Total Cost Management Division

TOTAL COST MANAGEMENT

FRAMEWORK
Version 0
November 2018
Foreword…
For over two decades now, the head wind disruptions in businesses is the
neo-norm, strongly challenging the going concern concept in the
corporate world.

Technology disruptions, changing customer preferences, unrelenting

competitive forces, stiffer regulations, and continued volatility in input
costs are posing serious threats like never before in the way of doing
business business models, organization structures, value chain designs
and product designs.

Gaining competitive and cost advantage amidst market and economic

chaos through delivering value to customers and stakeholders is no more a
'business as usual'. Aspiring for double digit growth in market share,
revenues and margins calls for challenging the status quo and embracing new school of thought.

With this background of challenges, the TCM Division of the CII is striving to embed and enhance 'cost competitiveness' of the
Indian industry through a tested concept 'TCM Total Cost Management'.

Key principles driving TCM in business are embedding strategy, systems and cultural focus on 'costs' at all levels and at all times
in a manner which is completely different from traditional costing. Industry's legacy view of costs limited to factory and
vesting ownership with the CFO is now a passé.

The concept of TCM addresses cost emerging from 'business models, product design, value chain e ciencies and product /
customer portfolios and addresses pro tability issues in businesses.

TCM in a business enables complete visibility of costs through 'True cost structure' encompassing key dimensions like costs
aligned to business strategy, enterprise level cost ownership and spotting pro t drain points to provide long term cost
advantage and long term sustainable business model.

Board of directors and CXO's of both manufacturing and service sectors have made incredible gains through complete
adoption of TCM concept. Connecting 'Value-Price-Cost' through TCM is a great proposition for building sustainable business
model.

I take this opportunity to thank the chief mentors of CII Mr. A N Raman & [Link] who have been the architects of
CII TCM Division and majorly contributed to this framework development.

Seshagiri Rao MVS

Chairman, CII National Committee for TCM &
JMD and Group CFO, JSW steel
Acknowledgments
We thank the founders and mentors of CII TCM Division who have envisioned 'TCM Division' at Confederation of Indian Industry
(CII) for accelerating 'cost competitiveness' in the Indian industry.

The 'TCM framework Version 0' synthesizes concepts gained from 2 decades of exposure from various sectors and sizes of
Indian corporates.

This publication would not have been possible without valuable inputs and insights from members of CII National Committee
for TCM'.

Acknowledgments

Mr. A N Raman & P Thiruvengadam, Mentors CII TCM Division

Mr. Seshagiri Rao, Chairman, CII National Committee for TCM & JMD JSW Steel & Group CFO

Mr. Kamal Bali, Co-Chairman, CII National Committee for TCM & President and MD, Volvo India Ltd
Table of Contents
Purpose of TCM Framework
1
Background & Scope
2
TCM Aligned to Business Strategy
3
TCM Principles
4
TCM Tools
5
TCM Processes
6
Key Performance Indicators
7
Outcomes
8
Maturity Levels
9
SCHEMATIC
REPRESENTATION OF
TCM FRAMEWORK
 SCHEMATIC REPRESENTATION OF TCM FRAMEWORK

Strategic Business Environment

Strategic Inputs TCM Tools Strategic Outcomes

TCM TCM a) Alignment with Customer Value

Principles Processes
a) Globalisation
b) Competitive product price
b) Volatility

Business c) Efficient Value chain

c) Competitiveness
Strategy d) Resilient Cost Structure
KPIs TCM Levels
d) Price Pressure
e) Sustainable Profitatbility

TCM

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Outcomes

Strategic Business Environment

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1. Purpose of TCM
Framework
 Purpose of TCM Framework

Presently, there is an ever increasing pressure on businesses to stay e cient and competitive due to recessionary
and competitive pressures. CEO's & BOD ponder and brainstorm relentlessly to address stressed pro t lines for various
stakeholder interests. Therefore, journey of a business to de-mystifying costs across business is now to be reckoned with.

