Cost Reduction and Control

Target Setting

Remedial Measures

Actual performance

Compare with standards and variance analysis

Cost Reduction
Cost reduction is the achievement of real and permanent reduction in unit cost of products manufactured. Attempts to achieve genuine savings in cost of production distributing, selling and administration.

Some of the areas in which cost reduction can be done are:

(a) Product Design

(b) Organization (c) Production (d)Finance

TECHNIQUES OF COST REDUCTION

The techniques available to a firm for cost reduction such as : Budgetary control and standard cost, Standardization and simplification, Economic batch quantity, Automation, Quality control, Production planning, Value analysis Inventory control

Cost Reduction v/s Cost Control

Cost Control
Achieving the pre-determined cost targets. . The process of cost control is to set a target ascertain actual performance and compare it with the target, investigate the variances and take remedial measures. Cost control is a preventive function Cost reduction is not concerned with maintenance of performance according to the standards.

Cost Reduction
Achieving a reduction in unit cost of goods manufactured.

Cost reduction is a corrective functions.

Forex Fluctuations Control

Supply chain management Reducing Buying Costs

Cost reduction

SUPPLY CHAIN MANAGEMENT

In 2003-04, 355 tier-I suppliers. Now reduced to 250(2011-12) Maruti Suzuki has about 800 vendors, including tier-II and III suppliers.

FOREX FLUCTUATION

Maruti Suzuki sources 10 per cent of components directly from foreign markets, while another 15 per cent are imported by its vendors.

In 2011-12, the company had to dole out Rs 280 crore as compensation on account of the rapid depreciation of the rupee against the Japanese yen.

REDUCTION IN BUYING COSTS

Cutting down component imports, improving yield and enhancing the usage of raw materials. Reduce buying costs 3-3.5 per cent annually Cost benefits from cuts in buying costs are at least Rs 800 crores in 2012-13 more than the Rs 653-crore decline in net profit the company saw in 2011-12. The company is likely to save up to Rs 2,000 crores a year.

Zaras Cost Reduction Strategies

Vertical Integration: Manufactures 60% of own products Supply Chain Management: Shortened from 5-7 months to 2.5 months

Zero Advertising:

0.3% compared to 3-4% industry average

React rather than Predict:

85% production done throughout the season

Short Lead Time:

Design to full product delivery in 14 days

Rapid Product Turnover:

1000 designs yearly, 200 inhouse designers

Artificial Scarcity boosts demand: New products every 2 weeks

Full Price Selling

Saves 15-20% in markdowns

Product Standardization:

80-85%

Efficient Inventory Management

Just in time inventory

Centralized Distribution Facility

Shipment to stores within 24-48 hrs