The document discusses cost management in the plastics and polymers industry, emphasizing that cost improvement is about value creation rather than mere cost reduction. It outlines the importance of three internal stages—R&D and engineering, operations and delivery, and post-sales service—in creating customer value, while also addressing the need for continuous innovation and effective cost management methodologies across the supply chain. Additionally, it argues for a robust cost information system to support decision-making and align performance metrics with overall business goals.

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50 Modern Plastics & Polymers ● August-September 2005
C
ost management has been defined as
any cost improvement that creates and
sustains value for the customer better
than the competitor.Put it simply,
cost improvement is not cost reduction.
Rather,it is value creation.Cost improvement can
be achieved by either keeping costs constant
& increasing value,or by reducing cost & keeping
value constant,or increasing cost a bit & increasing
value more, reducing cost & increasing value,
or reducing cost more & reducing value a little.
Further,the customer is at the heart of cost
management and organisations have found ways
to create more value for the customer at lesser cost.
Steps of cost management
Most organisations create customer value at
two levels: internal and external.The internal level
comprises three activities: R&D and engineering
cycle, operations and delivery cycle and post-sales
service cycle.The external activity includes buyer
supplier interface.
Internal level
Internal activities are the links in a chain
that create and sustain customer value. In
many industries, a part of these activities are
performed outside the firm. However, these
should not be viewed as silos but as links of a
chain. Otherwise, one could end up improving
the links and fail to address the linkages. The
three internal stages address specific customer
values (Figure 1). For example, the mould cost
and processing cost that will be incurred at the
operations and delivery cycle greatly depends
upon the kind of plastics decided at the time of
R&D and engineering cycle.
R&D and engineering cycle: Metals, wood,
glass and polymers compete with each other.
Each of them offers different value propositions to
the customer. Polymers compete on many of the
value parameters. However, there are difficulties to
provide cost effective replacement where extreme
strength, odour, etc, become critical.
For example, in the Indian context, tractors are
not only used for farming but also as a medium
for transporation. Imagine half a dozen heavily
built farmers travelling on fenders made of
plastics. Additionally, offensive odours emitted
by plastic products have long been a deterrent.
This problem becomes quite acute in the case of
recycled plastics.
Cost management
The focus
The first article of our series on cost management explored the perspective of cost management with respect to the
plastics and polymers industry. The second article of this series focusses on the various stages of cost management
and unravels its focus. Read on…
M Hariharan
Figure 1: Customer value creation through the three stages

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Modern Plastics & Polymers ● August-September 2005 51
Customer value creation at the R&D and
engineering stage, thus, becomes critical.
R&D efforts to increase the strength of the
polymer without compromising on the cost
can go a long way in ensuring the desired
customer value. Similarly for odour, plastic
resin compounders try to overcome odour
by replacing unpleasant smelling additives
with low-odour substitutes, minimising
levels of monomers in plastics, adding odour
absorbers to plastics and using antimicrobial
agents to prevent formation of musty
odours by bacteria and fungi.
Continuous innovation leads to sustaining
customer value throughout the lifecycle
of the product. Innovations are critical in
enhancing plastic’s performance, which
include properties like better thermal
behaviour, better low-temperature
behaviour, ease of processing leading to
lighter and cheaper packaging and, shorter
cycles, innovative processes and materials to
enhance shelf-life and recycling.
Electronic components are sensitive to
static discharge. So, it becomes dangerous
to use insulated materials such as polymers
in the vicinity of sensitive components. It is
therefore imperative for design engineers to
understand their options well.This will help
them to manufacture static safe polymers
from insulated polymers.
Thus, introduction of new products in the
market, reduced time to market and efforts
at the design stage to plan the future cost,
create phenomenal value for the customer.
Operations and delivery cycle: What is
planned at the design stage is fulfilled at
the operations and delivery stage. Besides,
having a focus on process technology to
enhance process capability, reducing the
delivery cycle time and efforts to control/
reduce the current cost, ensure customer
value creation and sustenance.
For example, for reduction of lingering
odours in the case of recycled plastics,
solvent extraction and degassing during
processing can help.
In the case of manufacturing containers
of different colours, colour changes cause
wastage of process efforts and materials.
Efforts to reduce this wastage can greatly
improve the flexibility of the plant to adapt
to the customer’s needs of varying colours.
Biodegradable polymers are generally
considered to be costly for processing and
less robust physically, when compared to
conventional plastics. However, innovations
at processing stage are bringing down
the costs of these plastics. Sophisticated
polymerisation and blending techniques are
making such materials stronger and more
durable.Thanks to eco-consciousness, these
plastics are gaining ground these days.
The use of plastic containers - compared
to glass - lead to tremendous energy
savings, handling, transport and end-use
wastes. Plastics requires blow moulding and
thus provides flexibility of volume
and variety.