Addressing element wise cost reduction (like material cost or overheads), pursuing cost down targets and / or reactive
measures to low pro ts are now a passé.

Cultural transformation for cost sensitization, enterprise level ownership to costs, visibility of cost information for strategic
decision support, mapping pro t drain points and relentless cost focus across value through e ciencies is catching up.

Addressing 'true cost' in business through product (re)design, factoring environment costs, value chain e ciencies, product
cost management and reducing 'cost to customer' are few contemporary ways to address costs and pro tability in a business.

CII TCM Division with inputs from industry, domain experts and consultants have over the decade pursued TCM philosophy with
Indian industry. Learnings have been distilled and now presented to larger section of the Indian industry as TCM framework to
address competitive journey of businesses.

1) Strategically designed 'competitive cost structure' in a competitive business scenario

In a competitive scenario, P/L based cost structure would have a limited support to CEO and leadership team in a business.
Strategic focus on costs emerging from strategy driven business processes - enhances competitiveness of a business to
stay ahead of competitors, re ne business process for cost-e ciency and make a blue-print for growth.

2) Cost structure re ecting business process

Cost sheet re ecting the value chain of business, aligning resources with processes to re ect true costs in a business.
This step largely reduces the quantum of overhead absorption and provides key information for focused improvements.

3) Enabling sustained cost advantage in a context of stressed economy and volatile global context
Delivering more value to the customer than competition at lesser costs through an
e cient business model.
A business model combining a well marketed product delivered at a truely low-cost.
A true cost advantage is di cult to overcome, especially in a price-sensitive
market. A company that can create a meaningful cost advantage is playing with a
stacked deck.
Eg: Walmart supply chain costs are the lowest in the world.

4) Create a blue-print for cost strategy in business

Cost structure vision in a corporate over a 3 5 year horizon helps c-suite to identify
and map strategic initiatives for a constructing competitive cost structure.
Eg: Make Vs Buy, import Vs make, alternate materials, additional customer offering,
et al

5) Optimized product and / or customer portfolio

Strategic in uence and building capabilities in a business to manage product / customer portfolio is a way for improving
overall margins in the interest of overall stakeholders
Cross subsidy of product margins, high cost to serve customers, long term unviable product segments and price-volume
dilemma products are addressed through active management of portfolios.
Deploying right TCM tools aides strategic decision support in a business for the portfolio management

6) Futuristic cost structure

Risk induced cost structure factoring top risks of the business.
Every major risk can be a threat to any constituent of the cost structure. Constructing risk based cost structure for
visibility on cost impact of risks provide mitigation plan for cost optimization.

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 2. Background and
the Scope The
External Environment
 Background and the Scope The External Environment

The rapidly evolving dynamics of business landscape has resulted in a dramatic reduction in planning horizons for
strategic plans and cycle times for business models. The planning horizons for strategic plans have shrunk from 8-10 years to
3-5 years and CEOs are forced to re-visit their business model every 2-3 years. As a result, the investments and resource
commitments are being restricted to retain exibility.

Competition:
Challenges to existing models, can come from completely non-traditional competitors e.g. electric vehicles disrupting the
automobile industry, Air BnB disrupting the hospitality business, Uber
disrupting the taxi industry.

Typically, many of these new entrants have exponentially lower costs

compared to the incumbents. At the same time, even in traditional
businesses, the mid-market and entry level competitors start making
inroads into the premium markets.

The initial DNA of such traditional businesses has been cost driving,
which is a valuable control that they bring to the table across the
market.

External business challenges:

Incidence of external forces like market, customer, economy and
regulatory seriously impact the cost competitiveness of businesses.
Emerging high cost structure hurt the overall pro tability of businesses in medium and long term timelines.

Each market is getting differentiated on multiple axes. As the choice increases due to competition, the customer
continuously seeks out and receives better value. Therefore, it is important for rms to track their investments and costs so
that they are aligned with customer's value to stay competitive.

