Cost Reduction Strategy at CI - Case Study Example

? STRATEGIC COST MANAGEMENT CASE STUDY STRATEGIC COST MANAGEMENT CASE STUDY Introduction As human being, though companies are set up on individual basis with independent visions and goals, they are considered social entities that are obliged to behave in certain ways that are dictated by other companies (Gartner, 1985). Presently, California-Illini (CI) is faced with critical managerial decisions rooted in the need to have a strategy that both make the company competitive and profitable. As an attempt to do this, the determinants of competitive strategy are taken from a multi-variant perspective including quality, speed and cost. It is not surprising that the plant manager describe their process as “better than anyone else” because it is guaranteed with speed and high quality, as well as reduced cost. To compete with such companies, it is important to have enough capital reserves to also engage in strategies like promotion. The paper will therefore look at how with the cost reduction strategy, the company is offered sufficient funds that were cut down from actual production cost to gain competitiveness and profitability. Firm’s competitive strategy Much of the emphasis of competitive strategy for California-Illini (CI) is placed on the ability of the company to produce high quality products at a speed that meet consumer demand and cost that meet consumer pocket. In effect, a consumer determinant strategy on demand and cost reduction is used as competitive strategy. Generally, this is a strategy that identifies the scarcity of consumers on the target market due to the number of competitors among which existing consumers may choose from (Bernanke, 2006). Knowing that the consumers are not many in number, a consumer determinant strategy generally aims at presenting the consumer with exactly what the consumer requires from the manufacturers in terms of production and cost. The question of whether the strategy used by CI seems appropriate will be answered from several perspectives. The first is to take a quick competitive analysis, based on which a question of the viability of the strategy against other competitors will be asked. Generally, CI is in the same market as other multinational horticulture companies like Simpson and Simpson Inc, and Garages Ltd. These are companies who base their competitive advantage on brand equity and high inflow of cash from other sectors of their business, making it possible for them to run expensive promotions and publicities. What is more, the strategy to add quality and speed to production is highly appropriate even that when supply from customers does not meet their demand, they would switch to other competitors. It is always important to note that the industry in which CI finds its self is one that is based primarily on seasonal production. In effect, one must not wait for seasons to pass before orders made can be honored (Fairlie, 2009). Cost reduction strategy at CI From the above, the cost reduction strategy can be said to have been generated by the need to be competitive and also increase the revenue of the company through reduced internal speeding. When calculating revenue or profit that companies like CI make, emphasis is not only placed on income but on expenditure as well. The fact that CI has been found to make an average annual sale of $13 million alone cannot be accounted in judging the company as a very profitable one. Rather, it would be important to balance this income with expenditure. Commonly, manufacturing companies like CI spend most of their expenses on the production aspect of the supply chain (Gartner, 1985). In effect, a cost reduction strategy that will ensure that production takes place at a more reduced cost always becomes beneficial. The need to be customer focused was also another motivation for opting for the cost reduction strategy. This is because when cost of production is lower, manufacturers always have the luxury of pegging the prices of their products lower because of a reduced unit cost in production (Fairlie, 2009). Generally however, the cost reduction strategy did not work according to plan because the company did not realize the perceived level of reduction on unit cost of products. This was generally due to the wrong application of strategic modules. For example when the robots were introduced and they guaranteed cost reduction in the first year, the company should have found a means of totally doing away with the services of the labor. Rather, the manual welders found their ways into other sectors of the company, creating new lines of cost in addition to the existing cost on robots and operating systems to manage their functioning. Effect of standard cost system on cost reduction strategy The standard cost system practiced by CI can be described as being more of an arbitrary standard cost system than a regulated standard cost system. This is because using standard unit cost to measure profit potential and performance left out key variables of cost measurement that were not catered for. Meanwhile, a cost measurement system that produces hidden or unaccounted costs have been found to have the tendency of creating illusion rather than reality in the measurement of performance and profit potential (Bernanke, 2006). In effect, the standard cost system affected the cost reduction strategy negatively because it did not give a true reflection of the actual level of existing cost, based on which a well determined quantum of cost should be taken out in the cost reduction strategy. New Production control/inventory control(PCIC)management In a failed standard cost measurement, a very technical way of reducing further costs at the production level is by ensuring that lesser units of productions are made. The logic here is that by so doing, the number of unaccounted costs of production will also reduce significantly. Clearly, this was the wisdom that the new production control/inventory control manager saw in suggesting smaller lot sizes for the company. It would be noted that prior to his coming, operating expenses had gone up to 20% more than values recorded in 1986, which were described as disastrous at the time. What is more, inventories had also increased by 24% against deteriorating net profits. Opting for smaller lots was therefore a means of offering the company a chance to undertaking an entire overhauling of its production system, including the accountability on cost. The mandate of the PCIC is clearly defined by the situation and problem in which California-Illini currently finds its self in. That is, the need to reduce cost in a realistic manner rather than an illusionist manner. Even though the company makes an attempt to use a cost reduction strategy, this was not well integrated into the total processing and running of the company’s supply chain. In effect, there were major lapses, leading up to increased cost of production rather than reduced cost of production. The very first step that the PCIC is likely to take is to review the entire supply chain management to ensure that it does not isolate key processes of cost reduction strategies. The next step will be to cut down on overlapping cost as such those costs that are produced by both the robots and in-house laborers. Finally, there will be the need to centralize production by focusing on local expansion rather than foreign expansions as the latter are difficult to monitor for cost. As far as cost system is concerned, it is recommended that a process cost system, which is integrated with information systems be used. Conclusion From the discussion so far, a number of conclusive remarks can be made about California-Illini (CI) and strategic cost management in general. First, it can be concluded that the application of cost management systems ceases to be known as strategic if efforts are not made to make these management systems as holistic as possible. This is because should CI have taken keen interest at what was happening to other sectors of its production when the robots were introduced to reduce cost, the cost reduction trend that was started would have been maintained. Again, the need to embrace modernity and standardization in strategic cost management system will be advocated. Clearly, California-Illini (CI) refused to live ahead of its generation in the first instance that an arbitrary cost reduction strategy was being used. With evolving trends in competitive strategizing, all companies that want to be viable competitors must learn to embrace the wind of change that is blowing around supply chain management, which is a supply chain management system that is rooted in the use of technology. References Bernanke, B (2006). Principles of Economics. New York: McGraw Hill Higher Education Fairlie, R. (1999). The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment, Journal of Labor Economics, 17(1) 80-108. Gartner, W.B. (1985). A conceptual framework for describing the phenomenon of new venture creation. Academy of Management Review 10: 696–706. Read More