Professional Documents
Culture Documents
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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, engineering,
manufacturing, marketing, etc.
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A CASE STUDY IN ABC:
Under ABC in a direct mail printing firm, cost reduction
occurred by developing plans to eliminate idle time and reduce the
total set-up time rather than layoff employees.
The firm was reporting decreasing profit although operating
at capacity. Its short-run solution was to reduce the labour force,
which is a cost the company can control in short run. A study of
activities in the printing process, however, indicated a set-up time
of 35 hours on complex orders with employees being idle 25% of
the time during set-up.
ABC demonstrated that this idle time was costing the firm
approximately US$.41000 in wages per complex order.
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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,
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
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and excellence.
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.
TQM aims at a customer-oriented process of
continuous improvement that focuses on delivering products or
services of consistent high quality in a timely fashion.
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7. SUPPLY CHAIN MANAGEMENT: (SCM)
SCM attempts to build a cost effective chain beginning
with the ultimate customer and links all the previous suppliers
under one platform.
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.
Close interaction between the corporate R&D and the
suppliers facilitates continuous improvements in product design,
process methodologies, etc. resulting in customer value
enhancement and cost reduction.
A rupee spent on the supply chain can give more
value than a rupee spent on marketing. The supply chain is part of
the service offering. 15
A CASE STUDY:
ESCORTS TRACTORS FARMS – BPR resulted to target cost
reduction per tractor by 20 %. Introduced in process involving the
manufacturers of rear axles, one that required maximum movement
of materials across the halls. Pre-reengineering, the manufacture
involved 9 changes in ownership, had 21 workers in any given
shift, and lead-time of 19 days. Today the process requires only 12
workers per shift, and lead-time has fallen to 8 hours.
“The physical resources are easy to change. The key to success lies
in motivating employees up to the grass root level to initiate
change, not just accept it.”
Farm Tract has extended its efforts to SCM and reduced the
number of vendors and brought down the total acquisition cost by
5%.
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8. PERT ANALYSIS:
Programme Evaluation 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 Standardisation
10. Design analysis
11. Substitute material utilisation
12. Production planning and control
13. Technological forecasting
14. Market research etc.
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Non-Conventional Approach
• Material Cost
• Manpower Cost
• Cost Management Initiatives
– Selling and Distribution
• Funding Cost
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Non-Conventional Approach (Contd)
• Material cost – Cost reductions thru’
– E-sourcing
• Discovery of new sources
• Competitive pressures
• Rationalisation of suppliers
– Thrust on Value Engineering
• Re-Visiting Designs
• Application oriented engineering
– Product Life Cycle Management
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Non-Conventional Approach (Contd.)
• Manpower Cost
– 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
• MOST
• CELL Layout
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IMPORTANCE OF COST CONTROL AND
COST
REDUCTION FOR CORPORATE
TURNAROUND
The importance of cost control and
reduction in a manufacturing organisation
can never be overemphasized. These
phrases that were mere clichés not too long
ago, have now come to acquire a new
meaning in the last few years.
In fact, it may not be an
overstatement to say that the revival and
subsequent boom in the corporate sector 21
in
Whether it be manpower reduction, controlling
overheads, reducing input costs or bringing down
finance charges, Corporate India has done it all in the
effort to stay profitable in the new milieu.
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CHARACTERISTICS OF NEW
MODELS
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