Strategic Cost Management Implementation

Strategic cost management is the juncture between managing pure cost in the supply chain and recognizing that pure cost is not the only criteria for making strategic sourcing decisions.

This is why exchange rates have little to do with multinational company decisions between low cost country sourcing and domestic sourcing.

Instead, these decisions are made due to strategy related factors and not pure procurement cost. For multinational companies, this is often determined with the maturity of their presence in a country, and how proprietary the technology is for their parts and sub components. Strategic cost management is about more than the size of checks paid to vendors.

One example of this and how strategic cost management can result in different solutions over time is the Japanese auto industry as it relates to the US market. During the initial entry into the US market, Japanese started by importing the final product only. As the volume of trade increased and tariffs played a larger role, Japan began buying assembly plants in the US.

This direct investment started with only final assembly. Rather than using domestic sourcing (relative to the assembly plant), Japanese companies tended to import their major assemblies from their internal assets in Japan. This was due to the proprietary nature of the technology involved and the lack of trusted local suppliers.

For the same reason, few if any of these components came from low cost country sourcing, as the Japanese high standards for quality and timely delivery made it unlikely for them to develop close partnerships with suppliers from low cost countries.

Strategic cost management decisions are made then on the following factors other than pure unit cost:

  • Patent/Proprietary Engineering
  • Order Lead Time
  • Reliability and Quality of components

However, regardless of what has driven strategic decisions in the past, more companies are looking for ways to implement strategic cost management. In order to do so, they are moving in two directions.

The first is to implement more robust IT accounting systems in order to track and account for spending on an enterprise-wide level, up to and including full implementation of e procurement systems.

The second is break down silos and encourage multi-functional, process oriented teams. True cost management occurs only when both suppliers and customers are involved in the process. With inventory being one of the largest capital investments in most businesses, involving all stake holders to improve the materials management process is how real savings happens.

The place where lean practices and strategic cost management overlap is in the area of root cause analysis. By breaking down the supporting activities into distinct processes, managers can identify where the supply chain efficiency and cost can benefit from automation, lead time or other factors.

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