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Synopsis

Cost overruns are dangerous as they demand funds allocated for other purposes and needs. To avoid them, managers must have a top-notch cost management strategy up their sleeve at all times. The good news is that our Cost Management agement presentation deck allows you to introduce your strategy for effective management of cost with ease and, therefore, provide your businesses with the freedom to make the right choices, remedy the shortcoming between strategy and execution and fuel growth.

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Some external factors that can affect the effectiveness of a cost management strategy include market fluctuations, changes in labor costs, changes in material costs, regulatory changes, economic conditions, and competitive actions.

A cost management strategy can contribute to the growth of a business by providing it with the freedom to make the right choices, remedy the shortcomings between strategy and execution, and fuel growth. It helps avoid cost overruns that can divert funds allocated for other purposes and needs. With a top-notch cost management strategy, a business can effectively manage its costs, which can lead to improved profitability and growth.

Some potential obstacles and challenges in implementing a cost management strategy include resistance to change, lack of understanding or knowledge about cost management, inadequate resources, and poor communication. It can also be challenging to align the cost management strategy with the overall business strategy and to ensure that it is effectively executed.

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Slide highlights

Use this slide to list all cost determinants for the project. Although determinants vary from organization to organization, they depend on two main factors: The Quantities of Resources and Combinations and Techniques of Productions.

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High costs most likely prevent your team from achieving goals, thus, identifying obvious and hidden causes for inefficient costs is crucial. Use this slide to discuss causes for high costs and introduce elimination solutions.

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With this slide, introduce cost reduction potential and propose strategies for savings. These can include: bartering with other businesses, monetizing marketing methods, sponsoring your events and introducing four-day work week.

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A four-day work week can contribute to cost savings in several ways. Firstly, it can reduce overhead costs such as utilities and maintenance for the extra day that the office is closed. Secondly, it can increase employee productivity and reduce absenteeism, as employees are likely to be more rested and satisfied with a better work-life balance. Lastly, it can reduce costs related to employee turnover, as a four-day work week can be an attractive benefit for potential employees.

Some potential strategies for cost reduction in a business could include bartering with other businesses, monetizing marketing methods, sponsoring your own events, and introducing a four-day work week. It's also important to identify and eliminate any obvious and hidden causes for inefficient costs.

Some techniques of production that can influence cost include the choice of technology, the scale of production, and the efficiency of the production process. The choice of technology can significantly impact the cost as different technologies have different levels of efficiency and require different amounts of resources. The scale of production can also influence cost as larger scales often allow for economies of scale, which can reduce the cost per unit. Lastly, the efficiency of the production process can influence cost as more efficient processes can reduce waste and improve productivity, thereby reducing costs.

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Overview

Cost management is the process of estimating, allocating and controlling the costs in a project, which enables an organization to forecast upcoming expenses and avoid exceeding the allocated budgets.

The most important element in cost management, says David Axson, managing director at Accenture Strategy, CFO & Enterprise Value "is to live and breathe a relentless customer focus. All too often cost reductions lead to service reductions, opening the door to disruptors who can deliver great service at the same or lower cost. Digital tools allow organizations to deliver better service at lower costs – it's no longer a trade-off of one for the other. Think about automatically checking into your hotel room, choosing your room and accessing your key through the app on your phone. For the hotel this lowers costs (no check in line, no plastic keys, etc.) while for the guest it delivers faster, more personalized service."

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Cost management in the hospitality industry can be applied in various ways. One practical application is in the use of digital tools to enhance customer service while reducing costs. For instance, allowing guests to check into their hotel rooms, choose their rooms, and access their keys through a mobile app. This not only improves the guest's experience by providing faster, more personalized service, but also reduces costs for the hotel by eliminating the need for check-in lines and physical keys. Other applications can include efficient energy management, waste reduction, and strategic sourcing of supplies to reduce costs.

A company that could benefit from implementing cost management is a hotel chain. By leveraging digital tools, they can deliver better service at lower costs. For instance, allowing guests to automatically check into their hotel room, choose their room, and access their key through an app on their phone. This lowers costs for the hotel (no check-in line, no plastic keys, etc.) while delivering faster, more personalized service for the guest.

Companies can implement cost management in their operations in several ways. Firstly, they can adopt digital tools to automate processes and reduce manual labor, which can lead to significant cost savings. For example, a hotel can use an app for check-ins, room selection, and key access, reducing the need for physical keys and front desk staff. Secondly, companies can focus on customer service to prevent cost reductions from leading to service reductions. By maintaining a high level of service, companies can prevent competitors from disrupting their market. Lastly, companies can continuously review their operations to identify areas where costs can be reduced without compromising on quality or service.

