Cost Reduction Strategies

Cost Reduction Strategies
In today's world when Corporate are struggling for profits and with fierce
competition in the market, cost reductions, productivity enhancement and lean organizations
have become today's mantra s for survival.Folllowing are the key area where you can implement
cost reduction methods with significant results.Cost distributions are
Raw material : 60%
Fuel: 6%
Manpower:11%
Adverisement :5%
Logistic:9%
Taxes : 5%
Maint & others : 4%
Following are major areas of cost reduction in any manufacturing industry
1. Raw material procurement:
a) Bulk buying
b) Opportunity buying
c) Make or buy
d) Annual Rate contracts
e) E-procurement
2. Logistics- Inbound and Outbound:
a) Route mapping
b) Loadability
3. Warehouse and Stores:
a) Low inventory
b) Space management
c) EOQ
4. Manufacturing Process (Production) :
a) Manufacturing
b) Automation
c) OEE
5.Packaging
6.Energy, fuel & Water
a) Motors
b)Lighting
c) Compressors
d) Fuels
e) Recycle
f) Waste water management
6.Information Management
Enterprise Resource management
7. Human Resources
Out sourcing
The major parameters for any manufacturing unit

o
cost per unit ($/unit)
units produced/unit time
man-hours/unit
break down time (%)
change over time ( min/hrs )
waste (%)
defectives (%)
fuel consumption (k therms/unit)
electricity consumption (kwh/unit)
water consumption ( kltrs /unit )
inventory turnover ( %)
lead time (min/hrs / days)
Why cost reduction

o
waste reduction
increase productivity
profits
competition
resource conservation
image enhancement
Where to implement cost reduction

Areas for cost reduction are
o
raw material procurement
logistics - inbound and outbound
production ( process ,time and work study,maintenance ,automation)
energy
human resource ( out sourcing )
sales & marketing
finance
How ?
In todays competitive world Corporates and businesses are struggling to
maintain profits and healthy bottom lines .Cost of production ,fuel, raw
material and human resources is rising each year . These developments
has prompted people to look for Cost reduction Ideas &method s.
Those who have opted for focused cost reduction strategies have
survived those who could not managed have perished .In recent economic
down turn it becomes more important to make cost reduction program
a major initiative in industry .Companies are finding it difficult to retain
people and are laying off people which is un precedented in recent history
of industrial recession .Companies have to develop its own cost reduction

program for savings without cutting jobs .
Procurement or Purchasing plays an important role in any manufacturing industry . Savings can be
achieved during procurement process by implementing ideas mentioned below . Suppliers
/Vendors
can also contribute in suggesting cost reduction' s ideas .Raw material, services constitutes major
part
of cost of product .Procurement department has now prime role in contributing savings in
company .It
is obvious from the above table that major expense for any manufacturing unit is buying raw
material .
these contribution are approx and vary industry to industry..
Given are few ideas which can result in savings

.
BULK BUYING-The companies which have greater geographical presence or are multi
locational
can achieve better price by buying bigger volumes instead of buying for individual units.
Central
buying policies are recommended for such unit .Bulk buying results in annual contracts for a
period of six - twelve months for entire year requirement with prices being finalised for the
entire
period .
OPPORTUNITY BUYING-Most of the commodities and raw material has seasonal cycle of
prices as they peak and fall in intervals .Hence we can book maximum amount of our
requirement
when prices are low .
LOCAL VENDORS -Vendors should be located in close vicinity of company which helps in
keeping low inventory as well as low freight cost .
PARTNERSHIPS WITH MAJOR VENDORS-It is highly recommended to have partnership

with
vendors in either having equity or technical collaboration so as to pass on savings to the
customer . Which results in cost reduction in manufacturing cost. Most of the Automobiles
Majors
has this kind of arrangement with their vendors .Vendors are assured of business .
E PROCUREMENT-Putting up tenders and requirement on Internet and setting up auction

