•Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered.
Areas of Cost Reduction
2.Factory organisation and method
4.Factory layout and equipment
Cost Control: Definition
Cost control is concerned with keeping the expenditure within acceptable limits. Its major assumption is that costs are in control unless costs exceed budget or standard by an excessive amount.
Differences between cost control and cost reduction
Cost control is effected through budgeting & standard costing
A budget may be defined as a comprehensive and coordinated plan of action, expressed in monetary terms. It is prepared and approved prior to the budget period and may show income, expenditure and capital to be employed to attain the objective.
In this, standards are set and actual outcomes are compared with the standard. Corrective measures are undertaken for any discrepancy found between the standard and “actuals”.
Techniques of cost reduction
1. VALUE ANALYSIS: Value analysis is the identification of unnecessary cost i.e. cost that neither provides quality, nor use, nor life, nor appearance, nor customer satisfaction. Thus value analysis attacks costs at production stage.
2. ECONOMIC BATCH QUANTITY (EBQ): EBQ is that point where carrying costs equals set up cost approximately. At this point the total cost will also be minimum.
3. ECONOMIC ORDER QUANTITY (EOQ): EOQ is the quantity fixed at a point where total cost of ordering and the cost of carrying the inventory will be minimum
Activity Based Cost management (ABC):
ABC assumes that resource-consuming activities cause costs. Its aim is to directly control the activities that cause costs, rather than cost. By managing activities that cause costs, costs will be managed in the long run.
Cost causing activities – designing, engineering, manufacturing, marketing, etc
Just-in-time approach: (JIT):
The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required.
JIT helps in cost reduction by –
a.elimination of non-value-added activities,
b. zero inventory,
c. zero defects,
d. zero breakdowns,
e. single batch ordering.
though the above goals are unlikely to be achieved, it represent targets and create a climate for continuous improvement and excellence.
Total Quality Management: (TQM)
TQM works on the philosophy that all business functions are involved in a process of continuous quality improvement.
TQM reduces cost by producing the products correctly the first time rather than wasting resources making substandard items and incurring additional expenditure on inspection, rework and scrapping.
It helps organisations to achieve their quality goals by providing reports and measures that will improve quality.
TQM targets a customer-oriented process of continuous improvement that focuses on delivering products or services of consistent high quality in a timely fashion.
•Cost Management Initiatives
–Selling and Distribution
Non-Conventional Approach (Contd)
- Material cost – Cost reductions through
- Discovery of new sources
- Competitive pressures
- Rationalisation of suppliers
- Thrust on Value Engineering
- Re-Visiting Designs
- Application oriented engineering
- Product Life Cycle Management
Non-Conventional Approach (Contd.)
–Right-sizing of Employees – VRS Schemes
–Optimum utilisation of Manpower
•Transition from Machine engagement time to Man-Engagement time.
–Productivity-linked wage settlements
–Adopting new concepts