Finance:Cost reduction
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Short description: Process used by companies to reduce costs
Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project[1] or the construction of a building.[2]
Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market.
The importance of cost reduction in relation to other strategic business goals is often debated.[3]
Cost reduction strategies
- Supplier consolidation: see examples in the aerospace manufacturing industry
- Component consolidation
- Low-cost country sourcing
- Request for quotations (RFQ)
- Supplier cost breakdown analysis
- Function cost analysis / Value analysis / Value engineering
- Design for manufacture / Design for assembly
- Reverse costing
- Cost driver analysis
- Activity-based costing (ABC), which assigns a cost of each activity undertaken in the production and delivery of each product and service according to the actual consumption by each activity including a share of overheads. Peter Turney in a 1989 article examines the role of ABC in the achievement of manufacturing excellence and the product cost information needed by managers working towards this goal.[4]
- Product benchmarking
- Competitor benchmarking
- Design to cost
- Design workshops with suppliers
- Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes or value adding stages to 1/N of the previous cost.[5]
References
- ↑ Barton, J. A. et al., Design determines 70% of cost? A review of implications for design evaluation, Journal of Engineering Design, Volume 12, published 1 March 2001
- ↑ Designing Buildings Wiki, Cost control in building design and construction, last updated 15 August 2021, accessed 11 September 2021
- ↑ Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021
- ↑ Turney, P., Activity-Based Costing: A Tool for Manufacturing Excellence, Association for Manufacturing Excellence, published summer 1989, accessed 13 September 2021
- ↑ High, P., AstraZeneca CIO Makes IT Twice As Good At Half The Cost - Here Is How, Forbes.com, published 3 January 2017, accessed 10 January 2021
Further reading
- Barrett R. Crane. "Cycle time & cost reduction in a low volume manufacturing environment". MIT DSpace.
- Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry". MIT DSpace.
- Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools". MIT DSpace.
See also
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