Cost Competitive Advantage:

Top management of every business is focused on developing sustainable 'cost competitive advantage' to grow pro tably.

Business strategies incorporating Total Cost Management (TCM) enables businesses to acquire sustainable competitive
advantage.

With the background of global volatility and customer value in business CII has institutionalized 'TCM' Total Cost
Management, as a company-wide systematic and structured approach, which provides a holistic framework to control,
reduce and eliminate costs, throughout the value chain of business.

CII Total Cost Management (TCM):

TCM calls for cost focus in every aspect of the business and ows through the organization as a part of strategy formulation.

Strategies are formulated with an objective of moving upward on the value chain and the focus is typically on the growth.

TCM recognizes that cost is incurred while creating value and brings cost dimension in the value creation process. TCM
requires managing the cost while creating value.

CII TCM Division has gathered substantial evidence for the e cacy of the TCM philosophy by working with industries for over 2
decades.

CII TCM Division's aspiration has now culminated to document the coveted philosophy into a framework document.

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3. TCM Aligned to
Business Strategy
 TCM Aligned to Business Strategy

Organizations pursue different strategies to achieve their goals.

While many organizations see cost
Though not articulated explicitly as an element of strategy, every organization
management as a way to reduce cost
adopts cost management at different levels.
and increase pro tability, a few align
TCM with the current business strategy
Customer requirements:
to achieve long term sustainable
With the advent of globalization and expanded bandwidth of products,
competitive advantage.
customers and markets the axis of business competitiveness shifted to
speci c or customized requirements. This was largely different from single
product / process orientation in erstwhile business focus.

Re-building competitive position in business began with understanding of customer requirements and embedding the
required value proposition into the product and services effectively.

Business models / business processes have been transformed with product and customer focus. The alignment of TCM with
business strategy is the heart of TCM framework.

The starting point of conventional costing accounting system is the manufacturing process and hence material and
manufacturing process is at the core.

Factory as a central theme of cost will therefore need to undergo a paradigm shift towards strategy, de ning the building
blocks of TCM.

Philosophy of differentiation emerging from business strategy is the driving force of TCM in business.

CII TCM philosophy re ects the For example, Technology deployed to be split into existing and new products /
understanding of product /customer customers / processes and risks involved associated with implementation of
segments with the expected value strategy. Strategy along with business-as-usual are the aligning points of TCM
proposition where in business wishes architecture.
to compete and makes it as a co-
ordinate in the TCM processes TCM philosophy completely aligns with the strategic thought process of a
business as apposed traditional costing system's factory centric & cost
reduction approach.

TCM's core approach is to identify, analyse and address the differential cost of producing and servicing the strategic
customer / market segments.

Linkage between business strategy and TCM constitutes the biggest element of change in the management architecture of a
current business

TCM aims to improve cost functionality across the value chain and thus Visibility of algorithm based cost structure,
bene t all stakeholders including shareholders. At a macro level, TCM cost ownership at functional levels, driving
deals with systems and processes required to bring a cost management e ciency across value chain, developing
culture into all levels of the organization. At the micro level, the focus is cost vision in business and deploying long
on implementing TCM across the value chain. term cost strategies are the building blocks
of TCM architecture in business.
TCM goes beyond bringing down the unit cost and facilitates
organizations to improve market share and revenue per unit.
The complementary process happens only when the strategy formally recognizes the TCM as an element of strategy.

TCM links cost to value creation and over time helps increase the value per cost unit. When the value per cost unit is high, rms
derive core competency and strategies are built around the core-competencies. TCM framework will help manager in
developing core competencies over the years by concentrating areas where the value per cost unit is high.

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4. TCM Principles
 TCM Principles

a) Resource Focus
Resource deployment in a business is purported to add value to the product or customer service offering.

'Resource' is the central theme of TCM and is all encompassing actual and notional.

Resources entering the value chain of business either add value or cost a clincher for managerial action to distinguish
between 'value added activities or non-value added activities' in a business.

