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Cost reduction:
Cost reduction refers to the process of permanently reducing the expenses involved in manufacturing products or rendering services. It comes about without unduly impairing the end use or quality of the product or service.
Cost reduction involves the following:
- A fall in expenditure with the same production volume.
- An increase in production with the same level of production.
Process
Cost reduction framework
Types of cost reduction
Some of the types of cost reduction are as follows:
- Product design cost
- Material cost
- Labour cost
- Organization or factory layout costs
- Administrative costs
- Management costs
- Marketing costs
- Financing costs
Cost reduction techniques
Firms can bring about cost reduction in myriad ways. Some of the popular cost reduction techniques include
- Budgetary control
- Simplification
- Standard costing
- Value analysis
- Design improvement
Techniques like contribution analysis, job evaluation, material control, market research, finance control, cost-benefit analysis, and labour and overhead control can also be utilized for cost reduction.
Leverage For Cost Savings
| Cost Category | Cost Drivers |
| Customer | Customer acquisition and loyalty
Quality requirements Responsiveness and flexibility Qualification of the sales-force |
|
Innovation |
Lack of requirements analysis
Product development process Qualification of employees Short product life-cycles Solution complexity |
|
Product |
Product complexity
Material prices Product variety Functional/technological requirements Legal requirements |
|
Globalization |
Logistics
Qualification of employees Information technology Heterogeneous markets Custom duty, taxes and local conditions |