Strategic Cost Management and Life Cycle Costing Essay

1.0 Introduction

Strategic Cost Management ( SCM ) is understood in different ways in literature as a affair of fact that there is no universally agreed definition. In fact, different costs are for different intents. However, SCM can be defined as the usage of cost information to make the followers: aid explicate and pass on schemes, carry out tactics that implement those schemes aims. [ Govindarajan and Shank ] . In other words this means that SCM is non merely cost direction but besides a tool usage to increase grosss, better productiveness and client satisfaction, and at the same clip better the strategic place of the company. The key is that costs must be viewed by looking at the same time at the value they provide to accomplish company ‘s strategic/long-term aims.

1.1 Life Cycle Costing – As a SCM Tool

The LCC construct was developed by United States ‘ ( US ) Department of Defense in the early 1960s to increase the effectivity of authorities procurance ( Shields and Young 1991 ) . After that, the construct came into the concern, and is used at that place in merchandise development surveies and undertaking rating. Then the construct was taken by the direction accounting. However, the application of LCC is limited until 1980s when there were unfavorable judgments of the traditional direction accounting patterns, which is focused chiefly on the fabrication phase of a Product ‘s Life Cycle ( PLC ) .

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PLC progresses through a sequence of phases from debut to growing, adulthood, and diminution. Therefore, comptrollers might non be able to analyse cost behavior and calculation of all associate costs would be disputing. The planning and design phase incur the most cost so cost direction has to be done in this phase

LCC refer to the procedure of gauging and roll uping the sum costs that the manufacturer or maker will incur over the merchandise ‘s full life ; from the beginning to decrease the peculiar merchandise. In other words, “ cradle-to-grave costing ” . The chief focal point of LCC is non merely to cut down the costs that the manufacturer will incur over the PLC including design, fabrication, selling, logistics, and service, but besides the costs that client will incur such as the costs of acquisition, operation, care, closures, and disposal. This means that, LCC explicitly takes the longitudinal cost construction of the merchandise ‘s quality and time-related characteristics into the history in two different angles. Therefore, a LCC position is utile non merely when costs are considered from the client ‘s position but besides sing the manufacturer ‘s position throughout PLC ( Artto 1994 ) .Hence, user of the merchandise plays a major function as the cost driver in LCC.

Although, the traditional cost direction attack primary focal point on the fabrication phase of the merchandise the PLC costs do non stop when the merchandise has been manufactured. As many writers normally cited, 80-90 per centum of the costs are committed or locked-in by the determinations made in the early phase of PLC. As mentioned, cost direction should be done at this phase. Therefore, the key to pull offing or cut downing cost is to concentrate attending and attempt on those determinations ( Shields and Young 1991 ) . But it is of import to observe that there are some statements against committed or locked-in costs. For illustration, in there survey, Cooper and Slagmulder ( 2004 ) “ aˆ¦our research suggest otherwise. Specifically we found that Olympus Optical ( merchandise they studied ) is able to pull off costs throughout its lifeaˆ¦ ”

Figure 1

Figure 1 ( Relationship between Committed Costs and Incurred Costs, adapted Atkinson et al 2001 )

2.0 The Purposes of LCC

In the direction accounting position, the chief intent of LCC is to follow a SCM technique which will maximise the return over the cost objects entire life by concentrating on the operational and terminal hard currency flows. LCC builds a conceptual model that installations direction ‘s ability to work internal and external linkages of the merchandise. Therefore, it helps the direction comptrollers to understand the cost effects of developing and doing a merchandise and to place countries in which cost decrease attempts are likely to be most effectual in a manner that promotes the strategic competitory advantage of the company.

However, many writers argued that there are four wide intents for LCC in SCM context. Below mentioned are: [ see refernce ]

to measure whether the operating net incomes earned during the fabrication, stage will cover the costs incurred in the planning and diminution stages ;

to place associated costs during the planning period with a given merchandise design and to take necessary actions ;

to back up cost comparings among different merchandise designs to do more informed determinations among options ; and

to place the nature and timing of costs to be after and pull off efficaciously.

