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Chennai, Dec 8: Corporates must adopt an integrated approach to cost management and get over the fixation with activity-based costing which is only an economic map of an enterprise, management guru Dr Robert S Kaplan of the Harvard Business School said on Tuesday.
Delivering the keynote address at the CII-organised two-day Second International Conference on Total Cost Management-- The Tool for Survival and Growth-- here on Tuesday, Kaplan said it's time corporates began talking about application of activity-based costing techniques over the entire spectrum of organisational activities including product mix, functional areas, operational needs, customers' requirements and so on.
Stressing the critical role of understanding capacity, he said a multi-dimensional reporting system had to be put in place to ensure that resources of the company were managed at least cost.
Current trend worldwide, Kaplan said, was to take an integrated view of the entire cost management process and leverage capacity (alsoreferred to as resources) in the best way to achieve strategic goals.
The activity-based costing model could create unused capacity but there is a need to move to customised operations to exploit the capacity that has been created. While adoption of improved management practices like total quality management could improve operational efficiency, it cannot help cut costs.
According to Kaplan, during a recessionary period resource costs are the same, but activities are down. Hence activity-driven cost rates are up and these lead to price increases.
But the organisation can also increase prices by 50 to 100 per cent and not worry about costs or losing market shares by catering to highly customised products. However, Kaplan said unless unit costs are cut by measuring estimates of capacity in standard unit of time for each activity, the benefits of using resources optimally would be dissipated and excess capacities could increase costs.
But the integrated systems approach also presents a difficulty.Managements are unwilling to see unprofitable products, poorly designed products, inefficient processes or excess capacities or even bad customers. They tend to take productive action only when the bottomlines are hit. Even financial institutions resist new ideas.
Kaplan suggested that the activity-based costing model could be implemented on new enterprise resource planning packages, which will allow things to be done much faster. The packages ensure real-time access to information, but the operational flow system of the organisation must be able to dial up the activity-based costing system which must be updated to meet all requirements of multi-dimensional reporting.
Sundaram Clayton managing director Venu Srinivasan in his address pointed out that project management in the country was very weak, adding up to cost-overruns owing to delays in execution of projects. Also, the domestic industry lacked cost ownership and leadership from the top to stem the problems of cost mismanagement. The cycles of newproduct development, engineering management and delivery were all ignored, which added to costs because of delays and a lack of commitment. Although concepts like total quality management and total cost management are being talked about, companies, by and large, ignored quality and costs.
The domestic industry has also not bothered much with time management as it has not yet felt the need to market with speed. Time management has an immediate and significant impact on costs.
Srinivasan also felt that before the activity-based costing or other cost management systems are put in place, workers must be taken into confidence and only if they are involved with the concept from the very beginning, organisations can expect some results. This is crucial especially in times of recession when workers need to be deployed efficiently tocontrol costs. Additional excess capacity caused by recession must be used efficiently to bring about value-addition, which will overcome problems of excess capacity.
Copyright© 1998 Indian Express Newspapers (Bombay) Ltd.
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