In the current era of multiple factors such as globalization, digitization, and low-carbon transformation, enterprises are facing unprecedented operational pressure. From the financial crisis in 2008 to the COVID-19 in 2020, the instability of the global supply chain, sharp fluctuations in energy prices, and rising inflation have directly pushed up the operating costs of enterprises. According to PwC’s Global Corporate Operating Costs Report, over 65% of companies indicate that the continuous increase in raw material, logistics, and labor costs has become the main factor contributing to the decline in profitability.
In this environment, cost control is no longer a simple “money saving” behavior in the traditional sense, but has become a core strategy related to the survival and development of enterprises. Enterprise managers need to have a clear understanding that cost control is not only related to short-term profit optimization, but also to the construction of long-term competitive advantages for the enterprise.
To stand out in fierce competition, enterprises cannot solely rely on increasing prices or blindly expanding market share. Instead, they must effectively control costs through improving internal management efficiency, optimizing resource allocation, and empowering technology. The problem is that many companies still lack a clear methodology and practical path on how to scientifically and systematically control costs.
This article aims to help business managers, financial managers, and operational decision-makers fully understand the significance, specific implementation methods, and implementation strategies of cost control. Through systematic theoretical exposition and highly operational process guidance, help enterprises achieve cost reduction and efficiency improvement, ultimately forming sustained, stable, and non replicable competitive advantages.
Cost control refers to the management activities of planning, organizing, coordinating, and controlling the expenses and resource consumption generated in the production, procurement, sales, management, and other links of an enterprise in order to achieve its predetermined business objectives. Its core purpose is to optimize the allocation of enterprise resources, improve operational efficiency, reduce unit costs, thereby enhancing the profitability and market competitiveness of the enterprise.
Why is cost control crucial?
Profit margin compression: With the increase of market price transparency, the profit margin of products is constantly compressed. Only through cost optimization can the profitability of enterprises be guaranteed.
Competitive strategy transformation: shifting from the previous extensive growth model of “running horses and enclosing land” to “refined management” and “equal emphasis on quality and efficiency”.
Dealing with Uncertainty: Faced with supply chain disruptions, exchange rate fluctuations, policy adjustments, and other uncertain factors, enterprises need to enhance their risk resistance through cost control.
Who needs cost control?
Not only the finance department, but also various functional departments such as production, procurement, logistics, and human resources should become the main body of cost control, forming a control system with full participation and comprehensive coverage of all staff.
In the past, ‘cost leadership’ was often equated with ‘low-cost production’. However, modern competition emphasizes value creation and experience enhancement. Enterprises are no longer just pursuing cost reduction, but achieving cost optimization while creating user value. It is necessary at different stages of the enterprise lifecycle, but the most critical stage is the intensification of competition, growth obstacles, or industry reshuffle.
Why change?
Simply reducing costs may harm product quality and service experience, and instead weaken brand value. Value innovation based cost control, on the other hand, enhances user value while reducing overall costs through optimization design, digital empowerment, supply chain collaboration, and other means.
The fundamental reason for sustained competitive advantage lies in the ability of enterprises to establish a cost control system that is difficult to imitate and effective in the long run. This system consists of three levels:
Institutional system (institutional barriers): Standardized processes and standardized institutional safeguards for execution.
Capability system (talent barrier): Cultivate cross functional cost management talents, enhance data analysis and cost accounting capabilities.
Technical system (technical barriers): relying on digital tools to achieve real-time data collection and dynamic cost optimization.
Comprehensive budget management is a systematic management method in which enterprises predict and plan their future revenue, expenses, investments, and financing based on strategic goals, and control, assess, and provide feedback during the execution process. Applicable to enterprises in all industries, especially cross regional and cross industry group enterprises, as well as cost sensitive industries such as manufacturing and retail.
1) Why comprehensive budget management?
Clarify the cost targets and responsibilities of each department
Ensure consistency between resource allocation and corporate strategy
Improve predictive and response capabilities
2) Comprehensive budget management operation process
Strategic decoding: Decompose the budget goals of each business unit based on the enterprise strategy.
Budget preparation: The finance department takes the lead and collaborates with various business departments to develop detailed budgets, including operational budgets, capital expenditure budgets, cash flow budgets, etc.
Budget approval and issuance: confirmed by senior management, assigned responsibilities and assessment indicators.
Dynamic monitoring and adjustment: dynamically adjust the budget through monthly or quarterly rolling forecasts.
Performance evaluation and rewards and punishments: The effectiveness of budget execution is incorporated into the performance management system, and rewards and punishments are clearly defined.
Lean Production originated from the Toyota Production System, with the core of eliminating all waste and improving value stream efficiency. Suitable for stages such as enterprise scale expansion, capacity bottlenecks, and long delivery cycles, reducing ineffective operations in the production process; Shorten production cycle; Improve resource utilization
Implementation steps of lean production:
Identify Value Stream: Analyze the production process and distinguish between value-added and non value added links.