3.0 LCC-The Positions

3.1 Producer ‘s Position

This position of LCC is based on the identifying, analysing, and managing of each single merchandise ‘s costs throughout its life rhythm to take competitory advantage. Harmonizing to Artto ( 1994 ) this refers to the costs that are included in merchandise construct, design, merchandise and procedure development, production, logistics, selling, services and warrants. Possibly, this suggests that most of the costs are committed or incurred in the earlier phase particularly in planning and planing phase of the merchandise or service in the manufacturer ‘s position. Therefore, manufacturers are able to analyse and pull off costs before any concluding fabrication and investing determinations are made.

3.2 Customer ‘s Position

From the client ‘s position the focal point is on costs incurred through purchase, operation, care, support and disposal of merchandise. Artto ( 1994 ) argued that a company ‘s long-run success with clients requires merchandises to hold a lower expected associated costs when comparison with utility merchandises. ( see Figure 2, LCC on both position )

Figure 2 ( LCC on both positions )

Besides, Artto ( 1994 ) mentioned that organisations must make analysis to larn the market and clients on a three dimensional manner ; merchandise quality, time-related factors and purchase monetary value. In fact, to be competitory in the market, these factors are critical. So, merchandise design and development standards should deduce from the client ‘s merchandise choice standards. This analysis should be done based on market and clients in the initial phase of merchandise design and planning. Therefore, with aid of LCC analysis, direction is able to do strategic cost determinations based on the mentioned two positions.

Figure 3. Three dimensional analyses ( Adapted from Artto 1994 )

Time related Factors

Purchase monetary value ( Cost )


Delivery, handiness and life

4.0 Success – LCC in Action

LCC is peculiarly of import in environments in which there is big be aftering and development cost for illustration, the NASA ‘s Advanced Air Transportation Technology ( AATT ) undertaking have achieved there strategic ends and have been able to pull off there cost through LCC on NASA ‘s Decisions Support Tools ( DST ) ( Wang and Datta ) .

Incorporate Business Machines ( IBM ) applies LCC and estimations and accumulates costs against net income over a PLC to find net incomes which could bring forth. Plus, universe ‘s prima electronic and electric giants such as Sony ( Japan ) and Philips ( Holland ) have proven successful by using the constructs of LCC.

Besides, many of the US building houses have adopted LCC in order to cut down costs as undertakings that undergo ; LCC analysis gives the entire cost of the Net Present Value ( NPV ) , therefore options could be considered.

BMW has proven so successful in utilizing LCC analysis that helps the direction for comparing costs of different designs in order to do determinations on most appropriate merchandise mix ( reclaimable plastic parts ) . Besides the Japan ‘s auto fabrication giant Toyota uses LCC to do determinations on its Packing Design determinations in gross revenues units. These, instances clearly show that LCC is a moderately widespread SCM technique usage globally.

4.1 Advantages

As mentioned earlier, LCC is a SCM tool that manages costs form “ cradle-to-grave ” , hence with LCC, direction is able to analyse the behavior of all costs including indirect cost to estimations and proctor during PLC, possibly get downing from the initial phase. LCC describing involves following costs and grosss on a merchandise by merchandise footing ( all possible information ) throughout their full life. Hence, a company can take actions that lower costs in the subsequent phases of the PLC every bit good as lower consumer ‘s costs such as operating and care costs. LCC integrates all point of views ( the client and manufacturer ) and therefore it leads to avoid partial optimisation of the PLC costs and feats both internal and external linkage ( Lindholm and Suomala 2005a ) . Furthermore, a successful execution of LCC provides competitory advantage for the company ( shields and Young 1991 )

