This is first of a series of 14 articles written by me on Cost Management in Modern Plastics and Polymers. This was between 2005 and 2007. Though a decade old, the central theme is relevant in today's context as well. This is the first piece on Cost Management - A perspective: Cost Management is defined by me here. "Cost management is any cost improvement that creates and sustains value for the customer better than the competition". "Customer value is at the center of Cost Management. of cost management. The perspective of cost management is to create customer value. A firm has to find ways of creating more value for the customer at lesser cost."

1. 50 ● Modern Plastics & Polymers June 2005
SMART MANAGER
T
oday, it is obvious that the customer
is king. Perhaps even more telling
is the fact that customers have the
right to choose among those who
probably create value for them; and never like
to be dominated. Earlier, the downside was
that the customer paid for the inefficiencies
of the manufacturer. In the present day,
however, it is a totally different scenario where
the manufacturer’s survival depends on how
efficiently he can fulfill the customer value. That
indeed has been a long journey in time.
Cost management, can thus be viewed as
creating relentless customer value. Besides
focussing on economic value creation, cost
management uses methodologies at
various stages of value creation - from
design to decline, womb to tomb or cradle
to grave.
Changing cost perspective
Stage 1: Cost reimbursement perspective
Life used to be simple, until Alexander
Parkes introduced a new material called
Parkesine in 1862. Since then, we have come
a long way - from Parkesine to bakelite
to plastics; and from PVC to polymethyl
methacrylate to Kevlar. Though the product
range became narrower; competition was
prosaic, and profit making too simple. Further,
the cost was passed on to the customer,
where apart from reimbursing the costs, he
bestowed the manufacturer with profit.
Here, the cost perspective was:
cost + profit = sales
Thus, not only did the hapless customer
reimburse the cost, but he was also made
to pay for the manufacturer’s inefficiencies.
But no sooner than later the party was over.
As competition intensified, more and more
suppliers gained entry into the marketplace, and
sales price got out of control. Having got used
to a level of ‘extravagance’, the cost too was out
of sync. This resulted in a lower margin or even
loss. As a result, this led to stage 2.
Stage 2: Cost reduction perspective
Now, the cost perspective changed to:
sales - cost = profit / loss
Consequently, the pressure to keep the cost
under check, led to cost cutting, cost control
and cost reduction.
Cost cutting is related to as,‘Not having more
than three cups of tea per day, and sharing half
a cup among three employees - that too once
in three days’. R&D, training, advertisement &
sales promotion and employee welfare were the
areas, considered easier to ‘cut’ cost.Though it
leads to perceptible quick results in the short-
run, the long-term implications are negative.
Thus, cost cutting is all about cutting corners.
Although, it seems to yield great results in the
short-term, it tends to get ‘brutal’.
Cost control is known to be more scientific.
There are many routes to control cost; but the
methodology is a typical feedback loop
(Figure 1). Cost control is conformance to plan. As
long as the actual performance is within the set
standards, things are deemed to be under check.
This methodology is appropriate for micro-level
control. It brings stability to the approach towards
Cost management
A perspective
Over the years, many different methods have been developed for analysing and solving problems in manufacturing.
In the process, organisations have designed aggressive cost management practices to maximise their Return On
Investment (ROI). The first article of our series on cost management explores the perspective of cost management with
respect to the plastics and polymers industry. Practical examples of cost management in plastic processing together
with flow charts have also been included. The subsequent series will accentuate the focus as well as methods of cost
management. Read on…
M Hariharan

2. Modern Plastics & Polymers June 2005 ● 51
SMART MANAGER
cost. However, it leads to two dangers:
One tends to get complacent,“Do
not disturb the status quo, and when
things are under control, why
tweak it?”
One also tends to get localised and
gets into a micro-level analysis; but
loses sight of the overall picture. The
macro picture of the business thus
gets lost in the process
Cost reduction, on the other hand,
is questioning the base itself. It thus
overcomes the complacency of cost
control. However, for effective cost
reduction, there should be a mechanism
of cost control in place. Cost reduction
calls for relentlessly questioning the
purpose of incurring a cost.There are
several quality tools that facilitate cost
reduction to a great extent. Approaches
like 3M (Muda, Mura and Muri), 5Ws & 1H
(5 Whys and 1 How follows), or any waste
elimination / waste reduction methods
can provide enormous cost reduction.
Cost reduction, too, is more scientific, and
has dangers to it as well.These include:
A tendency to get localised. Just as
in the case of cost control, one tends
to get into too much of a micro-
level analysis and lose the overall
business perspective
A thin line of difference between cost
reduction and cost cutting. If it loses
the ‘science’ it becomes ‘brute’
cost reduction.
In short, all the three approaches lose the
macro view of the business perspective.
