In these tough economic times reducing costs has become an integral part of survival strategies. In the cacophony of cost reduction what is often missed is that this could lead to lower quality or deficiency in services. Take the example of cost cutting in manpower. While this might save immediate recurring costs, losses of human assets are not easily replaceable. Similarly in the production of manufactured goods, the temptation to reduce input materials saves money but can give a feeling of a cheap quality good. The potential of long term loss is so well stated by Aldo Gucci:
“The bitterness of poor quality is remembered long after the sweetness of low price has faded from memory.”
A cost is an expense incurred in the form of money, time or resources to procure an item or a service. Since cost plays an important role in any enterprise; in the calculation and determination of profits, Cost Management plays an important role in business.
We use this term “cost management” very widely today, even though there is no uniformity in its definition. Usually we refer to cost management as a collection of management decisions and control functions which influence costs in terms of money or capital. Within it the continuous process of revenue enhancement and expenditure in a timely fashion is also clubbed. Many Organizations believe that by having strong cost management policies and procedures make them cost efficient.
This is because they equate cost efficiency with cost management. While a lot of companies can have great cost management, it may not follow that they are cost efficient companies. What does one mean by that?
I would like to explain the difference between the two by asking this question; “what is the difference between leadership and management?”
Though there is many an answer, one good way of differentiating the two is that management is linked with tasks or transactions while leadership has a lot to do with a vision. Cost efficiency similarly is a mindset, a desire for more with a lesser cost, while cost management is a wish to continue the same with less.
Take the case of Toyota and the Lean Manufacturing concept. Is Lean management a transactional way of manufacturing or is it a philosophy? While many corporate have tried to emulate the philosophies espoused by Toyota, how many have succeeded?
"Many good American companies have respect for individuals, and practise kaizen and other TPS tools. But what is important is having all these elements together as a system. It must be practised every day in a very consistent manner-not in spurts-in a concrete way on the shop floor."
Fujio Cho, President, Toyota Motor Corporation.
One may wonder is this not the same as “frugal engineering”?
http://sunilmohal.blogspot.com/2008/07/frugality-at-work.html
Frugal Engineering as explained by Carlos Ghosn is the ability to engineer products at lower costs. However this concept is not really focussed on the complete ecosystem, but is a subset. When we talk of cost efficiency we are now talking of “Cost Efficient Leadership”, a vision for the complete organization. USA Today said it best
“Toyota is as much a state of mind as it is a car company”
“The bitterness of poor quality is remembered long after the sweetness of low price has faded from memory.”
A cost is an expense incurred in the form of money, time or resources to procure an item or a service. Since cost plays an important role in any enterprise; in the calculation and determination of profits, Cost Management plays an important role in business.
We use this term “cost management” very widely today, even though there is no uniformity in its definition. Usually we refer to cost management as a collection of management decisions and control functions which influence costs in terms of money or capital. Within it the continuous process of revenue enhancement and expenditure in a timely fashion is also clubbed. Many Organizations believe that by having strong cost management policies and procedures make them cost efficient.
This is because they equate cost efficiency with cost management. While a lot of companies can have great cost management, it may not follow that they are cost efficient companies. What does one mean by that?
I would like to explain the difference between the two by asking this question; “what is the difference between leadership and management?”
Though there is many an answer, one good way of differentiating the two is that management is linked with tasks or transactions while leadership has a lot to do with a vision. Cost efficiency similarly is a mindset, a desire for more with a lesser cost, while cost management is a wish to continue the same with less.
Take the case of Toyota and the Lean Manufacturing concept. Is Lean management a transactional way of manufacturing or is it a philosophy? While many corporate have tried to emulate the philosophies espoused by Toyota, how many have succeeded?
"Many good American companies have respect for individuals, and practise kaizen and other TPS tools. But what is important is having all these elements together as a system. It must be practised every day in a very consistent manner-not in spurts-in a concrete way on the shop floor."
Fujio Cho, President, Toyota Motor Corporation.
One may wonder is this not the same as “frugal engineering”?
http://sunilmohal.blogspot.com/2008/07/frugality-at-work.html
Frugal Engineering as explained by Carlos Ghosn is the ability to engineer products at lower costs. However this concept is not really focussed on the complete ecosystem, but is a subset. When we talk of cost efficiency we are now talking of “Cost Efficient Leadership”, a vision for the complete organization. USA Today said it best
“Toyota is as much a state of mind as it is a car company”
The cost efficient way is a state of mind, not a management procedure.
2 comments:
"Is it that cost efficiency has to have a “soul” while in cost management you only have a “body”?"
Good question... :-)
As usual, I rely on you to ask a good one for me to think over...
I think cost efficiency is basically not only reason and mathematics, but also consideration of all factors involved in an activity. I don't know if I would say "soul", but it definitely looks at all the angles.
Cost management - I hate that!
Anyway, going through these rough times, I have learned one thing: we all cope differently with cutting costs and in my country, cutting the salaries of employees and firing administration has been the favourite approach. Which is why we have consultancies and production companies with still a lot of professional work force, who do not have the basics: coffee, someone to make copies, someone to go to the bank or to keep the financial books in order...
So I'd say to these managers: "Good job, buddy! It's gonna take you years to put this mess in order!"
All the while, I read about bullshit like "how to motivate your employees duringthe crisis", "how to manage costs", "how to bring out the best in people" and other blabla...
And I can't help but think that there are so many people out there who actually don't have anything better to do and, instead of being productive and having some down-to-earth initiatives for a change, quote or translate anything and everything on the net...
What Toyota's president is saying that kaizen must be incorporated into the corporate culture, rather than simply the pet project of one CEO or several executives. Otherwise, when a management change occurs, the Kaizen attitude is lost.
In regards to cost management versus cost efficiency:
Cost management is a broad term incorporating all forms of managing costs, whether this means cutting them (layoffs, decrease in production, etc.), halting their increase (by not expanding), or through efficiency (doing what you already do more efficiently).
Cost efficiency is a subset of cost management, wherein you try and do what you are already doing more efficiently to reduce costs. This may involve the reduction of workforce, but its primary aim is to reduce costs without reducing production scale, i.e. to decrease cost per unit produced.
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