Cost reduction

Basics of cost reduction in enterprises

1. COST REDUCTION JYOTHISH B QA- QC

2. Cost Reduction The process of identifying and eliminating unnecessary costs to improve the profitability of a business is known as cost reduction. COST = Cost of Material + Labour + Overhead + General & Administrative Expenses + Sales Expense

3. Cost Reduction Strategies Cost Savings Cost Avoidance Cost Containment Value Enhancement

4. Cost Savings A cost reduction that can be specifically identified and will be made to a budget or program, resulting from implementing a specific alternative in lieu of continuing the present system. The result of a planned or deliberate action taken by Purchasing Savings are a quantifiable monetary benefit There must be a direct activity reduction for a savings to occur; thus, benefits are considered as savings only if the estimate identifies benefits that start accruing during the budget/activity’s fiscal year

5. Cost Avoidance Financial or economic benefits that result from an initiative but do not permit a monetary reduction to a funded activity or budget Is a quantifiable monetary benefit Usually addresses the reduction or elimination of a future cost Does not lower the cost of materials purchased when measured against historical results, but it does minimize or avoid entirely the negative impact on net income that a price increase would have.

6. Cost Containment The process of maintaining organizational costs within a specified budget; restraining within a specified budget; restraining expenditures to meet organizational or project financial targets. Measures taken to reduce expenditure or the rate of growth of expenditure, or the unit cost of goods/materials/supplies/services. When an organization keeps costs low, or within a limit that has been planned.

7. Value Enhancement Value which affects the whole-life costs or whole-life income and its required functionality. Value For any service or offering to have financial value, the organization must have been willing to pay for it out of pocket or must have already been paying for it in a way that can be measured on the organization’s income statement. This definition is a requirement for any discussion of legitimate cost avoidances

8. Value Enhancement Value For example, in practicing sustainable environmental management, we may reduce the environmental impact; while at the same time achieve cost reduction and create environmental friendly conservation added value.

9. 7 Scope And Areas for Cost Reduction (a) Product Design  A well conceived cost reduction programme starts with the design of the product. All possibilities of cost reduction should be investigated by the management while introducing new designs of the products or while seeking improvements of the existing designs. Value analysis can be a very useful technique in this attempt. Cost reduction through the designing of the product will result in future economies at all points, i.e. production, sales, marketing and finance.

10. 7 Scope And Areas for Cost Reduction (b) Rationalization of Organization  Cost reduction may be brought about by an improvement in the organization structure of the firm. Rationalization of organization requires a clear-cut definition of each function and responsibility, avoidance of overlapping in authority and responsibility, promoting co- operation and close relationship between the various executives working at different levels in the organization, establishing good and efficient communication system, encouraging the employees for cost reduction suggestions and promoting the feeling of involvement among them.

11. 7 Scope And Areas for Cost Reduction (c) Factory Layout and Plant and Equipment  Factory layout and the plant layout also affect the cost of production to a large extent. The management should examine its factory and plant layout carefully and explore the possibilities of cost reduction by eliminating wasteful and irrelevant system and ensuring maximum utilization of existing facilities.

12. 7 Scope And Areas for Cost Reduction (d) Production Plan, Programme and Method An efficient system of production control ensures proper production planning, initiates efficient production procedures and develops economical production programmes. It avoids wastage of time, money and monetary, non-monetary resources, brings about economy in various types of costs. (e) Marketing Costs   An efficient cost reduction programme must cover marketing field also. It should aim at economizing in selling, advertising, distribution, marketing research, sales- research costs etc. The marketing manager must explore the possibilities of reduction in costs in selling and distribution expenses without impairing the efficiency of the marketing function.

13. 7 Scope And Areas for Cost Reduction (f) Personnel Costs Various economies may be sought for by the management in the area of personnel management too. It may be possible to cut down the labour costs by introducing training and development programmes, work simplification, improving machine loading improving the morale and productivity of employees, introducing various welfare measures, incentive wage payment and proving better working conditions. (g) Financial Costs Finance is also an important and sensitive area for effecting cost reduction. Cost reduction may be effected by improved system of fixed capital budgeting, avoiding over-investment in various current assets, obtaining capital at reasonable interest rate by lowering down the cost of capital, leading to ultimately maximization of return on capital employed in the business.

14. Features of Cost reduction Cost reduction is not concerned with setting targets and standards. Cost reduction aims at improving the standards. It is continuous, dynamic and innovative in nature, looking always for measures and alternative to reduce costs. It is a corrective function. This is applicable to every activity of the business. It adds thinking and analysis to action at all levels of management.

15. Techniques of cost reduction Organization and method studies Work study Simplification in procedure standardization Value analysis Automation Production control Design Material control Quality control

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