Stage 3: Cost
management perspective
Here, the competition is
further intensified. As more
firms enter the market, it
leads to a further decrease
in selling price. Competitors
too start offering superior
functionality and quality,
but at the same price
level or reduced prices. In
such a scenario, one needs
more money to invest in
operations as well as to
upgrade and compete. And,
when resources become
scarce, one approaches
the capital market to tap the limited
resources available with the investor.
Plastics and polymers is not the only
industry that approaches the investor.
In fact, competing firms from different
industries also reach out to them.
Further, the common investor is least
concerned about the type of industry - be
it steel, dot com, etc. Rather, he invests in
‘that’ firm in ‘that’ industry that promises
return, rise as well as realisation with
acceptable associated risk (four Rs of
investment). Unless the best combination
of four Rs is given, one cannot tap the
limited money on offer. Further, unless
one promises ‘that’ level of profit, one
cannot survive.
Now, the cost perspective changes to:
sales - profit = cost
Here, the cost is ‘allowable’ cost. It is no
more a cost reduction game but a profit
management game. And, to manage the
profit, cost has to be contained within the
range of sales and profit.
Definition of cost
management
Cost management is
any cost improvement
that creates and sustains
value for the customer
better than the competitor
(Figure 2).
Perspective of cost
management
Customer is at the centre
of cost management. The perspective of
cost management is to create customer
value. A firm has to find ways of creating
more value for the customer at lesser cost.
The following is a perfect example of
this concept. Refrigerators, till recently,
had handles to open the door. And, in
most homes, a dirty cloth used to be
wrapped on the handle so that the
enamel does not peel off. In the current
models, however, the handle is absent.
Instead, there is a groove. This calls for
a change in the mould, which in turn
amounts to additional cost. But, have
you thought about the cost reduction
that can happen through the chain from
manufacture to after-sales service.
Material cost: Handle cost is
eliminated
Vendor-related cost: Vendor is no
more required; no more meetings, no
more follow-ups, no more
purchase orders
Machining cost: Part is eliminated; so
no need to machine
Process waste: Drilling, attaching the
handle, breakages, spilling of chips,
collecting the chips, etc are eliminated
Cycle time reduction: Set of processes
to move the material, attach, move
the work in process, line stock,
inspection, etc, are eliminated
Stock keeping (RM and WIP): RM stock
and the WIP stock (after and before
handle fixing) is eliminated
After-sales service (process and stock):
Customer calls, complaints, visits by
service personnel to the customer
and stocking the handles at service
centres are eliminated
Base - Standard,Target,Norm,Budget,Plan
Feedback of actuals
Comparison
Variance analysis
Corrective action
Figure 1: Cost control - feedback loop
Cost management is any cost
improvement that creates and
sustains customer value bettr than the
competitor
Perspective
Customer
value
propostion
Economic
value
creation
Enablers of
cost
management
Focus Methods
Figure 2: Definition of cost management

3. 52 ● Modern Plastics & Polymers June 2005
SMART MANAGER
Packing cost: As the handle
protrudes; it had to be packed
safely to protect the handle. Now,
the extra packing material to take
care of the uneven front side of
the fridge is eliminated
Warehousing: 4 cm per fridge. A
lot of space can be saved by keeping
100 rows of them in a warehouse
Improvement in automation: A
circuitous process is eliminated, which
in turn facilitates automation
Aesthetics: It does look a
tad better
Thus, one can have a product with the
same value proposition (may be higher -
if the aesthetics is considered seriously)
at a much lesser cost. As far as the
customer is concerned, he pays for the
value, which he derives from the
product/service.
His perspective is:
value > price
But, if one has to survive, the reality
has to be
value > price > cost
Simply put, cost improvement is
not cost reduction. Rather, it is value
creation. And, there are five means of
cost improvement. These include:
Keeping costs constant and increasing
customer value; for example, finding
alternative uses for the same product
Reducing cost and keeping customer
value constant; for example, the
refrigerator handle
Increasing cost a bit and
increasing the value a bit more; for
example, LG Golden Eye -the cost
incurred for the product versus the
value proposition for the customer
Reducing cost and increase Value; for
example, alternative packing materials
Reducing cost more and reducing
value a little. This is normally not
acceptable. However, it is appropriate
if one seeks to segment the market
and plans to serve a lower segment of
the market
Perspective of cost management
for plastics & polymers
A competitor is not necessarily the
one who manufactures goods similar
to what his counterpart manufactures.
On the contrary, a competitor is anyone
who provides the same or similar value
to the customer. That is why polymers
have become a fast expanding field, as it
drives out other materials like steel, glass,
cement, etc.
Supply chain: Any initiative taken
by the firm should have a cost
management perspective. While
choosing the technology for processing,
the focus has to be on creating
customer value, but at the least possible
cost. For example, PET bottles are
manufactured in two ways:
One-step method: In this method,
the entire process - from PET granule
to finished bottle - is completed on
one integrated machine. The injection-
moulded preform is then withdrawn
from the injection cavity while still
hot enough to be stretch blown to form
the bottle.
