Competitive cost analysis for Zim economy

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Batanai Kamunyaru

Zimbabwe has been viewed as a high-cost country, especially for doing business, and several cost driv­ers have been pointed out. Obviously, costs are the major determining factor of the price for products and services, making the prices in Zimbabwe more expensive compared to the region. Calls are being made daily, to review the interest rates, the cost of electricity, the way ZIMRA is dealing with the tax payers, and several other ‘believed’ to be the major cost drivers. Are the real questions being addressed? Is the way ZIMRA deals with defaulting tax payers not according to the law set many years ago? Are the root causes of the problems being addressed or people are trying to deal with symptoms?

In accounting terms, a cost driver is described as a factor that can cause a change in the cost of an activity or product or service. There are two key types of cost drivers that organisations should take congnisance of, which are, the resource cost driver and an activity cost driver. The resource cost driver seeks to deal with the quantity of resources consumed by an activity or a product or a service, whereas the activity cost driver deals with the fre­quency and intensity of demand placed on activi­ties to produce a product or a service. It is there­fore important for organisations to perform a cost driver analysis to find out the major cause of high costs. Without understanding the activities in the organisation’s functional areas, it becomes difficult to identify the suitable cost drivers, making it also difficult to deal with the cost structures that are bal­looning daily.

When it comes to the organisational activities, major types of cost driver analysis that should be noted are structural and executional cost drivers. The structural cost driver relates to business stra­tegic choices about an organisation’s underlying economic structure, such as scale and scope of operations, use of technology and complexity of products. On the other hand, the executional cost driver relates to the execution of the business activi­ties, such as utilisation of employees, provision of quality service, product design and manufacturing. With limited understanding of cost driver analy­sis, cost management becomes problematic. Peter Drucker, once said, “If you can’t measure it, you can’t improve it.” To improve the cost structures and make business competitive, skill and experi­ence to measure the costs with a better degree of accuracy is a must.

Several organisations are complaining about the labour costs, maybe a genuine complain, maybe not! To what degree are you utilising your employ­ees? Are you paying for value received from your employees or you are paying for presence at work? If you pay for presence rather than results, then the labour costs will be too high for the organisation, making your products uncompetitive. Are your la­bour costs linked to productivity? Why is there a need to have fixed labour costs – the laws should promote the use of a sliding scale for determina­tion of labour costs. The more value one gives, the more they should also earn. The fixed labour costs do not promote productivity, as one is guaranteed of pay every month-end, whether they produce or not! Writing to the Thessalonian church, Apostle Paul said, “…For even while we were with you, we used to give you this order: if anyone is not will­ing to work, then he is not to eat, either.” Worthy implementing!

Since we are now in a global economy, the idea of feeling entitled to big perks in organisations, maybe because one has attained an additional qual­ification, is no longer the way to go. With or with­out a qualification, people should be remunerated according to the value they bring to the organisa­tion. It is also important for employees to under­stand that they are paid for bringing value to the market place, not for being present in the office or for attaining an additional qualification. Yes, addi­tional qualifications may assist in adding value, but not every qualification is so! Only the qualifications that add ‘proved’ value should be rewarded and not any other. It is the little disciplines or cultures that organisations have developed that drive costs high­er than they ought to be. Non-core activities are rewarded handsomely,  pushing the cost of products and services higher.

Comparing production cost drivers between Zimbabwe and other countries in the region, Zim­babwe seems to be on the higher side, but a deeper analysis of why each cost is so proves that the coun­try is very much competitive. If each cost is broken down to the core, and a benchmarking is done with other countries, Zimbabwe can produce competi­tively.

Sadly, the mostly cited reasons as to why the nation is not competitive are just symptoms rath­er than the root cause. Trying to deal with the symptoms is of no value if the root cause is nur­tured daily.

The three main factors that affect the cost per unit or service that every business leader should be focusing on are productivity, efficiency and ef­fectiveness. Productivity deals with the measure of output per inputs. How much are you produc­ing from the inputs? For any business that is well structured, there are standards expected for each unit or service, and these standards differ not from other countries. For a product of the same specs and produced by a similar machine, there should not be major differences in cost of produc­tion regardless of country!

Also, productivity cannot be divorced from capacity utilisation. The higher your capacity utilisation, the likely chances of a lower cost per unit.

Efficiency tackles how well you are doing things. To be more efficient, you must produce more output for less input. On another note, ef­fectiveness is about doing the right things. Is the quality of your products the same or you have many reworks? The more you produce a sub-standard product, the more it will affect the next manufacturer who buys from you and the next, till it gets to the consumer.

However, because we are now living in a glob­al economy, customers will shun your products and go buy from where they can get a cheaper product of better quality – hence the reason the imports bill is high.

Sometimes it is not because people want foreign products, but the local manufacturers are giving the customers bad deals. Customers should not be made to suffer for the inefficien­cies and ineffectiveness of the local manufactur­ers.

Remarkably, it is not always that the local manufacturers produce poor quality products, but procurement managers and company buy­ers are taking kick-backs or bribes and let a sub-standard raw material find its way into produc­tion. It is such a culture that is destroying the manufacturing sector of the nation.

One man is benefiting at the expense of many customers and consumers. Unfortunately, it is slowly becoming the new normal for Zimbabwe that if you do not bribe or pay a kick-back you will never get a contract to supply anything in any institution.

Not to ignore other factors that are driving the cost of doing business high in Zimbabwe, greed, bribes, kick-backs and lack of skills are pivotal. Focusing on anything else other than the four is dealing with symptoms rather than the root cause. It is not only the politicians who are corrupt, for the government or the politi­cians to some extend reflect the society.

If the society is not corrupt and shun bribes and kick-backs, how will the politicians do it by themselves? Politicians or the government are not even involved in some organisations that are known for demanding kick-backs and bribes. Several organisations are made to pay for products and services that they do not even receive, or they receive half of what is ordered, and the difference of the money is paid to the procurement manager or the buyer! It is time for lifestyle audits – especially for people in procure­ment and finance. Greed is also destroying the nation in a major way. A product is imported from South Africa and sold four or five times higher. What kind of margins are such? What is driving it? Wanting more for less! Would you blame the customers and consumers if they go and buy from neighbouring countries and shun your products and services?

The skills of management accountants should also be interrogated, as wrong cost computa­tions can cost the business a fortune. You need to hire experienced management accountants, who understand the costings, and not anyone with an accounting degree.

It is also important to understand the dif­ference in accounting qualifications – there are those that focus on financial reporting and there are those that focus on management accounting.

Never confuse the two, the one trained in management accounting should not be hired for financial reporting – and the one trained in financial reporting should not be hired as an ex­pert in management accounting. If one is con­fused for another, the organisation might be led in the wrong direction by these accountants!

50% – 75% of certain products cost is the cost of bribes, kick-backs, greed and lack of skill – and these have nothing to do with the actual cost of the product or service. Jesus Christ once said, “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? You hypocrite first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye.” Before we blame politics for every problem, cor­ruption, greed, bribes, kick-backs and lack of skill, let everyone else be clean!

A good cost analysis approach is needed be­fore generalising that Zimbabwe is a high-cost country – for it is not always!

Batanai Kamunyaru is a business writer, speaker and coach. He can be contacted on bat.kamunyaru@gmail.com or +263 718 852 489.