COST REDUCTION

COST REDUCTION CAN BE EFFECTED BY EITHER

OF THE FOLLOWING WAYS:
(1) By reduction in unit cost of production:
This is usually brought by elimination of wasteful and non-
essential elements in the design of products and from techniques
and practices carried out.
(Any reduction in costs due to changes in Government
policy like reduction in taxes or duties or due to price
agreements do not come into the area of cost reduction).
(2) By increasing productivity:
This refers to increase in the volume of output with the
expenditure remaining the same..
AREAS OF COST REDUCTION:
1. Design
2. Factory organization
3. Product planning
4. Factory layout and equipment
 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 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.
3. 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.
4. ACTIVITY BASED COST MANAGEMENT:
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, manufacturing,
marketing, etc.
 5. 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,
6. 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.
 7. SUPPLY CHAIN MANAGEMENT: (SCM)

An effective SCM eliminates most of the activities in

between customers and raw material suppliers along with
associated costs. Most of the non-core activities are outsourced
and hence fixed costs are kept minimal.
 8. PERT ANALYSIS:
Program Evaluation And Review Technique (PERT)
reduces cost by giving an optimum schedule for the activities
necessary to complete a project.
SOME OTHER COST REDUCTION TECHNIQUES ARE
9. Simplification and Standardization
10. Design analysis
11. Substitute material utilization
12. Technological forecasting
13. Market research etc.
CASE STUDY

Nano Car
Non-Conventional Approach

• Material Cost
• Manpower Cost
• Cost Management Initiatives
– Selling and Distribution

• Funding Cost
Non-Conventional Approach (Contd.)
 Material cost – Cost reductions thru’
• Discovery of new sources
• E-sourcing
• Competitive pressures
• Rationalization of suppliers
 Thrust on Value Engineering
• Re-Visiting Designs
 Product Life Cycle Management
 Non-Conventional Approach (Contd.)

• Manpower Cost
– Right-sizing of Employees
– Optimum utilization of Manpower
• Transition from Machine engagement time to
Man-Engagement time.
– Productivity-linked wage settlements
THANK YOU