for
requirement on web which helps in reaching out more numbers of vendor base . This also
helps
in cutting cost when we opt for conventional way of asking tender /quotation . Most popular
way
of procurement strategy is reverse auction , where the lowest price bidder takes away the
order
BUYING MATERIAL FROM TAX EXEMPTED AREA .-In several countries the federal/ State
govts
provide tax heavens for manufactures for certain period say 10- 15 years .Hence buying from
these area s helps in cutting cost .In common parlance it is called TAX HOLIDAYS . Look out
for
such places prior to placing orders.
ALTERNATE MATERIAL-Select high cost items and replace it by some low cost material .
eg ;
steel by plastic/aluminium .
TRY MERGE IN TRANSIT- The concept of in-transit product mergingwhere, for example,
two
things are shipped from different locations and then married in transit so that they reach the
customer as a single shipmentcan be seen as a technique for reducing inventory if the need
for
the customer to simultaneously receive multiple SKUs is a given. To some extent, merge-intransit
represents an extension of postponement beyond the distribution center walls.
VENDOR MANAGED INVENTORY (VMI). With the appropriate incentives, allowing suppliers
to
assume the responsibility for replenishment of your inventory, because of their visibility into
both
their own inventory and production schedule and your demand data, can almost always
reduce
your inventory.
VENDOR STOCKING PROGRAM (VSP). Used primarily for maintenance inventories but
applicable
to all, VSPs require a supplier to commit to an extremely high service level for delivery of
specific
SKUs within a fixed time at a predefined markup. VSPs can reduce or eliminate inventories for
slowmoving products. There are numerous ways to take better control of inventory and decrease
its
associated costs. The key to managing inventory successfully is to continuously measure your
performance and look for new ways to improve. These 25 strategies should get your
organization
thinking about what it can do to lower inventory costs.
PLANT AUTOMATION IN MANUFACTURING INDUSTRY

With development in software industry and demand of lean manufacturing many industries have
gone for automation .It has
increased productivity manifold . Automation could be applied for various requirement of industry.It
has changed the way
manufacturing are done now days .
Why Automation
Increase efficiency.
Increase productivity
Less manpower
Early fault detection and repair
Remote operations
Data for better results
Safe Operations
Areas where automation can help

Raw material handling , packaging , assembly line , conveying , Utilities Operation ,production
Process
some examples for automation In Industry

Robots and others in automobile industry , packaging in pharmaceutical ,food processing industry
,and textiles etc
Components
PLC , SERVO DRIVES , MAN MACHINE INTERFACE ,COMPUTERS , SENSORS , PNEUMATIC
AND HYDRAULIC OPERATIONS
ETC
Best Example for automation in our daily life

1. Automated cash withdrawal machines :
It has helped banks to reduce employees for cash Disbursement.It has helped customer with easy
accessibility.
2. Automatic dispensers.
a . soft drink
b. news paper
c. coffee and tea
On advent of newer technology and software storage of data , sharing , transferring data
have become much easier . Now decisions are made more fast and accurate.
Complete resource allocation and decision have been made easy by implementing
ERP SOFTWARE .Following are popular software available in industry .
ORACLE
BAAN
SAPR/3
SAPR/5
They provide customised report for following areas which can help in cost reduction by taking most
viable
solution .
Module for materials planning
Modules for production planning
Modules for production
Modules for finance
Modules for sales
Similiarly by installing intranet and internet facility for inter office communications we can
achieve higher employee productivity ,save time and could result in substantial savings in
stationaries
sales
Distribution channels like area wholesaler and retailers are strategically located as to allow
products to
reach them in shortest period

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Cost Reduction Strategies

The major parameters for any manufacturing unit

cost per unit ($/unit)

units produced/unit time

break down time (%)

change over time ( min/hrs )

fuel consumption (k therms/unit)

electricity consumption (kwh/unit)

water consumption ( kltrs /unit )

lead time (min/hrs / days)

Why cost reduction

Where to implement cost reduction

raw material procurement

logistics - inbound and outbound

production ( process ,time and work study,maintenance ,automation)

human resource ( out sourcing )

sales & marketing

of industrial recession .Companies have to develop its own cost reduction

Given are few ideas which can result in savings

PARTNERSHIPS WITH MAJOR VENDORS-It is highly recommended to have partnership

E PROCUREMENT-Putting up tenders and requirement on Internet and setting up auction

PLANT AUTOMATION IN MANUFACTURING INDUSTRY

Early fault detection and repair

Data for better results

Areas where automation can help

some examples for automation In Industry

Best Example for automation in our daily life

c. coffee and tea

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