A four-step cost-competitiveness roadmap for Indian manufacturers
January, 10th 2008
Industry leaders should have the vision to drive target cost management and kaizen costing as a cost management process instead of purely looking at the same as a quality movement.MR HIROSHI OKANO, PROFESSOR, GRADUATE SCHOOL OF BUSINESS, OSAKA CITY UNIVERSITY, JAPAN.
Local demographics and the economy may be acting against Japanese automobile sales, pushing the latest tally to a 35-year low, yet their business abroad is brisk. And, the leading industry players in the Land of the Rising Sun continue to bring out innovative and environment-friendly models at continually lower costs.
One may wonder if Japanese automakers, well known to have already achieved high cost efficiencies, still see a role for cost management. Can any incremental gain from cost management be too insignificant to pursue?
Cost efficiency is very necessary for Japanese automakers, because global competitors are getting more competitive, argues Mr Hiroshi Okano, professor in Graduate School of Business, Osaka City University, Japan.
There cannot be a lowering of speed on cost management process; and Japanese companies will be always on the treadmill, he observes during the course of an e-mail interaction with Business Line. In fact, companies like Toyota still continue to save significant resources through cost down initiatives.
Mr Okano, who has authored ten books and over 30 papers, has research interest on diverse themes. Such as, the historical and social aspects of management accounting, strategic cost management, R&D (research and development) management, eco-design, financial management for public sector, sport and art management, JIT (just in time) accounting, strategic city planning and urban studies, accounting and the poor.
Later this week, he is scheduled to speak at the Global Summit of the Institute of Cost and Works Accountants of India on cost management in the manufacturing sector.
Excerpts from the interview:
Where have been the major shifts that Japan has achieved, compared to the practices elsewhere in the world?
The shift has been from standard costing to kaizen costing (that is, continuous standard costing), and target costing (that is, longer term budgetary control, meaning two or four years during the design stage). In Japanese automotive and electronics companies, they must launch a variety of products relatively for short terms (four years for automotive, and six months for electronics).
Also, in one assembly line they make several types of products, so standard costing is not an effective tool.
Since the 1960s, therefore, Toyota, Nissan and other companies started to introduce target costing in the design process and kaizen costing.
Target cost for each part is also the target for suppliers. Target cost for suppliers is not linked with price.
Price is fixed almost six months after SOP (start of production). Target cost is fixed after the calculation of target price and target profit.
Are there reasons why costing did not develop as an independent profession in Japan?
Lots of Japanese companies have been using cross-functional management (for quality, cost, delivery, etc.) since World War II. Especially, product engineers, process engineers, purchasing, marketing and finance staff must act as accountants.
So they have their own target costing offices in the organisation. Toyota, for example, has five target costing offices.
Also, almost all big Japanese companies have been implementing lifetime employment systems; many people stay in the same company, which is why I guess the need to establish professional bodies has been low.
Accounting of costs is less important than upstream management of costs, and hence the country did not perhaps see the evolution of cost accounting institutes.
Is cost management a component in education? At what levels, and to what depths?
Yes, cost management is a part of our curriculum, but normally undergraduate students have no experience in any company. Therefore the level of cost management in the practical sense has not been deep in the curriculum.
But once the employment exposure starts the practical deployment of cost management skill is very intense and sharpens the academic knowledge gained in the undergraduate curriculum.
What specific cost management tools and techniques are the most popular now, in Japan? And what have become irrelevant?
Kaizen costing, target costing, and shared service (outsourcing of administrative works) are the most popular. Standard costing practices have become irrelevant and no company in Japan is considering this Western practice.
Much has been written about Japanese manufacturing success through cost management. Not so much about cost management in services, such as telecom, banking, IT (information technology), and so on. Why? Are there successful cost management initiatives in the Japanese services sector too?
I think that the linkage between cost down and benefit for customers in manufacturing companies is visible for everyone, so customers can check the situation, but in the service industry it is very difficult to do that. Actually, I have been involved with the service cost management of a telecom company, but its cost management activity does not seem to be supported by customers, I think.
Do Japanese manufacturers extend cost management to their marketing functions, even when the same are operated as separate entities?
If marketing means sales, it is yes. But it was very difficult to do cost management in the sales function because of the long-term commercial customs and other practices (kickback and so on).
What are the takeaways for the Indian automotive industry from the Japanese cost management experience?
Target costing and kaizen costing for sustainability and innovation. These two pillars can drive the bottom line of the Indian industry in the short and the long run.
But the industry leaders should have the vision to drive target cost management and kaizen costing as a cost management process instead of purely looking at the same as a quality movement. Of course, without losing the integration with the quality management process.
Can you suggest a cost-competitiveness roadmap for the Indian manufacturers, in view of the stiff Chinese competition?
First step: Kaizen costing for enhancing manufacturing innovation.
Second step: Target costing for R&D innovation.
Third step: Green kaizen and target costing.
Forth step: Overall cost management.
What is the next book you are working on?
I am working on strategic management accounting for city (urban) planning and control, a project of the Urban Research Plaza of the Osaka City University (http://gcoe.ur-plaza.osaka-cu.ac.jp/en/index.html). Id also like to do joint research with some Indian companies on target costing for the bottom of the pyramid, a concept made popular by Professor C. K. Prahalad.