Robust 'Measurement and Management' of resources in the 'value chain' positively in uences the growth path of business
and eventually maximize value to stakeholders. We need to recognize resources at times lying outside the boundary of
entity book keeping. This will be relevant in the context of sustainability when the entity consumes environmental
resources not recorded in nancial statements.

b) Strategic Context
Dimensions of VUCA, business complexity, diversity in customer value offering, technology interventions, product
disruptions and government regulations pose enormous business and cost pressures.

Historical cost structures driven by economies of scale and standard costing are factory oriented and will be narrow in
vision.

Costs and their role in the management of enterprise are important because the information concerning costs play a vital
part in formulating more performing strategies and get lasting competitive advantage. Therefore the start and nishing
point of costs will be competitive strategy which subsumes factory which is a legacy thought.

Aligning 'cost management' with building blocks of 'business strategy' processes, products, markets and customers for
creating 'cost advantage' in business is key.

c) Future Outlook
Conventionally, businesses stack up 'costs' which emerges from the nancial accounting system and resembles historical
cost structure.

Principles of 'business continuity' necessitates corporates to 'manage costs' on a longer timelines.

TCM Techniques enable business entities to gain insights on the consequences of strategic initiatives / actions product
design, production process and cost to the customer etc.

Life cycle costing for identifying least cost alternatives,

Target cost technique for achieving desired pro t level (calculated in the early design and development cycle)
DTC (Design To Cost) technique to engineer low cost into a product / service

d) Integration with other initiatives

Disruption in the businesses contexts compel leadership to drive continuous improvement processes and sustainable
results.

Initiatives like TPM, TQM etc. are driven across functions to accrue operational savings and pro tability improvement.

Core principles of TCM promulgates institutional architecture for managing costs. Creating a long term cost advantage in a
business through 'competitive cost structure' provide sustainable business model and value creation. This should be seen
in sync with other initiatives to create value and sustain.

TCM aligns and does not overlap or compete with concurrent initiatives such as TQM, TPM, TOC, etc. in a business. Other
frameworks are not substitutes or surrogate to CII TCM framework in business.

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TCM Principles

TCM compliments several strategic initiatives with a focus on increasing value and reducing the cost

e) Learning and Innovation

Commonly known PDCA cycle embedding into TCM and connecting to innovation.

PDCA Cycle is implemented to improve the quality and effectiveness of a business

process.

Embedding TCM architecture into a business is similarly divided into 4 sequential

categories PDCA (Plan, Do, Check & Act).

'Cost' or 'resources will become inputs for the PDCA of the decision making process in
a business to address viability of the processes, products and customers.

f) Enterprise wide involvement

'Cost ownership' in a business was traditionally with few functions or levels like CEO / CFO. Year-end P/L or B/S or ABP
(Annual Business Plan) triggered cost sensitivity in an organization eventually restricting cost focus to/from the
nancials or historical data.

Scoping cost reviews and amends in shop- oor only equips or empowers only operations team which itself is a portion of
total value chain of business.

Compelling arguments in favor of enterprise wide approach to cost ownership as an effective approach in today's business
world is gaining momentum. This argument becomes more profound when costs need to be harnessed upfront and needs
the engagement of design engineers or new product development managers.

Maintaining sharp focus on 'costs' at all times business cycle uctuations, negative demand, price pressures and
customer disruptions enriches bottom lines.

Monetizing value for abnormal occurrences, deviations, non-standards and sub-normal processes helps leadership teams
to map 'pro t drain points' across the value chain.
Functional excellence closely aligned to cost excellence is a clincher for design and drive to achieve 'cost economics'.

g) Aligned to policy development (PD)

Policy deployment is a strategic improvement system in corporates.

PD has been implemented in numerous organizations and is one of the four core components for deploying TCM along with
Cross Functional Management, Daily Management, and Small Group Activities.

Leadership voice on TCM linked to business strategy to be communicated to all levels of hierarchy and functions.

