Question

What are the salient characteristics of strategic cost management and contract management?

Answer 1

STRATEGIC COST MANAGEMENT

Strategic cost management is the process of reducing total costs while improving the strategic position of a business. This goal can be accomplished by having a thorough understanding of which costs support a company's strategic position and which costs either weaken it or have no impact. Subsequent cost reduction initiatives should focus on those costs in the second category. Conversely, it may be useful to increase costs that support the strategic position of the business.

For example, the strategy of a manufacturing firm is to be able to offer rapid turnaround of customer orders by maintaining tight control over its bottleneck production operation. To do so, the company incurs extra costs to keep the bottleneck running 24x7. Expending extra funds here directly contributes to the profitability of the business. Conversely, cutting costs at the bottleneck operation will reduce the production capacity of the business and will have an immediate negative impact on its profits. From a strategic perspective, the company would do better to cut costs in non-bottleneck areas that are downstream from the bottleneck operation, since these cuts would have no impact on the delivery times quoted to customers.

It is almost never worthwhile to cut costs in strategically important areas, since doing so reduces the customer experience and therefore will eventually lead to a decline in sales. Consequently, management needs to be involved in cost reduction activities, so that they can provide input regarding how certain costs must be incurred in order to support the competitive position of the firm.

Strategic cost management is a continuing process, since the strategy of a firm may change over time. Thus, certain costs may be sacrosanct when one strategy is being used, but can be readily eliminated when the strategy shifts.

The strategic management process is a management technique used to plan for the future: Organizations create a vision by developing long-term strategies. This helps identify necessary processes and resource allocation to achieve those goals. It also helps companies strengthen and support their core competencies.

The strategic objectives of the organization are linked to its mission and formulated vision. Strategic objectives may not necessarily meet the conditions and principles of SMART (specific, measurable, achievable, realistic and time availability), if they are further disintegrated into the specific objectives

Strategic Management is important because it allows companies to analyze its current capabilities and its operating environment, identify long-term threats and opportunities, and marshal the company's resources to address them.

CONTRACT MANAGEMENT

A Contract Management System (CMS), sometimes called Control Lifecycle Management manages the production and management of contracts, Service Level Agreements (SLA) and Procurement Master Agreements.

Contracts are core to any business’s procurement activities. They set out the prices, service levels, terms and supplier relationship and ensure that your company is regularly supplied with their direct and indirect supplies.

A company’s Contract Management System not only sets out these important details but also controls a company’s risk of a vendor not performing correctly. Features of a good Contract Management System includes:

• Storage of the company’s standardized contracts.
• A core workflow management system to facilitate and manage the drawing up and execution of new contracts.
• Flexibility to cope with a vendor relationship and its interactions.
• Calendars that include milestones that the vendor should meet.
• Check lists to manage information and activities within the contract life cycle.
• Compliance monitoring.
• Alerts to indicate movements from expected behaviour.
• Agreed delivery schedules and the ability to track them
• Prices and budgeting for each product line and vendor.
• Document depositories to hold the live contracts and standard contracts for use by the company.
• Event management for any problems.
• Claims administration to cope with any non-adherence with the contract.
• Request For Proposal (RFP) management that includes: Template based creation.Interactive and dynamic workflow managed creation.Structured RFP management through its life cycle.
• Contract management that includes: Template based creation.Interactive and dynamic workflow managed creation.Structured contract management through its life cycle.
• Management information that will show which contracts: Have the greatest risk potential.Are costly to manage.Are the most valuable.Are close to being renewed.Take an excess amount of time to manage.