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Application

There are four major steps to the process:

  1. Resource planning – the process of discovering future resource requirements for an organization or a particular project. This requires the assessment and planning of the use of the labor, finances and other resources.
  2. Cost estimating – the process used to quantify, cost and price the resources required for an organization or a particular project. It requires the employment of tools that transform technical and programmatic data into finance and resource data.
  3. Cost budgeting – the process used for evaluating the estimated cost of resources into cost accounts and measuring cost performance against them.
  4. Cost control – the process used for measuring variances from the cost baseline and establishing effective correctional action to achieve minimum costs.
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    Case study

    Boeing Commercial Airplane Group Wichita Division

    The case study published by Massachusetts Institute of Technology examined the effects of employing Activity-Based Costing and Management Practices (ABCM) – an approach where activity-based cost (ABC) models provide economic information for management decision making, within the Aerospace Industry.

    According to MIT, BCAG is the world's largest manufacturer of commercial airplanes, which comprises about 60% of Boeing's total revenues. The main focus of BCAG Wichita is the development of a lean, efficient design and production system supported by an effective cost management strategy in order to capture and maintain world-class aerospace manufacturing reputation.

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    I'm sorry, but I don't have a specific case study on BCAG Wichita's cost management strategy. However, it's known that BCAG Wichita focuses on developing a lean, efficient design and production system supported by an effective cost management strategy. This approach has helped them maintain a world-class aerospace manufacturing reputation. For more specific details, I would recommend reaching out to BCAG Wichita directly or looking for case studies in aerospace industry publications.

    The cost management strategy of BCAG Wichita aligns with the overall profitability goals of Boeing by focusing on the development of a lean, efficient design and production system. This approach helps to minimize costs and maximize efficiency, thereby contributing to Boeing's profitability. Additionally, BCAG Wichita's effective cost management strategy supports its aim to capture and maintain a world-class aerospace manufacturing reputation, which can lead to increased market share and further enhance Boeing's profitability.

    BCAG Wichita might face several challenges in implementing an effective cost management strategy. Firstly, the complexity of aerospace manufacturing could lead to unforeseen costs, making it difficult to maintain a lean and efficient design and production system. Secondly, the global nature of the aerospace industry could introduce currency exchange risks and regulatory compliance costs. Thirdly, the need for continuous innovation and technology upgrades could result in high research and development costs. Lastly, the high dependency on suppliers for raw materials could lead to supply chain disruptions and increased costs.

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    The MIT researchers write: "One of the most attractive and counterintuitive characteristics of activity-based costing arises from the previously untapped sources of added value that it allows a company to discover. As the emphasis on costs shifts from labor to overhead, companies are changing their business strategies to capture these gains. Although overhead costs now dwarf labor costs as a percentage of overall expenditure, companies have not changed the methods they use to quantify costs."

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    Companies can implement activity-based costing (ABC) in their operations to maximize profitability by first identifying all the activities involved in their production process. Each activity is then assigned a cost based on the resources it consumes. This allows companies to accurately determine the cost of each product or service, leading to more informed pricing and budgeting decisions. ABC also helps in identifying inefficient processes and areas where costs can be reduced. It's important to note that implementing ABC requires a thorough understanding of the company's operations and may require a cultural shift within the organization.

    Common challenges in applying activity-based costing include: difficulty in identifying all activities and assigning costs to them, resistance from employees due to change in traditional costing methods, and the time and resources required to implement the system. These challenges can be overcome by: providing adequate training to employees, using software to automate the process, and ensuring top management support for the change.

    Activity-based costing (ABC) aligns with digital transformation initiatives in cost management by providing a more accurate understanding of overhead costs. Digital transformation initiatives often involve the implementation of advanced technologies that can automate the process of cost allocation based on activities, making ABC more efficient and precise. This can lead to better decision-making, improved profitability, and a competitive advantage. Furthermore, digital transformation can enable real-time tracking and analysis of costs, enhancing the effectiveness of ABC.

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    And continue: "Advocates of ABCM believe that unless there is a change to a new way of identifying monetary output, companies will never know the true costs of production. At present, a majority of the companies that have adopted ABCM operate in the commercial sector. Traditionally, these companies have been perceived to be more exposed to economic variability, and thus must be able to adapt to changing market conditions in order to retain competitiveness.5 Although the aerospace industry has been slower to adopt activity-based costing methods, cycles of instability in the industry may lead to increasing interest in ABCM. The successes of the pilot projects at BCAG Wichita may illustrate the benefits of investigating different cost management strategies. BCAG Wichita hopes to move ABCM principles into other areas of the manufacturing process, and encompass an ever-increasing portion of the facility's operations."

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