Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the December 5, 2006 issue of the Bangkok Post.
By Gary Murphy
This is the third article in a four-part series entitled Inside Automotive. In this article, we look at how cost reduction is the underlying theme of most auto industry challenges, and how the strategy of managing these costs is changing.
The automotive industry is undergoing massive change, and is therefore facing growing challenges. Firstly, we have the pressure that arises from global markets and competition. The cost challenges here are a result of new market entrants, economic volatility and saturated markets.
Secondly, we are seeing rapidly changing value-chain models, which include decreasing vertical range of manufacturers, consolidation of parts suppliers, modularisation and co-operative alliances, all of which have the underlying aim of cost reduction.
Thirdly, we have increased product portfolio and complexity, with challenges ranging from technological change, increasing research and development efforts and shortened development cycles. On top of all this, we have the challenges posed by the regulatory environment, which include risk management, transparency and transfer pricing.
How can original equipment manufacturers (OEMs) cope with these challenges while remaining cost effective?
To cope with these challenges, OEMs need to focus on a number of key goals. One is sustainable performance management. Organisations must be able to pinpoint their company's key success factors and implement a stringent and strategy-oriented control model. This should be done with reasonable consideration for all stakeholders.
Next, organisations need market-oriented organisation structures. By keeping the organisation flexible, and at the same time robust, they may improve the value and the supply chain. In addition to this, organisations need an attractive and profitable product and service portfolio that integrates good product management and innovation while fostering customer orientation.
Competitive cost structures are a necessary element of any organisation. This demands the creation of decision supporting cost transparency and the identification of individual cost drivers. Organisations need to manage these cost drivers along the product life cycle.
How do you define "cost management"?
Cost management means placing a strong focus on managing cost drivers, rather than treating symptoms, such as cost reporting and cutting.
Is cost management strategy changing?
Yes. The old ways of dealing with cost are not effective because they do not deliver sustainable change. They may succeed in addressing the short-term pressure to deliver a margin improvement but fail to position businesses to be competitive in the face of new challenges. Out-of-date cost strategies can damage the ability to execute strategic aims.
What needs to be done differently to turn cost into a competitive advantage, with sustainable results?
To deliver significant shifts in competitive advantage, cost-effective organisations adopt enterprise-wide, systematic, structural and integrated approaches, which provide a holistic framework to control, reduce and eliminate costs throughout the value chain.
They focus on harmonising the factors that they can control, and involve the whole organisation. Year after year, they perfect the art of cost reduction. Once cost drivers are determined, they decide where to lead and where to match, and then build an enduring competitive advantage through continual improvements.
An OEM may approach a cost driver in a number of ways. It may reduce the variations of part types, reduce its supplier base, use technology to accelerate development time, or achieve an economy of scale from global sourcing.
Which phases in the automotive value chain are preferred instruments to manage costs?
This varies from business to business. In fact, there may be cost-saving potential in many phases. Take research and development. Here we may see potential savings on products, processes and resources through the development of target costing and change management. In the "sourcing" phase, strategic partnerships and low-cost country sourcing may reduce costs on processes and resources.
Continuous improvement and complexity management may save costs in the "production" phase. And in terms of logistics, better warehouse strategies and distribution network design are a good place to start, if cost reduction is the aim.
What makes a cost-effective organisation?
Organisations that are successful in managing their costs understand their cost base. They invest in those areas that are central to the achievement of their business strategy and continuously plan, monitor and revise their cost strategy. The result is an organisation that continuously optimises cost to create strategic value.
