, public holidays etc

unavoidable and non-controllable- Voluntary: Insurance, medical and hospitalisation

benefits for employees and families, paid vacation,

additional annual/maternity leave etc all are

avoidable and discretionary.



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Employee relations (Contd)

- Voluntary benefits

- Some are expensive eg medical and hospitalisation,

paid vacation, additional leave etc; whereas some

are relatively cheaper, eg insurance- Benefits of insurance: Containment of costs via a)

collective bearing of risks, and b) increase perceived

value of benefits

- HR initiative for the employers. It is an employeefriendly gesture which promotes a feeling of

satisfaction and helps in reducing attrition



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- Types of insurance and their benefits:

- Many risks can be offset by buying insurance

Midsize and large employers can buy insurancemore cheaply than can individuals. This makes

employer-sponsored insurance a preferred

benefit

- Group term life insurance is one of the oldestand most widely available employee benefits.

Most full-time employees of medium/large

private firms are covered



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- Types of insurance and their benefits:

- Medical and hospitalisation insurance is a

preferred benefit due to ever increasing cost ofhealthcare. Most employees and their

immediate families get basic or major medical

and/or hospitalisation coverage. Research shown

that those with these benefit will do regularcheck up more often. Healthy employee means

productive workforce!

- But these benefits cease once the employees

leave the employment!



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Leveraging on Insurance to Contain Cost

3 ways HR can help to control and reduce cost

- Protecting the interests and assets of the company

with general insurance on assets and fidelity

insurance on employees

- Avoiding unpleasant surprise and upsurge of costswith group life, hospitalization and medical

insurance

- Keeping cost of employees benefits low by

increasing the perceived value of benefits withinsurance, to leverage on the group coverage which

is not available to employees


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Thank you

Questions & Answers Session

Documents

Cost Control Presentation