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    Cost Reduction Strategies
    Cost Reduction Strategies
    Cost Reduction Strategies
    Ebook304 pages1 hour

    Cost Reduction Strategies

    By Palani Murugappan

    ()

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    About this ebook

    The word "Cost Reduction" usually sends shivers to any employee as the first thing that comes on their mind is they may be next in line to be retrenched (worst case scenario). Alternatively, the cost reduction exercise may case many existing privileges to be removed. Thus, any cost reducing exercise sends an initial negative response to most.

    However, in this book, the cost reduction tips and pointers outline how any manufacturing company can reduce their costs significantly by using concepts used in Japan and many other developed countries for years.

    Activities such as Gemba Kaizen (continues improvement), Six Sigma, and others are pointed out as how you can use them. All these activities are supported with relevant exercises using Microsoft Excel with key chapters on using some of the more useful built-in functions.

     

    LanguageEnglish
    PublisherBlue Micro Solutions
    Release dateJun 23, 2015
    ISBN9781513098562
    Cost Reduction Strategies

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      Book preview

      Cost Reduction Strategies - Palani Murugappan

      What is a strategy?

      A strategy sets a direction for us. It provides a sense of orderly direction for an organization to sail cohesively through its environment.

      A strategy focuses effort and promotes co-ordination of activities. Without it, chaos will ensue.

      A strategy gives a sense of direction and defines the organization. It gives the people within the organization a meaning to understand their organization better and to distinguish it from others.

      A strategy also provides consistency as it reduces ambiguity and provides order.

      Strategic planning

      The very first step to strategic planning is to establish a mission, vision, and goals for the organization.

      The mission of an organization is the basic purpose and values of the organization.

      It is a statement of the organization's reason to exist. It is often written in terms of the general clients it serves.

      The vision of an organization is to provide a perspective on where the company is headed and what the organization can become. It clarifies the long term direction of the company and its strategic intent.The strategic planning process of involving managers from all parts of the organization in formulating and implementing goals and strategies is called strategic management.

      Strategic management

      Briefly, the strategic management layout can be described as outlined.

      From the above, you have the four perspectives of uncertainty. These can be described as below.

      The four perspectives include a clear enough future where you know the exact direction of where you want to be and how you plan to get there based on the time given.

      By following a certain path, one may have a range of futures; or an alternate futures if the future path taken changes according to the current surrounding then.

      Finally, the last perspective remains ambiguous as one is totally unsure as to which direction to head.

      The architecture of strategy

      The architecture of strategy can be illustrated as below.

      Views on strategy

      There are many views on strategy. Here are some:

      Strategy making is an art, an experience.

      It is about how to improve the present to

      capture a better future.

      It is always about the future.

      It is about People, Products (services), and

      Processes.

      It is always about matching the internal and

      external situation.

      There is no one right strategy, but it is always

      about winning.

      It is an eternal process.

      A company's strategy

      A company's strategy should consider the following:

      how you capture a market position

      conduct your operations

      attract and delight your customers

      compete successfully against rivals

      achieve organizational objectives

      Executing a strategy

      A company executing any strategy is an eternal process. It is always action oriented and very hands-on. It includes the following:

      Building organizational capability

      Allocating resources/budget to support strategy

      critical activities

      Setting up strategy-supportive policies and procedures

      Re-forming strategy

      Motivating people to perform

      Getting the reward structure right

      Creating the right work ambience

      Getting the information, communication,

      procedures right

      Get best of breed practices

      Nurture leadership at every level.

      Criteria for effective strategy

      Here are some effective criteria strategies that senior

      management should consider.

      Clear, decisive objectives

      Maintaining the initiatives

      Concentration

      Flexibility

      Co-ordinated and Committed Leadership

      Surprise

      Security

      A strategic approach to cost reduction

      Many cost savings plans are devised by management on a frequent basis. However, not all of them are thought of thoroughly and cater for contingency plans.

      Despite the sense of urgency at achieving cost savings, it is vital that business managers apply strategic thinking to the reduction of their costs.

