Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 41

Complexity of Operations and the Effect on Cost In the mid-1990s, a large consumer goods manufacturer moved its customer-based department and specialty stores to mass merchandising in a a variety of retail stores, large and small. The strategic change required it to increase significantly the complexity of its operations—the number of products, prices, discounts, patterns, colors, and sizes. After noticing the firm’s expense beginning to rise, the company hired a consultant to study the firm’s cost structure. The findings:

• As many as10 different vendors provided certain purchased items.

• Of the firm’s customers after the strategic shift, 98% were responsible for only 7% of total sales volume.

• The wide variety of prices and discounts and promotional programs added complexity to the accounts receivable collection process because of increased disputes over pricing and customer balances.

• Seventy-five percent of the company sales involved products with five or more color combinations.

• Customer demands for fast delivery of new orders had caused a shift in manufacturing to smaller batch sizes and more frequent equipment setups. Thus, total setup-related costs increased.

Required What would you advise the company to do?

Step 1 of 3

Strategic role of cost management concepts:

Cost management concepts are very useful in deciding and effectively utilizing the resources of an organization for the maximum output. Diversity of products, number of customers, a supply chain etc creates complexity in the firm’s operations. And hence, cost management is applied to remove these complexities.