Mapping cost based decision making points at customer, market and product level for the management team to address
corrections and create pro tability path.

h) Process Orientation
A business process forms the lifeline for any business and helps it streamline individual activities and make sure that
resources are put to their optimum use.

Legacy view of 'cost ow' in a business is in the perspective of cost centres which is akin to cost pooling or cost allocation.

The key to TCM architecture in a business is integrating business processes supporting business strategy with TCM.

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 TCM Principles

Identifying business processes cutting across functions and linked to resources at product or customer segments is the
key.

'Cost incurrence' is across the value chain of business sourcing, manufacturing, design, engineering, logistics, branding,
sales & marketing etc.

Aligning cost information across the business processes & resources to product, customer and market segments provides
holistic approach to cost management.

E ciency monitoring is made possible through institutionalizing the cost capture across business process.

I Performance Orientation
The TCM systems set up KPIs which measure the outputs and outcomes of the TCM efforts. This helps the management
continuously evaluate the cost management of the organization at different levels and functions and make improvements
accordingly.

Performance is measured by the KPI matrix which is broken down till the last employee using the TCM framework. The
main measures of performance are - Growth, market share and bottom line. A KPI matrix is made for each process aligned
to the main measures of performance. Each process can be broken down into individuals to ensure global impact.

Cost analysis is a powerful tool to measure the gaps in performance targets and actual performance. As TCM is to be
ingrained in the culture of the organization, all individuals are aware of the metrics and can track their own performance
and that of their business unit and reduce waste or improve e ciency accordingly.

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5. TCM Tools
 TCM Tools

TCM tools are deployed in a business to accelerate 'cost competitiveness' by generating desirable outcomes of costs,
price, value and pro t.

Tools also involve technicalities of measuring resources in business with both accounting and non-accounting information

Entire spectrum of 'cost management' architecture measuring, managing, reporting, analyzing, controlling, course
corrections, predicting and estimating costs across value chain of business is enabled by an array of TCM tools.

Contemporary businesses are largely driven by several market and customer dynamics complexity and variety in business
processes, product and customer portfolios.

Businesses manage 'costs' associated with both current and future activities and application of TCM tools scopes its
deployment accordingly.

TCM tools can accordingly be classi ed into basic (operational) and advanced (strategic).
Day-to-day simplistic analysis of costs like variance analysis, cost driver analysis, cost of quality, kaizen costing, application of
ABC principles (to address variety and complexity), input-output balance, kaizen costing, inventory valuation etc.

Leadership vision for achieving future business goals are addressed through advanced TCM tools like target costing,
constructing risk articulated aspirational cost structure, customer pro tability management, value chain costing, life cycle
costing etc.

a) TCM Tools: Operational

b) TCM Tools: Strategic

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6. TCM Process
 TCM Processes

TCM architecture in a business is re ected through creating and operationalizing TCM processes.

Set of processes with de ned outcomes enhances the e cacy of TCM creating competitive cost structure, cost advantage
and pro tability growth.

Governance structure:
Most corporates continuously strengthen governance frameworks and policies for providing stronger governing roles.

Securing a governance structure and process for TCM, institutionalizes the 'cost management process' in a business.

IT enabled architecture for capturing cost information:

Activating CO module and mapping cost information into IT system helps
businesses to go 'live' with outcomes, analytics and decisions.

Primary information relating to process, product and customer to be online.

Standards can only help to build standard costing which has limitations.

Cautions should also excised by the leadership and governance structure to

secure non-standard information also into IT architecture.

Eg: Unique sourcing processes, abnormalities in the production processes (re-work generation etc.), maverick expenses,
R&D effort, specialized selling effort, staggered expenses etc. to be factored into product or customer costs for
pro tability reporting.

TCM competencies at enterprise level HR:

Calibrating TCM competency skills amongst employees enhances cost
awareness, cost ownership and improved analytics.

