1

COST
REDUCTION

Submitted to: Prof. Ganachri

 INTRODUCTION
• Cost reduction may be defined as the achievement
of Real and Permanent reduction in the unit cost of
goods manufactured or services rendered without
impairing their suitability for the use intended or
diminution in the quality of the product.

• The definition of cost reduction does not however

include reduction in expenditure arising from
reduction or similar govt. action or the effect of
price agreements.
THREE FOLD ASSUMPTION

There is saving in a cost unit.

Such saving is of a permanent nature.

The utility and quality of goods remain unaffected, if

not improved.  
 SCOPE OF COST REDUCTION
• Cost reduction is attainable in almost all areas of business
activities.

• It covers a wide range like new layout, product design,

production methods, materials and machines in factories as
well as in offices, innovation in marketing etc.

• It may also extend to specified activities like purchasing,

handling, packaging, shipping, warehousing, marketing, use
of administrative facilities and even the utilization of
financial resources.
 ADVANTAGES OF COST
REDUCTION
In so far as Individual capacity is concerned, cost
reduction helps in profit improvement.

It enhances the share value, improves investment

opportunities and facilitates the collection of capital.

The society will be benefited by the reduced prices

which may be possible by savings from cost reduction
programs.
 CONTD.

Workers and staff of the industry may also be

benefitted through increased wages and improved
staff welfare amenities.

The country also stands to gain immensely by the

cost reduction programs.
COST REDUCTION
vs.
COST CONTROL
 COST REDUCTION COST CONTROL

This process finds out This process undertakes

the substitute by finding the competitive analysis of
new ways or methods. actual results with
established norms.
Under this process
Under this process the
necessary steps are
taken for further variances are appraised
modification in the and necessary course of
method. action will be taken to
revise norms, standards
etc.
 CONTD.
It challenges the standards
forth – with and attempts
to reduce cost on a
continuous basis.
The emphasis is partly on
the present costs and
largely on future costs.
It starts from established
cost standards and
attempts to keep the costs
of operation of a process in
line with those standards.
The main stress is on the
present and past behavior
of costs.
 CONTD.
It is universally It has limited applicability
applicable. It should be to those items of costs for
applied to every area of which standards have
business. It does not already been set. The items
depend on standards, for which standards are set
through target amounts mainly relate to productive
may be set. operations.

Cost reduction is a Cost control is a preventive

corrective function. It function. Costs are
operates even when optimized before they are
efficient cost control incurred.
system exists.
 COST REDUCTION PROCESS
ANALYSI
EXAMINA
SELECTING
DEVELOPING
ASOLUTIONS
SOLUTION
TION
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 ANALYSIS

Separate steps

Asking questions

Data collection

Improvements
EXAMINATION

Consider
whether they
Detailing and classifying should be:
activities as:
Vital • Eliminated
Secondary • Combined
Unnecessary • Simplified
DEVELOPING SOLUTIONS

Possible Solutions

No solutions should be overlooked or ignored

Knowledge of analysts

Requirements need to be checked

 SELECTING A SOLUTION

Choice between several solutions.

Depends on numerous factors.

Understanding the advantages and disadvantages of

each solution.

 Rational solution
 OBTAINING AGREEMENT

Acceptance

Obtaining approval from major stakeholders.

APPROACHES TO COST
REDUCTION

to
Crash
cut spending
programmes:
levels

to
Planned
cut spending
programmes:
levels
TECHNIQUES OF
COST REDUCTION
VALUE ANALYSIS AND ENGINEERING

This method is very important and useful in

driving down the product cost which helps
companies retain market share and sustain their
profitability.

VAVE - process of reducing costs in a

development project. This process is achieved by
assessing materials, processes and or products
and offering alternatives.
 BENEFITS OF VALUE ANALYSIS

 It enables to identify and pinpoint areas that need attention

and improvement.
 It is an effective tool for cost reduction.

 It ensures and maintains the desired quality products.

 It makes possible optimum use of all resources.

 It concentrates on customer satisfaction which lead to

profitability of the organization.
 It promotes innovation and creativity.
CONTROL OF WASTE, SCRAP, SPOILAGE
Waste control:
(a) Waste is material loss during production or storage.
(b) It may be visible or invisible wastage

Waste control can be achieved by :

1.Quantity control : involves maintenance of detailed

record s of quantities with an object to detect shrinkage,
breakage, losses etc.
2.Quality control : management fix responsibility on
purchase, stores, production department to ensure
standards of quality.
 CONTD.
Scrap control :
It is residue material that has recovery value.
Scrap control ways:

Material Selection Selection of

right type of Determin Reporting
specificati of right
personnel ation of source of
on at material
with proper acceptabl waste,
product and training e limits of quantum
design equipmen and
scrap of waste
stage t experience
 CONTD.
Spoilage control :
It is production that fail to meet quality so damaged
in manufacturing so disposed off.