      A well conceived cost reduction strategy enables managers to capture maximum value in the form of direct savings and the installment of a culture of efficiency while minimizing the destruction of company value resulting from cutting too much from core business activities.

      To avoid the negative connotations that employees may have with cost cutting, it is necessary to clearly communicate what strategic cost reduction is and is not.

      Strategic cost reduction takes advantage of every opportunity to better leverage existing and new assets to bring value to customers and shareholders.

      Set your objectives and identify what you want this exercise to do for you in the form of a vision statement.

      Align all cost reduction activities with business strategy by calibrating the company's vision/objectives with its cash flow and budget. Determine the financial gap between current capabilities and the future needs of the company. With this information, managers can identify and prioritize areas that need to be strengthened and those to be rationalized.

      Choose your personal approach with these objectives in mind. The strategic manager will choose the cost reduction approach that best meets their objectives both from dollars saved and organizational impact.

      Management should pinpoint specific business unit, activity or input as a candidate for cost cutting attention. It may be a process that is inefficient or a single business activity or raw material that represents a significant proportion of total expenses where even a small reduction in cost would have a large impact on total expenses.

      Finally, set the goals and prioritize. After the process has been communicated and the objectives outlined, the priorities must be set. The approach chosen can then develop detailed and measurable goals that will help achieve the broader vision.

      Make a list of the top 10 savings initiatives and choose 3 to 5 based on cost and efficiency savings versus organizational impact over 1 and 3 years. Make sure each performance target is quantifiable and specific, such as 30% reduction in operating costs from non-strategic units or 25% reduction in travel expenses.

      Cost reduction

      Cost reduction involves the reduction of costs from previous levels without adverse impact on the quality of product being provided (the functional value of the product or service).

      There is a tendency to confuse cost reduction with cost control. Cost control means attempting to keep costs within predetermined limit (e.g. standard costing, budgetary control, etc).

      Some of the areas where cost can be controlled or reduced are as below:

      Administrative expenses

      Legal expenses

      Management fees

      Utilities

      Inventory, over production

      Salaries

      Re-work, Waiting period

      Wastage

      Bad Decision

      Awareness

      Travel

      Attitude and lack of leadership

      There are three main causes that cause cost to increase:

      Lack of information

      Inability to see beyond the data

      Resistance to change

      Thus, one should only embark upon cost reduction strategy when it is clear that the potential benefits outweigh the cost that will be incurred.

      Cost reduction – what areas to focus on?

      Cost reduction activity can be quite mind-boggling. Where do you start from and which areas do you focus on. Here are some pointers to help you.

      First we need to know what is the total cost

      Obtain a percentage of cost of each area

      within the process in relation to total cost

      You may then compare it to other factors e.g. man hours allocated. If it makes sense or compare it to the industry benchmark

      Identify the cost that will be incurred to correct it

      Will it increase the value of my department and any organization

      Cost reduction must be incorporated into the planning stage and build into the budgeting process

      Objectives to reduce cost:

      Implications to reducing cost:

      Cost reduction – work method study

      Don't know where to begin your cost reduction exercise? Perhaps you should ask the following questions and analyze the following.

      Identify area of study using cost/ benefits

      considerations

      Collect data: Observation, Interviews,

      primary and secondary data

      Convert to information: Flow charts, Reports

      Choose the best method after all the following

      questions are answered

      Is the job necessary?

      Can somebody/ machine do it better?

      Are there adequate controls?

      Are there bottlenecks?

      Can new standards be set?

      Adopt the best alternative

      Feedback is obtained and progress is monitored

      Cost reduction – value analysis

      The value analysis aspect examines all aspect of the product or component in order to reduce cost whilst maintaining or improving its quality. This needs to be done at the design level to be effective.

      Similar methodologies for the work studies are used. The following questions are often asked at the final stage:

      Is the product needed?

      Do we need all the features?

      Is there an alternative product available?

      Is there a possibility of setting standards?

      Are there cheaper materials and sources of production that are available? Are there any other alternative storing and delivering strategies?

      Cost reduction – efficiency and effectiveness

      It is crucial to know the difference between efficiency and effectiveness both in a corporate sense and from the way an employee's contribution is assessed.

      For example, a company

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