Top 10 Application of Cost Reduction Methods

The following points highlight the top ten applications of cost reduction methods. The applications are: 1. Product Design 2. Organisation 3. Factory Layout and Equipment 4. Production Plan, Programme and Methods 5. Administration 6. Marketing 7. Personnel Management 8. Material Control 9. Financial Management 10. Utility Services.

Cost Reduction Methods: Application # 1. Product Design:

Product designs the first step in the manufacture of a product. The impact of any economies on cost reduction effected at this stage will be felt throughout the manufacturing of the product in all fields viz. production and sales etc.

Design constitutes the most important field where cost reduction may be attempted. Possibilities of cost reduction should be investigated both when introducing new designs and when seeking improvements of the existing designs. It is worthwhile putting in some more care and a little money at the initial stage than to incur losses and wastage later when production is established.

Efficient designing for a new product and improving the design for an existing product reduce cost in the following way:

(a) Material Cost:

Cheaper substitutes, higher yield, less quantity, variety of materials so that storage cost and investment in inventory are reduced.

(b) Labour Cost:

Minimum tolerance, reduced time of operation etc.

(c) Standardisation and simplification in variety increases productivity and reduces cost.

(d) Reduction in after-sales service costs.

Cost Reduction Methods: Application # 2. Organisation:

All efforts should be constantly made to reduce the costs by the adoption of new methods of organisation and new production methods. It is not possible to measure the cost reduction resulting from an improvement in the organisation.

Nevertheless, economies are bound to be achieved if the following considerations are looked into:

(i) Definition of each function and responsibility.

(ii) Proper assignment of tasks and delegation of responsibility; overlapping will be avoided.

(iii) A suitable channel of communication between various management levels.

(iv) Removal of doubts and points of friction.

(v) Encouragement of employees for cost reduction suggestion.

Cost Reduction Methods: Application # 3. Factory Layout and Equipment:

It will influence costs to a large extent. A cost reduction programme should study the factory layout and the utilisation of the existing equipment to determine whether there is any scope for cost reduction by elimination of wastage of men, materials, and maximum utilisation of the facilities available.

The necessity for replacement of plants, introduction of new techniques and expansion of facilities should be considered and various alternatives explored with a view to reduction in cost. Any concealed bottle-necks and difficulties standing in the way of maximum utilisation of plants and other facilities should be probed into.

For instance, there is no point in detaining skilled worker to manage number of semi-automatic machines, all at a time. He is not able to be fully utilized on the machines, although, in the process, is able to occupy himself fully. It should be rather the other way so that the machine automatically be fully occupied.

Cost Reduction Methods: Application # 4. Production Plan, Programme and Methods:

Production control ensures proper planning of work by installing an efficient procedure and programme of materials ordering, correct machine loading and proper utilisation of material and manpower and resources so that there is no waste of time and money due to waste of components, men, materials etc.

Cost Reduction Methods: Application # 5. Administration:

There is ample scope of cost reduction in this area because cost reduction is a top management problem. Office should be re-organised if there is scope for improvement in the efficiency of persons engaged in the office.

Use of unnecessary forms should be avoided to save the cost of stationery and labour cost involved for compiling them. Efforts should be made to reduce the expenses on telephone, lighting and travelling but not at the cost of efficiency.

The points to be examined in this area will be:

(i) The extent of use of job evaluation as a basis for reducing staff.

(ii) Systematic supervision of the use of office machinery.

(iii) Possibility of reduction of files and filing space.

(iv) Expenditure on printing, postage and telephone.

(v) Use of forms and stationery.

Cost Reduction Methods: Application # 6. Marketing:

The various activities which can be brought under the cost reduction programme include market research, advertisement, packing, warehouse, distribution, after-sales service etc. Sales performance can be improved by making ABC analysis of customers. Customers can be classified in three categories A, B and C.

A category customers means customers having about 10% of total despatches but cover about 70% of sales value, B category customers means customers having about 20% of total despatches but covering about 25% of sales value and C category customers means customers having about 70% of total despatches but covering about 5% of total sales value.

In this way of categorisation of customers, sales efforts will be better focused and there will be reduction in marketing cost.

The major points that need examination with a view to cost reduction in this area are:

(i) Whether the channel of distribution is efficient and economical.

(ii) Whether there is an effective system of sales promotion.

(iii) Whether the market research is adequate.

(iv) Whether there is any possibility of reduction in selling and distributing expenses without impairing efficiency of sales division.

Cost Reduction Methods: Application # 7. Personnel Management:

The cost reduction programme should explore the following:

(i) Reduction in labour content of production by suitable work study techniques and introduction of sound incentive schemes.

(ii) Reduction in labour cost by improving labour relations, welfare measures and better working conditions.

Cost Reduction Methods: Application # 8. Material Control:

Some of the aspects that may be looked into are:

(i) Effective and economical purchase of materials.

(ii) Adherence to EOQ.

(iii) Keeping low inventory—less investment in stock.

(iv) Effective check on goods received.

(v) Control over material storage and issues.

(vi) Effective check on materials yield.

Cost Reduction Methods: Application # 9. Financial Management:

With the increasing difficulty in procuring finance, management should eliminate useless investment. To be able to do so, it must critically examine the amount of working capital and fixed capital needed and the financial conveniences of reducing them.

Wasteful use of capital is as bad as inadequate capital. Over and under capitalisation are both danger signals; what is needed is fair capitalisation. Capital should be procured at economical cost and it should be economically used so as to give the maximum return.

Fixed assets and inventories which cannot be economically used should be sold; the money realized from their sale should be reinvested in more profitable channels.

Due consideration should be given to the following areas of financial management for reducing cost:

(i) Whether there is any scope for improvement in the system of control over utilisation of finance.

(ii) Whether the capital is economically employed to give maximum return.

(iii) Whether there are any over-investments.

(iv) Whether the capital is received at economical cost.

Cost Reduction Methods: Application # 10. Utility Services:

These services include power, water, steam, repair and maintenance, transport and clerical services, etc.

Following points should be considered:

(i) Whether the utilities are supplied at economical costs or whether there is scope for any further increase in utilisation.

(ii) Whether the proper system for preventive and curative maintenance is there.

(iii) Whether wastage and other losses in distribution have been kept to minimum.

(iv) Whether up-to-date equipment’s are being used and the routines are mechanised.

(v) Whether workflow and loading factor has received due attention.