Strategic Cost Management: Helping Manufacturers Master COVID-19

MANUFACTURING NEXT

Strategic Cost Management: Helping Manufacturers Master COVID-19

 
June 23, 2020

The COVID-19 pandemic has affected industries across the board, but within the manufacturing sector, that impact has been different across each sub segment. For instance, the demand for products in the automotive, industrial, and aerospace sectors has seen a slump, and chemical manufacturers of specialty products such as paints have seen lower demand. But those in the manufacture of pharmaceutical intermediaries and processed food have seen positive demand growth.

The manufacturing sector, deemed to be one of the hardest hit sectors during the pandemic, has a steeper recovery slope as compared to other industries. This inference has been drawn by comparing the performance of the manufacturing sector during past periods of crisis. To illustrate, a report by the United Nations Industrial Development Organization (UNIDO) states that manufacturing output declined by 7.1% in the fourth quarter of 2008, during the global recession. In a similar vein, the lockdown measures of the current pandemic have caused global manufacturing output growth to fall by 6.0% in the first quarter of 2020.

The immediate priority for most manufacturing businesses is improving liquidity and building financial resilience. However, detailed research by TCS indicates that there are financially resilient companies across the sub segments of manufacturing, such as automotive, industrial, and chemicals, that are better placed to weather the crisis. What sets these resilient companies apart is their persistence to remain financially resilient, irrespective of whether a market crisis is unfolding. These firms have regularly focused on strategic cost management initiatives.

In the present context of the global pandemic, these initiatives have gained special significance for manufacturing businesses looking to build operational resilience, crisis management strategies, and business model resilience. Strategic cost management is like a Swiss army knife – it has multiple tools to meet the varied needs of manufacturing businesses.

Zooming in on costs

The success of cost management depends not just on how quickly cash can be freed up, but also on the minimal cascading impact of cost reduction measures across a business. By viewing the build-up of costs across the value chain (see Figure 1), a manufacturer can find ways to identify areas where cost outs are possible.

For instance, cost outs can be identified by considering total supplier costs, by accruing components costs, or by taking the view of total cost of ownership that provides an end-customer view of the cost that is accumulated over the value chain to buy the product and its associated services. Segregating costs across the value chain can not only help discover areas which require attention for cost outs but can also evaluate the associated impact of the cost outs on the value chain. In fact, by using a value chain perspective on the costs structure, a manufacturer can rapidly undertake relevant cost outs while ensuring minimal cascading impact and free up much-needed cash.

Figure 1: Cost build up across the manufacturing value chain

Resiliency in operations, supply chain and business models

Depending on their financial standing, manufacturers can take a short-term or long-term approach to become financially and operationally resilient and adapt to various demands of the market and customers. In the short term, manufacturers that are already financially and operationally resilient will shift their focus from improving liquidity to cost management strategies to building new business models as compared to other players whose primary focus is to become resilient on both those fronts.

To the already resilient market leaders, strategic cost management has numerous benefits, including strengthening their business models, diversifying into new revenue streams, and more, as listed below:

  • Improve liquidity through visibility into inventories and future costs.
  • Increase cost efficiency through reduction in obsolescence, premium freight, and logistics and transport optimization.
  • Conserve capital by avoiding cost obligations such as cost of quality, warranty, and recalls.

By focusing on one or more of the above imperatives, manufacturers will be able to free up much-needed cash. Cash gets the best returns when it is made to work for the future. In the medium to long term, armed with the right transformation roadmap, manufacturers can develop robust and scalable models for operations by exploring alternate sources of supply and by enhancing visibility into their supply chains, inventories, and order fulfilment. A thorough understanding of the costs structure, product development dependencies, and robust operations will help manufacturers make informed decisions about product and portfolio profitability.

By viewing cost management strategically, manufacturers can explore newer business models and enhance customer engagement through e-commerce strategies and new services. Strategic cost management can become an excellent lever for manufacturing businesses to build adaptability, agility, and innovation across the value chain. 

Priya Varadan is a domain consultant in the Manufacturing Business Practice at Tata Consultancy Services. She has over 18 years of work experience straddling different functions such as research and development, pre-sales, innovation evangelism, and marketing. She has a management degree from the Indian School of Business, Hyderabad.