Post-sales service cycle: There is a
difference between the cost incurred
in acquiring the product and total
cost of ownership (TCO) (ie, total cost
of acquiring, using and disposing the
product). Many a times, one tends to look
only at the purchasing cost and fails to
recognise the TCO.
All innovations in design and
processing are put through the litmus
test at the usage stage. Ultimately, the
product’s failure at the users’ end, the
response of the service provider and the
product & service capability to reduce
TCO, impact the customer value. Impact
of plastics and polymers on TCO is both
positive and negative.
For example, automotive industry
incorporates methodologies to ease
assembly, stock control, purchasing.There
is tremendous proliferation of models.
Plastics offers solutions to reduce the TCO
with lower processing costs and lower
end-user maintenance costs. Polymers
and composites allow integration of
functionalities with a substantial reduction
of part number.Thus, assembly costs are
greatly brought down. Possibilities of
bulk colouring and in-mould decoration
contribute to the reduction of finishing
costs.Tooling costs are lower than that of
metal; hence, easier modifications of tools
that allow frequent introduction of new
variants of vehicles and extension of ranges
are possible. At the customer’s end, use of
polymers saves the weight and thereby
leads to savings in fuel consumption.
On the negative side, there are
environmental issues like chemical risks,
pollution, recycling risks, etc.
Managing the TCO is critical for
customer value and economic value
creation. Hence, processing post-sales
services should be viewed as a seamless
chain providing cost management
solutions. Various cost management
methods are used at three internal stages
of value creation (Figure 2).
Buyer supplier interface
Firms do not compete any more. Rather,
it is supply chains that compete. So one
has to look beyond the firm to understand
where and how value is created. One also
has to identify and fulfill value-creating
opportunities through three stages
and across the value chain (starting
from suppliers’ end to customers’ end).
Interaction between the various players
- from source suppliers to end customers
- creates and sustains customer value
and increases economic value. At this
stage, cost management graduates from
Figure 2: Cost management methodologies

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52 Modern Plastics & Polymers ● August-September 2005
a firm level to inter-organisational cost
management (IOCM) (Figure 3).
Focus of cost management
A common refrain from many CFOs is,
“Our guys in operations claim that the
plant efficiency has improved by 60 per
cent in the last five years; but on the
contrary our ROCE has dipped from 17 per
cent to 3 per cent. I wonder where all that
‘efficiency’ vanished!”
What one must understand here is that
though there are systems and procedures in
place - to plan & incur capital expenditure
(capex), to control cost & to motivate people
towards achieving their goal - these are
however not an insurance against bad
decisions. For example, we conducted a
simple exercise in one of the companies
to check whether their capex budgeting
process was robust enough to validate
good investments. Its operations were also
quite energy intensive, and most of the
capex proposals were for energy saving.
Further, we added up investments made
during the past three years with respect to
energy savings and also added up all the
‘savings’claimed by those investments.This
process revealed that total energy savings
were indeed 70 per cent of the total energy
consumed by the plant. Subsequently, we
suggested adding a few more capex so
that by running the furnace one could
‘generate’ energy.
Causes that lead to the above include:
In many organisations, ‘management
accountant tends to be an accountant
appointed by the management whose
job is to justify the unjustifiable
actions and rationalise irrational
decisions.’ The decisions are taken
and then they are justified
‘People behave in the way their
performance is measured’. In many
organisations, the reason for bad
organisational performance is
inappropriate performance measures.
Many a times, managers are motivated to
do the wrong things
The focus of cost management, however,
addresses the first cause. One of the main
purposes of cost information system is to
support the decision making process. Cost
information is normally required for three
purposes: decision support, cost control/cost
reduction and statutory requirement.The
numbers required for these three purposes
are different (Figure 3)
Costing is normally presumed to be an
accounting function. It is run by a team
of accountants, whose prime objective is
‘statutory compliance’. In the process, the
cost information system (CIS) turns out to be
a‘cost accounting system’. Cost accounting
systems are appropriate for meeting the
statutory requirement and not for decision
support and control/reduction.With its
primary objective being compliance, the
other two requirements lose out.
To be competitive, a company must know
its sources of profit and understand its cost
structure. Key decision makers must also
be aware of how informed their decisions
are. Further, they must be able to answer
the following questions, without much of a
number crunching effort.
Customer/channel/segment decisions:
How profitable are our
customers/segments?
Which among them are the least
profitable and how can their
profitability be improved?
Who generates the greatest profit
contribution and how best can we
protect them?
Which is the most profitable channel to
reach our customer?
How does our competitor trigger
our cost?
How cost-effective are our marketing and
sales efforts?
What will be the impact of distributing to
major customers via their channel rather
than through our own network?
What is the implication of serving small
accounts through third party logistics?
What are the maximum discount/ service
packages we can afford in the next round
of negotiations with our largest customers
while still meeting our profit objectives?
What type of account should we
focus our new business effort on, for
maximum profitability?
Do our large accounts really make
money? Under what conditions are
we prepared to walk away from that
volume and what will we have to do
as a consequence?
