Strategic Cost Management

November 2011

Cost-cutting and cost-containment tactics and techniques are common to any business. And, when tied to the budget, they're a necessity. Although it's often confused with those first two terms, "cost management" is another issue entirely.

"Cost cutting and cost containment do not incorporate strategy. Think of cost management as part of a long-run strategy and cost cutting as a short-run tactical method," explains Michael Maher, Professor of Management and Accounting at University of California at Davis and co-author of the Handbook of Cost Management. "Generally, cost cutting occurs because costs look greater than the budget, so you have to cut. Cost containment typically means that you don't want the costs to exceed the budget, so you find ways to keep them below the budget. Cost containment can be part of cost management, but cost management implies a longer-term, strategic approach—not a short-term tactical approach to cost control."

As a fundamental concept, strategic cost management means getting the most out of your resources as part of an overall strategy. Maher points to Southwest Airlines as a classic example of a company that uses resources wisely; it manages costs by having planes in the air as often as possible and by cross training personnel so that everyone pitches in to provide good service at low cost.

"In developing a cost-management strategy, it helps to start by thinking about how you can get the most value out of the resources you use to achieve the organization's goals," counsels Maher. "For example, if quality is important, don't start with the idea that quality means high costs. Start with the idea that quality is important, and ask how to best spend resources to achieve high quality. This will probably indicate that spending more resources at the front end of the supply chain will save money in the long run."

Strategic cost management seems like a big concept, but implementing it isn't as difficult as you might think. Essentially, it's about thinking of the long-term impacts inherent in the cost side of the business and making them more manageable when you can. There are probably several tactics you already employ; but, when taken together, they can represent a true strategic approach. Examples of techniques that might compose a cost-management strategy could include:

  • Buy in bulk. Warehouse clubs, like BJ's, Sam's Club, and Costco, give you the opportunity to buy key supplies—pens, paper, printer cartridges—in bulk at better prices than most office supply stores offer. It means supplies last longer, your office supply budget is easier to maintain and, as far as write-offs for taxes go, you have a single receipt. You can also ask your suppliers for discounts if you buy in bulk or agree to service terms that are longer than those you currently have. In addition, if you're someone who attends a lot of conferences and trade shows, put together a shopping list before the next one you attend; on-site discounts are almost always steep.
  • Use your vendors. Asking for discounts for bulk purchases is just one way you can help yourself with suppliers. Remember, they usually have the same cash-flow issues you do, so they may be willing to offer discounts for early or cash payments.
  • Go co-op when you can. Join volume purchasing groups. They exist for buying everything from the common supplies you might need to electricity and gas. Often, trade groups for your industry and local chambers of commerce offer access to these groups, not to mention discounts of their own.
  • Shop your services every year. Whether it's insurance, phone, your Internet provider, or any other type of service, shopping around can always help you better manage those costs.
  • Buy it with barter. A web search will yield a number of barter exchanges—organizations that can help you trade your products and services for in-kind goods. To help narrow it down, check out barter journal Barter News's state-by-state listing of the country's exchanges.
  • Renegotiate your rent. If you're ready to move, or re-upping on a lease, you can always negotiate better terms. (Check out "How to Renegotiate Your Lease" to learn more.)
    "Keep in mind that many costs are not measured by any company's accounting system," Maher adds. "The cost of customer ill will because of poor service or quality is an example. This is a real cost that should be part of cost management, but is not measured explicitly by any accounting system. Another example is the opportunity cost of people's time. When assigning projects and tasks, it's worth considering what will be given up if an employee does the task or project. For example, I knew an owner who asked employees at the last minute to provide a performance report. The employees had to forego customer service to fill out the forms that the owner wanted. When you're thinking about cost management, remember that it's as much about the value of time you're spending as it is about direct costs and expenses."

Source: "Cost Management as a Strategy," Trendline

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