Management in Accounting
Profitable business operations in the 21st century are a function of management’s ability to forecast the external operating environment to better navigate via available internal resources. Given the growth in emerging markets and the threat of rising inflation and rising inflation rates, Chief Executives are required to consider the NPV of dollars used today to generate future cash flow.
Additionally, such projects are more profitable when cost constraints are adhered to and subsequent cost management practices necessary to adhere to cost constraints are implemented and managed appropriately. The area of cost control is rather broad and opaque to the layman. Cost control in retail is a more defined and narrowed parameter of the nature of industry expectation to the requirements of constraints within retail.
Cost Management is the process of implementing or actualizing cost control either through direct or indirect means. Heyman (1975) is still relevant in the modern discussion of cost control. According to Heyman, an organization’s management is the critical component to acknowledging the requirement to control expenses. He cites the following areas for improvement, Payroll, Performance, Costs, Rent, Advertising, Electronic Data-Processing, Communications, and Supplies (Heyman, 1975).
Additionally, the suggestion is if costs are out-of-line, then to line-item each cost into an expense item to determine where savings can be identified and cost saving measures or cost control measures may be implemented. A cost control executive should be appointed whom is solely in autonomous control and final say of decisions regarding cost containment and expenditures.
Trozzi (1974) has identified the cost reduction process as the highest priority with such urgency central to the organization’s ability to meet the demands extended by a comprehensive cost reduction process. Trozzi suggests that a ‘champion is named by the executive management. A champion is a designated steward appointed to oversee a targeted process with a clear set of goals. The champion is responsible to management and the entire organization such that the ability to effectuate cost-control is inherent to the power within the position and such that the employees of the organization are better able to perform their jobs due to the intervention of the appointed champion (Trozzi, 1974)
The champion is able to convey the attitude of cost control and containment procedures to key staff and management throughout the organization as a means to adopt to specified cost reduction techniques often associated with Six Sigma and Kaizen. The successful cost reduction program is a function of the organization’s ability to analyze corporate data and identify where waste reduction will have the greatest net benefit on impacting short- and long-term profit goals (Trozzi, 1974)
Cost reduction techniques are linked to increases in profit growth and certainly revenue growth. According to Bannon (2001) the Mattel Corporation was able to control costs with such success as to double the revenue growth experienced at the industry average of 2% to 3%. The average growth rate of 2% to 3% indicates that profits before cost reduction measures are implemented are approximately where the industry average is.
The Mattel Corporation is a relatively large toy company and is the owner of a large market share in the retail toy industry, and therefore is expected to be around 3% prior to the cost reduction processes and innovative cost reduction management imbued by Mr. Robert Eckert (Bannon, 2001) Mattel’s ability to reduce cost or expenditures is inherent of the ability to see how to do a process differently, or with more care toward a lower cost per unit.
Companies have a number of means to reduce costs, from changing vendors in the supply chain to process change management and human resources cost management. Mattel decided to repackage its product in a manner consistent with cost control. Innovations such as multi-lingual packaging allows for lower production and raw material costs while enabling greater leverage with product shipment to more competitive markets in mid season. (Bannon, 2001)
Organizations that are able to control production and raw material costs will ensure a stream of profitability for the organization and its stakeholders. This is true due to the nature o microeconomic theory and the cost, price, and revenue curves for average, marginal, and total cost. Production costs are generally associated to processes in the supply chain and the manufacturing process of producing x units of product. The packaging for the product is a separate process from the manufacturing of the actual product, which is the toy for Mattel.
The price and revenue curves are going to be higher than the cost curve in the long-run however, this may not be true in the short-run when the company is expected to be highly leveraged if in the new phase or in the growth/expansion phase. Companies will decide to take the say $10 million needed to reduce cost per unit and produce the next production phase of the process, and invest this amount at an interest rate higher than the rate paid to finance the 10 million borrowed from a creditor or bank.
Rethinking the procurement of raw materials is also critical to cost containment and expense reduction. This main issue to cost control is inherently responsible for companies increasing costs due to either unpreparedness to address such increases or due to an insidious desire to take advantage of a higher raw material cost environment to pass the cost onto the consumer reflective in the consumer price index CPI rather the producer price index PPI.
The manner corporations are able to hedge against higher raw material costs is to buy the futures of the corresponding raw materials or those materials, which are highly correlated to the price movements of the underlying raw materials used in the manufacturing process.
The design and removal process (Bannon, 2001) as implemented by Eckert at Mattel is a direct method to obtain process management results. Logistical improvements to enhance the design process was critical to reducing manufacturing time and reducing time to scrap, or removal of a potential project due to violating cost constraints.
This ability to relocate critical staff to better discuss the cost and manufacturing process enables a cohesive and functioning team capable of identifying cost measures on manufacturing processes but to also give the go-ahead to scrap a project if it appears to perhaps be unprofitable or marginally unprofitable, or realizing decreasing marginal returns prior to the break-even.
