Question

‘Qualitative factors do not play an important role in relevant cost analysis. We should focus more on quantitative factors as outcomes can be measured in numerical terms.’ With reference to the production manager’s statement above, please provide your comments by stating the relevancies of the quantitative and qualitative factors for flexibility in making decision related to cost analysis. Give an example to illustrate your answer.

Answer 1

In my opionion, both qualitative and quantitative factors play significant role in relevant cost analysis.

Quantitative factors such as cost of materials, employee costs, production costs. capital expenditure, working capital requirements, cost of long-term capital etc. play a major role in determining costs. However, there are many qualitative drivers which play an important role in making relevant decisions, such as : brand, corporate social responsibility, welfare of internal and external stakeholders, long-term vision and goals of the organization, regulations etc. Furthermore, qualitatative factors may not directly contribute in numerical terms in the short-term, over a longer period of time they are more likely to impact the profitabilty and valuation of the company. For instance, companies which are perceived to be more ethical and vital contributors to welfare of general society are given premium valuation by markets.

This can be explaind through the following example :

Let's say an FMCG company called Sunrise is evaluating if its manufacturing operations could be outsourced to a low cost geography such as China. In numerical terms, the production manager is likely to arrive at savings in cost due to low labour cost, material and production costs. However, it is imperative to arrive at the decision by having a holistic perspective. Sunrise shall also assess the following qualitative factors :

• Existing regulations on importing from and outsourcing to China.
• How does the current geo-political relationship look like between the local country and China?
• There could also be a sensitivity analysis done to evaluate different scenarios - for instance impact on savings if import duties or labour costs increase by 10% over the next three years
• Would there be a procurment risk if there are unforeseen circumstances such as force majeure or pandemic situations? Are there any alternatives in such cases?
• How would your customers perceive such decision and if this would have impact on sales?
• How would you internal and external stakeholders such as employees, labour unions and local suppliers react to such decisions? Would that strain current relationships with them?
• Impact on the market value of the company over long-term

There could be various other qualitiative factors which could outweigh the benefits derived in numerical terms.

Hence, both qualitative and quantitative factors play significant role in relevant cost analysis.