Eliminate waste: Implement optimization for seven major waste processes, including waiting, handling, and inventory.
Process standardization: Establish standard operating procedures (SOP) to ensure job stability.
Kaizen: Continuous optimization through tools such as PDCA cycle and daily morning meetings.
Automation and informatization: Introduce MES system and automation equipment to achieve intelligent manufacturing.
Strategic procurement refers to optimizing procurement costs and overall supply chain efficiency through long-term cooperation with key suppliers based on enterprise strategic goals. Applied in industries such as manufacturing, retail, and construction, it has a significant impact on the procurement costs of raw materials, goods, and components. If procurement costs account for 60% -70% of production costs, optimizing procurement strategies is the key path to rapid cost reduction.
Strategic procurement implementation process:
Supplier classification management: distinguish strategic, leveraged, conventional, and bottleneck suppliers, and clarify management strategies.
Long term cooperation agreement: Establish strategic partnerships with core suppliers, negotiate long-term preferential prices and cooperation terms.
Centralized procurement and scale bargaining: Integrating procurement needs to reduce individual procurement costs.
Supply chain collaborative management: Reduce inventory and logistics costs through models such as VMI (Vendor Managed Inventory) and JIT (Just In Time).
Informationization and digital technology include ERP MES、RPA、 Artificial intelligence, big data analysis, etc. are applied in various aspects of cost control. In the stage where enterprises hope to improve management accuracy, cross departmental collaboration capabilities, and achieve digital transformation. Realize data transparency and reduce information asymmetry; Enhance the scientificity and responsiveness of decision-making
Steps for enterprise digital application:
Requirement analysis and system selection: Based on the characteristics of the enterprise’s business, determine the system requirements and select a suitable ERP/MES system.
System integration and data standardization: Connect the data interfaces of various systems to achieve unified information flow, logistics, and capital flow.
Data modeling and analysis: Through big data analysis, gain insights into cost structure and volatility trends.
Automated process implementation: Using RPA to reduce repetitive manual operations and improve efficiency.
Cost accounting is the process of classifying, collecting, allocating, and calculating various expenses incurred in the production and operation process of an enterprise, and performance evaluation is based on this as a basis for incentives and constraints. Suitable for all enterprises that require refined cost management and performance oriented management. Ensure the accuracy of cost data; Establish a fair and effective assessment system to promote employee cost reduction and efficiency improvement;
Key points for implementing performance evaluation:
Improve cost accounting methods: Adopt methods such as activity-based costing (ABC) and standard costing to improve accounting accuracy.
Establish clear responsibility attribution: specific cost control objectives corresponding to departments and positions.
Performance indicator design: Set reasonable cost control KPIs, such as unit cost, expense rate, procurement cost reduction rate, etc.
Implementation of incentive mechanism: Linking cost control results with employee performance bonuses to enhance motivation.
Blind layoffs, cuts in research and development, and other short-sighted behaviors lead to weakened innovation capabilities and long-term loss of market competitiveness.
Excessive budget compression hinders product upgrades, technological innovation, and misses market opportunities.
Simply compressing costs leads to a decrease in benefits, an increase in work pressure, and a decline in employee satisfaction and cohesion.
Information systems are outdated, data silos are common, and inaccurate cost data leads to decision-making errors.
The lack of unified planning in IT construction, system redundancy, and asynchronous data have led to poor effectiveness in digital cost control.
Through cultural promotion, institutional constraints, and exemplary demonstration, we will strengthen the awareness of conservation and promote the participation of all staff in cost control.
Adopting a five step closed-loop approach of “budget accounting control analysis improvement” to ensure systematic and sustainable management.
Guided by customer needs, simplify processes, reduce levels, and improve decision-making efficiency and execution.
Build a unified data platform, utilize AI and big data analysis to optimize decision-making, and promote intelligent operations.
Promote green procurement, energy management, and circular economy, achieve energy conservation and emission reduction, reduce environmental costs, and enhance corporate social responsibility image.
Cost control is the foundation of strategic competitiveness, and only through scientific and systematic cost management can enterprises maintain profits and competitive advantages in complex and ever-changing markets.
Digitization, lean management, and green low-carbon are the future directions. Enterprises should keep up with the trend of the times, comprehensively promote digitalization and green strategies, and build cost advantages for long-term sustainable development.
Systematic thinking and continuous optimization are key, and cost control cannot be achieved overnight. It is necessary to form unique competitive barriers for enterprises through systematic thinking and continuous optimization.
This article "How to Build a Sustainable Competitive Advantage for Enterprises through Cost Control" by AcloudEAR. We focus on business applications such as cloud ERP.
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