Monetizing of abnormal business occurrence / process deviations, capability

of middle level leadership to link business outcomes and cost outcomes,
balance cost and value proposition etc are closely aligned to speci c
competencies related to TCM.

Design and development of formal pedagogue to embed 'TCM competencies'

across functions and hierarchy

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7. Key Performance
Indicators
 Key Performance Indicators

A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving
key business objectives. Organizations use KPIs to evaluate their success at reaching targets.

E cient and effective TCM architecture also provides KPI's to leadership to measure, manage and do course corrections mid-
way for better business results.

KPI's are typically distinguished as 'strategic' and 'operational'.

To enable robust decision making process KPI's are further classi ed as 'lead and lag' indicators.

Operational KPI s Strategic KPI s

Lead KPI s Cycle time variation of products
Target cost process, negative cost
variation while selecting design
parameters
Lag KPI s Process cost per SKU, cost of Cost of market penetration (for strategic
obsolete technology. segments)

KPI's in TCM architecture govern and report the whole gamut of process, product and customer outcomes.

Periodical reviews based on a standard template report lag indicators like process costs, selling costs and design cost at unit
level.

However, lead KPI's re ect causal factors for eventual cost impact. Any maverick processes like air-freight, deployment of
speci c or unique technology for a speci c product or unique processes involving unique resources are lead indicators for
cost variations at product level.

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8. TCM Outcomes
 TCM Outcomes

'Outcomes' are basically the result or the consequence of something, or doing something.
The 'outcomes' can also be the 'achieved end state' that can be veri ed through measurable results.

The e cacy of TCM architecture in a business is also measured by several desirable outcomes which fructi es in the form of
growth or pro tability or value to stakeholders or all of them.

Decision Making Process

Decision making is the process of making right choices by identifying a decision, gathering information and assessing
alternative solutions.

Business decisions again are classi ed into 'operational and strategic' based on short-term or long-term outcome.

Operational decision support: Make or buy decisions, Insourcing or outsourcing, visibility of price-cost gaps for
corrections, resource optimization, improving RFQ strike rate, identifying NVA (Non Value added Activities), mapping pro t
drain points et al.

Strategic decision support: Re-con guring product/customer portfolio for higher margins, value chain modi cations,
alternate materials, re-designing of products et al

Visibility of strategy implemented

Viability or economics of 'business strategy' in its execution phase can be monitored through appropriate design of TCM
architecture.

Processes, markets, segments and customers absorb high value resources through the value chain of business. TCM
identi es pathways and reports to management for course corrections if any. This ensures better pro tability from mid-
course corrections.

Cost visibility beyond P/L books of accounts

Cost information in business is strategic. However, cost information in a business limited to historical data is now a legacy.

Staggered costs / investment (technology, R&D costs, branding costs) spill over to years beyond the current nancial year.

Business view of cost sheet (Robust cost measurement)

Unlike traditional 'cost sheet' stacking up of P/L drawn costs, TCM architecture provides business view of a cost sheet.

Business processes and its impact are factored into TCM based cost sheet which provides business perspective of costs.

E ciency / effectiveness of business process re ect the highs and lows in the cost sheet and corrective actions are
triggered accordingly.

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9. TCM Maturity Levels
 TCM Maturity Levels

CII TCM Division has conceptualized 'cost maturity Levels' in a business on a 5 level hierarchy. The 5 level hierarchy is
called 'CII TCM Maturity Model' and the model is an IPR (Propriety Right) of CII.

Business models are constantly being reviewed for sustained competitiveness which has also injected a new dynamism into
cost management. The basis and assumptions used in the traditional costing are constantly being challenged resulting in
pressure for evolving the organizations into higher maturity levels.

Organizations are hard pressed to focus on cost management levers to create value. It is timely for business models to look up,
discern and review their cost management systems.

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 Contact Details
M. Nagesh Babu
Principal Counsellor,
Total Cost Management Division
Confederation of Indian Industry
T: 040 - 44185120 | M: +91 9849909683 | E: [Link]@[Link] | W: [Link]