Work-force cuts are also critical to lean operations, a function in cost containment and control. The human element is often lost upon corporate decision-making bodies, as the bottom line is the most important and most integral part of the business operations and will always seek by decision-makers to be maximized. Organizations have relied on layoffs and attrition to reduce workforce staff and therefore working capital obligations in the short-term.
In the case of Mattel cost reduction cave via a 4% workforce reduction (Bannon, 2001), which equated to approximately 1,300 jobs. This refocus from long-term revenue growth to the bottom line is what propels the stock price in the short-run. Chief Executives are inherently paid to raise the stock price and that means short-term decisions necessary to raise the stock price. Long-term decisions that will raise the stock price at a point in the future will not raise the stock price in the short-run and therefore, may not raise the stock price during the CEO’s tenure.
Eckert is also borrowing from other companies in his industry. Chief Information Officer Joe Eckroth (Bannon, 2001) implemented what he terms as “bullet train,” which was used at his previous employer of the GE Company. By relying on several metrics including categories of travelling and printing materials (Bannon, 2001), Mattel is forecasting to reduce costs by $1 million per year simply by focusing on such processes as catalog production and centralizing production and the paper procurement process (Bannon, 2001).
This approach is certainly not uncommon and is relatively the modern approach to cost reduction. The process is ostensibly that of Design, Manage, Analyze, Improve, Control, which is the Six Sigma module to process redesign. By identifying processes specific to cost items on the income statement, the organization or the champion within the organization can determine a methodology to best reduce the costs associated with each process.
The process instituted by GE is designed to produce consistent earnings rather strong revenue growth (Bannon, 2001). The supply chain is inherently contingent on the ability to timely ship product to overseas markets where the demand is peaking. Executives will always seek to reduce the lag time between product demand in one market and the production and supply in a market other than the demand market. Mitigation of costs is achieved through planning and communications with logistics suppliers to best determine when supplies will be ready for shipment and the methodology needed to reduce total time.
The idea of focus groups as implemented at Mattel by Eckert (Bannon, 2001) is a modus to reduce costs and process design flaws by determining interest among consumers of the product for the product in question and whether the product is something the consumer will like to purchase. Process redesign is central to cost control. The notion of focus groups as a means to reduce costs and enhance process control is notable for its two-pronged approach.
Focus groups (Bannon, 2001) also enable manufacturers to identify early in the process whether a product will be a hit among the consumer base or if it is expected to flop. The earlier the product is identified to flop, the better the savings for the company and potential for greater profits through the pipeline of alternative toys used in the focus group process.
Other measures pertinent to the cost control process include securing an earlier production schedule (Bannon, 2001) and utilizing a smaller number of molds or casts necessary to manufacture the facsimile toy product. “The difference is important, since molds can cost as much as $100,000 each. Says Mr. Bousquette. “For 30 years, the company has been talking about doing this,” he says, referring to the change in production schedules, “and now we’ve done it in the past 18 months.” (Bannon, 2001)
The aforementioned example is a prime use of process redesign. The lucid nature of the change in production scheduling is an understanding to the profitability cycle inherent in the design and manufacturing of the product. Understanding the yield in the profitability curve is essential to operating profitably when facing production cycle and logistic constraints.
Zero-based budgeting (Landers, 1989) is an alternative to incremental budgeting and is viewed as a method to review individualized overhead activities to assess for efficiency and relevance to business needs (Landers, 1989). The most clear manner to obtain results using zero-based budgeting is to determine the total contribution of the itemized budget activity as the contribution pertains to business needs and requirements.
Cost reduction comes via the ranking of fundamental activities to nonfundamental activities. The fundamental activities are identified and assessed for lean processes, which removes all unnecessary activity associated withthe activity. Nonfundamental activities “are separated and ranked against each other. Once the benefits are ranked, costs can be ranked and a cost-benefit matrix developed.” (Landers, 1989)
The cost-benefit matrix (Landers, 1989) enables the costs to be ranked in order against each other for easy comparison. Such comparisons enable a clear and present context on which to analyze costs for removal and the decisions needed to remove costs without reducing revenue streams.
References
Bannon L. New Playbook: Taking Cues from GE, Mattel’s CEO Wants Toy Maker to Grow Up – the Former Cheese Whiz Puts Financial Discipline Ahead of Marketing Flash – but is Barbie Unpredictable? Wall Street Journal. (Eastern Edition). New York, NY.: Nov 14, 2001. Pg a.1
HEYMAN, S. (1975). Expense control for retail companies. Retail Business Review, 44(2), 2. Retrieved fromhttp://search.proquest.com/docview/211124929?accountid=13044
Landers, B. (1989). Overhead cost management in retailing. International Journal of Retail & Distribution Management,17(3), 14. Retrieved from http://search.proquest.com/docview/210969127?accountid=13044
Trozzi, M. (1974). Managing the Cost Reduction Process. Retail Business Review 42.9 (Jun/Jul) 14. Retrieved fromhttp://search.proquest.com.rlib.pace.edu/abiglobal/docview/211124576/12DAF4D15AB6D9CC697/12?accountid=13044
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