This method is
appropriate where the
market is localised,
but large. Further, as
the geographical reach
is lesser, the filled
bottles are
transported within a
manageable radius.
Cost management perspective: The
processing cost is lesser, while the
transportation cost does not pinch.
Hence, the total cost of a bottle of water
delivered is lesser.
Two-step method (Figure 4): Here, the
preform is first injection-moulded, and
then reheated and blown on the second.
Further, it uses two separate machines: an
injection moulding machine for making
the preforms, and a reheat blow moulding
machine to reheat the preforms from cold
and blow the bottles.
This method can be incorporated in
places where the market size is small
locally. Therefore, one has to reach
a wider geographic area to attain a
critical size of market.
Cost management perspective: The
processing cost is higher, while the
transportation cost is much lower. As
the preform is made in one place, it is
transported to another local area where
the second stage happens. Further,
transporting preforms is much cheaper
than transporting full-blown bottles.
If the cost management perspective is
not considered, one could end up using
the wrong technology for the wrong
market. Besides, whatever was saved on
the processing cost using the one-step
method, would have been blown up
through high transportation costs.
Thus, it is essential to choose the right
method, and provide the same value for
the customer at a lower supply
chain cost.
Civil engineering: The customer
perception is that civil engineering
traditionally looks to reducing material
costs. As it considers plastics and
polymers costly, it prefers traditional
Figure 3: Small change in the design leading
to higher cost savings through the chain
Figure 4: Two-stage PET bottle making (Kanplas)
Figure 5: Decks made of wood-plastic
composites. Source: Trex Co Inc

4. Modern Plastics & Polymers June 2005 ● 53
SMART MANAGER
materials such as concrete and steel with
low material cost.
Cost management perspective:
Though the traditional materials have
lower material cost, these have high
processing and installation costs as well
as limited possibilities of processing. On
the other hand, plastics components can
bring lower ownership costs - initial cost
of purchase coupled with processing
cost at the customer’s end. Also, the
installation and maintenance costs
are less compared to the traditional
materials. Further, these have features
like better productivity, lightness,
greater design freedom compared to
that of wood & other similar materials,
corrosion resistance, insulating
properties, etc.
Hence, if polymer has to break
into this domain, the customer has
to be sensitised to the cost
management perspective.
Decor: Customers perceive plastics and
polymers to be cheap, as well as low
on aesthetics.
Cost management perspective:
Unlike wood, composites of wood
and thermoplastics are resistant to
rot & insects, and require very little
maintenance. Unlike extruded plastics
profiles, wood composites are stronger
and more rigid.
Composites can be fabricated
with aesthetically pleasing surfaces
and colours.
The architect can find higher value
in composites of wood and
thermoplastics than simply plastics or
wood. Composites can also find wide
acceptance in strong and durable
outdoor decks and fences, window
and door profiles, spas and marina
boardwalks (Figure 5).
Aerospace: In this industry, customers
have several impending questions
about the flame- or chemical-resistant
properties of plastics. In reality, plastics
is creep- and fatigue-resistant over
a wide temperature range, as the
materials are relentlessly exposed to
extreme temperatures. Plastics also has
dimensional stability and is resistant
to abrasions.
Cost management perspective: Plastics,
along with flame retardant additives
can be considered to be solutions. But,
they tend to get under the scanner due
to suspected environmental and health
hazards. Polymers like PEEK, PEI, PPS, PPSU,
PES, PVDF and LCPs are inherently flame
retardant. PEEK, for example, provides
all the stated qualities. However, these
materials are usually more expensive than
non-inherently flame retardant plastics
and the additives.
These can provide the cost
management solution to aerospace,
wherein the application requires
both high performance and low
flammability (Figure 6).
White goods: Polymers help in the
integration of functionalities, with
substantial reduction of part number.
This leads to assembly cost reduction.
Bulk colouring and in-mould decoration
also leads to reduction of the finishing
costs. Further, tooling costs are lower
than that of metal. In fact, weight
reduction, ease of production and
noise reduction at a lesser cost, creates
tremendous customer value. Plastics and
polymers have replaced quite a bit of
metal from the white goods. Thus, the
cost management impact is quite high
in this industry.
Conclusion
To summarise, cost management is all
about relentless customer value creation.
Further, it focusses on creating
economic value for the investor. It also
validates the perspective of
cost management in terms of
bottomline improvement.
Cost management uses various
methodologies, tools and techniques
that integrate seamlessly to facilitate
the perspective and focus of cost
management. It is a never-ending
journey, which calls for the survival of
the fittest.
“In the struggle for survival, the
fittest win out at the expense of their
rivals because they succeed in adapting
themselves best to their environment”
- Charles Darwin,
The Origin of Species, 1859
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.
E-mail: sfgroup@vsnl.com
Figure 6: These interior components provide a weight reduction of approximately 50% and
reduced part costs of up to 75% compared with the replaced aluminium parts. Source: Victrex PLC