Cost Reduction - Introduction

• Everywhere Production goes, Costs follow behind like a shadow.

• Everywhere Production goes, Costs follow behind like a shadow.
• Firms have to pay for their inputs and profitable businesses are aware of the
• Firms haveevery
fact that to pay for their
dollar inputs and profitable
of unnecessary businesses
Cost reduces are aware
their Profit of dollar.
by same the
fact that every dollar of unnecessary Cost reduces their Profit by same dollar.
• Role of Cost goes far beyond influencing level of production. Smart businesses also
• Role
payofattention
Cost goes far beyond
to Cost influencing
when they level their
are making of production.
operating Smart businesses also
decisions
pay attention to Cost when they are making their operating decisions
• Exercise Cost Control through a two-pronged approach
• Exercise Cost Control
• reduction through a two-pronged approach
in a specific expenses.
• •reduction in a specific expenses.
a more efficient use of every rupee spent.
• a more efficient use of every rupee spent.

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 Cost Reduction – How we define it.
• Cost Reduction has been defined as :
• Cost Reduction has been defined as :
“The achievement of real and permanent reductions in the Unit Cost of Produced
“The achievement
Goods of real
or Services, and permanent
rendered reductions
without impairing insuitability
their the Unit Cost of Produced
for the use intended ”
Goods or Services, rendered without impairing their suitability for the use intended ”
• It also means :
• It also means :
• saving on the cost of manufacturing , administration, distribution and sale
• saving on the cost of manufacturing , administration, distribution and sale
• accepted standards must be constantly challenged for improvement.
• accepted standards must be constantly challenged for improvement.
• products, processes, procedures and personnel are subject to continuous
• products,
scrutiny processes, procedures
to see where andsame
and how the personnel are subject
requirements cantobecontinuous
achieved with
scrutiny to see
reduced cost. where and how the same requirements can be achieved with
reduced cost.

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 Cost Reduction – Various stages
Stages Cost Cutting Cost Management Cost Design Cost Positioning
Basis Arbitrary spending cuts Understanding cost Redesign internal value Redesign external
drivers chain value chain
Objective Achieve cost reduction Satisfy customer Enhance company Enhance supply
targets requirements competitiveness chain
competitiveness
Time Horizon Short term Medium term Long term Long term
Perspective Internal Internal Internal External
Cost Measurement Classified into Organized by Organized by links in Organized by links in
committed & resources, activities the internal value chain the external value
discretionary and cost objects chain
Reduction Reduce discretionary, Eliminate unused Eliminate redundancy & Consolidate links,
Methodology large and expedient capacity, NVA activities conform to operational share information,
costs & reduce cycle times strategy coordination &
synergies
Performance Historical standards Long-term standards Best-in-class standards Strategic objectives
Standards
Common Tool Standard costing Kaizen costing Activity based costing Strategic cost
management

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Cost Reduction – Multiple opportunities

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Our Cost Reduction Strategy approach

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