4.2 Restrictions

LCC estimations excessively early in the life of a undertaking when the grade of truth is questionable and presuming that the option has a finite life rhythm. The cost of executing a LCC analysis may non be appropriate for all undertakings and a high sensitiveness to altering the demands. The LLC is influenced by many factors of which some merely can non command as they arise without warning. Like the entry of new rival. Beside, the directors and employees might happen LCC as a non sound SCM technique and it is hard to calculate costs in the client ‘s position. Besides, the differences in measuring future cost and covering with uncertainnesss sing factors impacting LCC may hold restricted its usage ( Lindholm and Suomala 2005a ) . The application of LCC relies on the handiness of cost information, therefore the normal merchandise costing patterns affect companies ‘ abilities to use the attack. If company fails to sufficiently track merchandise costs, it is improbable that the true entire cost of the merchandise can be measured systematically and accurately. Besides the long PLC could do LCC hard. Furthermore, there is grounds from pattern that the failure to acknowledge the uneven hard currency flows during the merchandise life rhythm can actuate unsought and inappropriate determination devising ( Lindholm and Suomala 2005a )

4.3 Criticism

Some writers criticize LCC as it merely is applicable for the merchandise which has a certain life period ( e.g non merchandises with short life ) . However, Cooper and Slagmulder ( 2004 ) argued that companies can accomplish important nest eggs during merchandise life rhythm even in an environment of merchandises with short life rhythms and aggressive cost direction focused on merchandise design.

Harmonizing to Takala and Carlsson ( 2001 ) , the most well-thought-of unfavorable judgment of the PLC, was made by Dhalla & A ; Yuspeh ( 1976 ) that is “ clearly, the PLC is a dependant variable which is determined by market actions ; it is non an independent variable to which companies should accommodate their selling plans ” and “ Forget the merchandise life rhythm! ” Possibly, this was more related to the LCC usage in selling.

In their survey Lindholm and ( Suomala 2005a ) argued that the acceptance of LCC depends on the organizational maps instead than different sectors, as there are some belief that LCC is merely applicable for industries like military and building sector. Possibly, this is non the instance as discussed earlier ( see Success – LCC in action ) .

5.0. Decision

SCM is of import to organisations because it is more than concentrating on costs but besides value and gross in both internal and external angles, which is consider as a critical factor for the success of the companies in the twenty-first century ‘s competitory concern environment. Many surveies ( Shields and Young 1991, Arrto 1994 and Lindholm and Suomala 2005a ) progressively stress that rapid alterations in the concern environment particularly technological alterations and shortened life rhythms have made LCC critical to organisations. LCC differs from other bing methods because it by and large includes grosss every bit good as costs of the PLC ( Artto 1994 ) .

Since, LCC is to back up during the merchandise planning phase and the analysis of the cost behavior of a peculiar merchandise helps directors and comptrollers to pull off costs more efficaciously and minimise incorrect decision-making as it focuses cost behaviour of each alone stage of the PLC. Because different types of costs tend to rule in different stages of the life rhythm, by placing the timing and nature of important costs in progress, organisations can develop more effectual agencies of budgeting and managing these costs. Beside, it is besides really utile when doing determinations sing operation and care ( such as guarantee ) costs incurred during the life of the merchandise. But the cardinal issue is how far beyond the phase where action is taken should a company expression for positive impacts cut down costs.

Detailed analysis of LCC makes industries to get at make-or-buy determinations to be more completive or re-gain its fight in the industry. Because LCC draws general decisions in all relevant costs which the manufacturers has to incur in doing a merchandise or service before the productions does n’t take topographic point.

Similarly, by using LCC as a SCM technique, directions are able to use may other techniques in to do economic determination feasible such as cost-benefit analysis, discounted hard currency flow, sensitiveness analysis and NPV analysis. Therefore this would give an border over rivals who do non utilize LCC as a SCM tool

However, in pattern LCC is frequently represent long-run costing, but the computations do non cover the full life rhythm costs in many instances ( Lindholm and Suomala 2005a ) . The ground for this is that historically colleted information ( in early phases ) might no longer applicable as some conditions change. Therefore, appropriate usage of historically collected informations and covering with the hereafter uncertainnesss which affect the effectivity of life rhythm costs ( in both positions ) , must be in the top precedence of any organisation to be competitory in the market and to accomplish its strategic advantage by implementing LCC as a SCM tool.


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