Does this product contribute
sufficiently to profitability to justify
retaining it in the range?
Should we stay in this market?
Product decisions:
How profitable are our products?
Is it appropriate to launch the product in
this market at this price?
Should we drop this product? Should we
withdraw the product from this market?
Are our R&D efforts paying?
Should we make or buy?
Process decisions:
How cost effective are our processes?
What is the cost of accommodating less
than our desired‘batch’?
Is it the right time to expand
our capacities?
Are we sweating our capacities?
Is our capacity excess or protective?
Figure 3: Cost management – stages and enablers

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Modern Plastics & Polymers ● August-September 2005 53
Which material is appropriate for
managing the overall cost of ownership?
If these questions can be answered with
reasonable assurance with reference to their
profit impact, then it can be presumed that
the company’s CIS is quite supportive.
For every action there is a
financial reaction
Had Sir Isaac Newton been in business,
his third law would have been‘for every
action there is a financial reaction’.Whatever
be the function we are in, so long as our
firm is‘for-profit’, the ultimate goal has to
be the‘bottomline’(economic value). Cost
management perspective has to be backed
by the focus of cost management. Focus
of cost management is to understand,
articulate and communicate the‘financial
reaction’of the firm’s actions.
Many a times accounting justification is
done more as an afterthought. Or worse,
accounting requirements create hurdles
to cost management. What is missing in
many firms is an integrated approach
towards cost management with customer
value creation as the perspective and the
bottomline as the focus.Therefore, cost
management calls for an organisational
effort to integrate, and align financial
analysis and customer focus.
Cost information system forms the edifice
of cost management. It cannot be viewed as
an extension of financial accounting system.
To sustain the focus of cost management,
we need a cost information system that
can articulate the financial reaction of
the actions by addressing the resource
consumption. (Figure 3)
Performance management system
It is important to decide how you
will evaluate the effectiveness of your
performance management system
before you begin implementing it.
What are the outcomes you want from
the system and how will you measure
them? Most organisations will initially
focus on monitoring.
However much we plan, it all boils down
to people. Firms attempt to align employee
performance to the overall goal. But, inspite
of this noble intention, we end up having
conflicts between individual goals and firm
goal; and conflict among individual goals.
We end up creating conflicts, resolving
conflicts and get‘enlightened’.
No performance measurement and
management system can be fully aligned
ever. But, we cannot do away with them
either. After all we cannot manage what
we do not measure. Attempts are made by
firms to have an aligned the performance
measures to the business goals. (Figure 3).
However, it goes out of sync more often
than not.
There are two primary reasons for this:
People behave in the way their
performance is measured. Individual
players end up protecting their turf.
Employee focus gets localised. In the
process, the overall goal is lost
Performance metrics are to be aligned
to the strategy of the firm. Strategy
depends to a great extent,
on changes in the environment.
Strategy is for the future while
performance metrics are for the
present. There is always a time gap
between changing environment and
strategy alignment; and strategy
alignment and alignment of
performance measures
Conclusion
The perspective of cost management
is to create value for customers. And, this
is achieved through three stages: design,
process and usage. It is sustained through
better buyer supplier interface. Further,
different methods and tools are used at
these three stages to ensure customer
value creation.
The focus of cost management, on
the other hand, is to create an economic
value for the customer. A robust cost
information system ensures that the
financial reactions of the actions are
reasonably articulated. Besides, various
tools used at the stage of customer
value creation also ensure economic
value creation. To carry these efforts
one should have a performance
measurement and management system.
Such a system should be aligned with
the goal of the firm.
‘Cheshire puss,’ asked Alice,“Would
you tell me, please, which way I ought
to go from here?”“That depends a good
deal on where you want to get to,” said
the cat.“I don’t much care where…” said
Alice.“Then it doesn’t matter which way
you go,” said the cat.
M Hariharan is the
director of Savoir Faire
Management Services,
Mumbai. He has been
helping firms across sectors
in identifying their core
problem, aligning their
processes according to
customer needs and enable sustenance of
the efforts. He preaches what he practices and has
successfully trained more than 5,000 executives
on these aspects. He can be reached on
email: sfgroup@vsnl.com
Table 1: Cost information depends upon the purpose
Purpose Grammar Information need
Decision support
What will be the
cost? (Future
tense)
Incremental cost/Revenue
Planned capacity utilisation differentiating between
protective capacity and excess capacity
Type of cost information required for the hierarchy of
the decision maker
Classification of cost based on cost drivers
Classification of cost based on the cost object
Customer/channel/segment/profitability, product
cost analysis / R&D, etc
Control/reduction
What should have
been the cost or
what should be
the cost? (Present
‘p erfect’ tense)
Function wise cost
Value stream cost
Controllable and uncontrollable cost
Cost driver analysis
Based on the current capabilities/efficiencies
Statutory
requirement
What was the
cost? (Past tense)
As required by the specific external agency -
company law, electricity regulator, cost audit, tax
requirement, etc