Normal spoilage:
●
When spoilage well within limits.
●
Limits laid down through study of material, men, processes , operating conditions

Abnormal spoilage:

●
exceed of normal spoilage. It require prompt quick action.
 CONTD.
Spoiling control ways:

Control through predetermined standards, fixation of individual

responsibility

Prompt and systematic reporting of spoilage.

IMPROVING IN MATERIAL HANDLING SYSTEMS

Strategy for Material Improve in handling can

Handling would mean following things :
involve:
Faster production

Elimination of all
unnecessary moments Higher plant capacity

Mechanization and Lower stock in process

automation of remaining
moments in order to Lesser damages and wastages in raw
increase efficiency. material and finished products
 FACTORY AUTOMATION

It is automation of factory through the use of :

 Flexible Manufacturing System (FMS)
Computer Aided Manufacturing (CAM)
Office Automation (OA)

e.g. industrial robots , numerical control machines,

automated material handling etc.
REASON FOR INTRODUCING
AUTOMATION
●
To reduce cost

●
To increase quality

●
To improve efficiency of current operations without
increasing output.(reduces workforce)

●
To increase the speed of activities so organization
can develop and grow.
 COST BENEFIT ANALYSIS
Differentiates between necessary and unnecessary
costs.

Five steps in establishing the benefits created by

resources consumed in the business:
(a) Cost analysis
(b) Contribution analysis
(c) Benefit analysis
(d) Cost reduction
(e) Profit improvement
 ENERGY AUDIT

Power and fuel are generally a significant element of

cost of production.

Use them with maximum efficiency.

Appraising the energy efficiency.

 COST REDUCTION PLAN AND
PROGRAM
Steps involved:
 To develop and apply appropriate remedies

 Scrutinize cost records of the following kinds:

(a) Trading results by products or product groups
(b) Product costs and main cost element ratios for product groups
(c) Departmental costs of overheads
(d) Product cost standards and variances
(e) Budgeted and actual performance
(f) Labor cost and capacity utilization reports
(g) Stores consumption analysis
 CONTD.
Study of Procedure

 Such a study in general seeks to establish:

 
(a) The need for the task being performed
(b) The precise nature of the task
(c) The most efficient method of performing the task
 CONTD.
Control over the program

 The progress of the cost reduction program should be

subjected to close control by a time table coordinating
the many various phases of the overall plan.

 Control is exercised through regular reports.

 
 COST REDUCTION
STRATEGIES
 
Costs can be reduced in the following areas by:

 Raw material procurement:

a) Bulk buying b) Opportunity buying c) Make or buy d)
Annual Rate contracts
 Logistics:

Inbound and Outbound: a) Route mapping b) Loadability

 Warehouse and Stores:

a) Low inventory b) Space management c) EOQ

 CONTD.

 Manufacturing Process (Production):

a) Manufacturing b) Automation c) OEE
 Energy, fuel & Water:

a) Motors b) lighting c) compressors d) fuels e) recycle f)

Waste water management
 Information Management: Enterprise Resource
management
 Human Resources: Out sourcing
 TATA STRATEGIC
MANAGEMENT GROUP
CASE STUDY
MANUFACTURING OPTIMIZATION
FOR COST COMPETITIVENESS
Tata Strategic split the assignment into three parts.

First, they identified manufacturing constraints by estimating

demand and detected capacity bottlenecks.

Secondly, variable costs, inbound and outbound logistics costs,

temporary manpower costs and structuring costs were identified
and analyzed.

Finally, strategic options were generated for the short-term and

long-term and potential cost benefits analyzed.

Savings potential worth Rs 350 million was identified based on a

revised product mix at each manufacturing location.
 CONTD.
Optimization of export logistics cost

Tata Strategic identified cost reduction opportunities in the

areas of transportation, clearing and handling, and
inventories.

It also identified opportunities to de-bottleneck capacities at

nodes through process redesign and route optimization.

It negotiated with several potential third party logistics service

providers who could manage end-to-end logistics activities.
 CONTD.
Achievements

 Tata Strategic’s recommendations enabled the client

achieve overall cost reduction of about 30 per cent while
also reducing capacity requirements of warehouses.

 Other fixed costs were expected to reduce by about 40 per

cent. The client achieved a 5 per cent cost reduction by
implementing some of the recommendations even before
the study was completed.
THANK YOU