What is strategic cost management?

Strategic cost management is a program companies use to regularly identify and analyze cost drivers to reduce costs and maximize total value. This type of program is necessary to create budget parameters and a framework for purchases. By implementing a strategic cost management program, companies can not only reduce their costs but also create a strategic competitive advantage.

Applications of strategic cost management include creating a strategic plan, prioritizing operations, and ensuring that you are using limited resources appropriately. Developing strategies based on a cost management program helps companies achieve their goals while saving costs. It also provides management with enough information to determine whether a new business model should be implemented.

The structure of strategic cost management programs generally includes three components to be analyzed. The first component includes its main functions, in which management must define the nature of the business and its lines of action for planning, product development and research and development. The next component focuses on value-added activities such as customer service, technical support, marketing, sales, and manufacturing. The final component of the strategic cost management framework are the activities that support the core activities. These include IT, human resources, general administration, accounting and finance.

Steps to strategic cost management include reviewing the company's strategies to develop a plan to encourage more internal communication and identify any performance gaps. Subsequently, management must train team members to implement the strategic management plan. Next, the management team must delve into fact-finding by collecting data, interviewing employees, conducting research, and developing benchmarks. Results should be analyzed and recommendations to make changes. If changes are required, an employee should be responsible for overseeing each change with clearly defined responsibilities, as well as ensuring that a system of continuous improvement is in place.

Tips for having an effective strategic cost management program include full support from senior management, integrating information systems to streamline processes, and implementing effective cross-functional teams. Management must understand the importance of the program and how its role adds value, otherwise they may be reluctant and uncooperative during the implementation and continuous improvement stages. Information systems are used to quickly collect and analyze data, as well as to ensure that the right information reaches 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 together to regulate them.