By Kessara Sakmaneevongsa
The manufacturing and trading industry in Thailand has become highly competitive, with organisations actively seeking ways to outperform their peers and sustain a profitable growth level.
However, today’s more uncertain economic environment, coupled with less purchasing power, has made it more difficult to sustain top-line growth. Many leading organisations have chosen a different cost-reduction approach to bring down costs of goods sold and selling, general and administrative expenses, which are the two largest cost categories in the income statement, in order to improve operating margins.
To manage these expenses more effectively, organisations need to be able to generate accurate, timely, and insightful information to better support decision making. Successful organisations do make solid decisions. In order to do that, they first need to make sure that they have their information right. Equipped with better information, organisations know specifically where and how the value is created and which particular areas they should focus on improving, whether it is to manage and control costs of goods sold or minimise selling, general and administrative expenses.
Conducting cost diagnostic and management focusing on tackling the costs of goods sold and selling, general and administrative expenses would help organisations identify opportunities for improvement and increase overall shareholder values. The approach to cost management may vary from company to company. However, we found that there are some common areas most organisations usually struggle with. Managing costs of goods sold: In most cases, most manufacturers find it hard to manage costs of goods sold because there is a lack of visibility and transparency of costs. Obtaining cost information for effective decision making requires an in-depth understanding of the cost base to be allocated and underlying cost drivers.
Most organisations struggle to find the true cost of their products because typically the cost data necessary cannot be easily captured and it is too difficult to identify cost drivers. Additionally, the purpose of cost allocation is not clearly understood and communicated, resulting in costs being allocated to the wrong cost centres.
Working with several leading organisations, we have found that an improved understanding of cost drivers and effective cost allocation can help organisations understand their true costs along with stimulating a change in business behaviour to drive sustainable control over the costs of good sold.
Hence, true cost information allows them to know where to focus their effort, whether to reduce product costs by enhancing the sourcing strategy to acquire optimal and cost-effective raw materials or by improving the efficiency of manufacturing operations, for example.
An organisation may find that its existing software or applications used in core operations are not able to provide specific cost information or provide cost reports specific to their needs. An additional costing model or tool may need to be developed in order to support the timely generation of cost information that is essential for management to make better cost-related decision.
Controlling and minimising selling, general and administrative expenses: Many organisations make the mistake of focusing their cost-reduction efforts too narrowly, or the approach may not be embedded into business as usual. They sometimes undertake a cost-cutting programme by focusing on just a few key areas, resulting in a temporary cost improvement, but costs begin to rise again over time.
There are several improvement levers an organisation may consider, including launching an initiative to reduce selling, general and administrative expenses. Another approach is changing or adjusting the service-delivery model of the supporting functions by centralising some activities previously dispersed across multiple business units, or even outsourcing some activities.
However, organisations that take a broader and sustainable approach tend to have many more improvement levers to work on, which can result in higher savings and broader benefits and impacts. Therefore, it is best to design an approach which fits your business objectives and embeds this into business as usual.
Cost cutting without changing behaviours, having no buy-in from employees and a corporate culture that accepts operational inefficiency and legacy procedures will not result in sustainable cost reduction.
The bottom line: Without a strategy and sustainable cost-management approach for controlling or minimising costs in costs of goods sold and selling, general and administrative, an organisation risks becoming inefficient and uncompetitive. While there is no single silver bullet to ensure that cost-management programs will stick, organisations can increase their chances by enhancing accountability, focusing on how they cut costs and treating reduction as an ongoing exercise.
Kessara Sakmaneevongsa is a partner in consulting services, Deloitte Thailand.