Cost reduction

A number of techniques are widely used as a means of attempting to achieve cost reduction, particularly in manufacturing organisations.

Standardisation of materials and components

This relates to a policy of reducing, so far as is possible, the range and variety of materials and components purchased by the manufacturer and of components produced. If the manufacturer is producing a number of models of the product, it is often possible for one component to be used throughout the range. For example, where there is a series of car models it may be possible to use one type of door handle on all models.

The advantages of such a policy are:

(i)the manufacturer can buy, or make, large quantities, gaining the benefit of reduced unit cost

(ii)having proved the efficiency of a material or component, the manufacturer knows that the quality and content will not change

(iii)because of the reduction in variety, inventory control will be easier

(iv)better service can be provided to customers in the provision of spare parts

(v)less time will be needed to train operatives who handle the component.

The possible disadvantages are:

(i)if there is only one supplier of the material or component, the manufacturer will be at risk if supplies are interrupted

(ii)there may be restrictions on the design of a new model if the manufacturer wishes to continue the policy for economic reasons

(iii)for the same motive, a standard component may be used in one model when it would be better technically if a special component was used.

As an example, many of the major car manufacturers now design vehicles in such a way as to ensure that as many components as possible are common to as wide a range of models as possible.

Standardisation of product

This refers to the production of articles to the same standard, or a range of products each of which is standardised.

The advantages are as follows:

(i)the manufacturer derives the benefit of long runs of production with reduced unit cost

(ii)tooling is simpler because it is geared to one method of production

(iii)because of the uniformity of the production method, mechanisation can be extensive

(iv)the consequent buying of large amounts of the same materials and parts results in a reduction of unit cost

(v)production management is simpler, being confined to standard processes

(vi)less training of operatives is required because the processes do not change

(vii)there are fewer demands on the design staff

(viii)inspection costs are low

(ix)customers know they are buying a proven product and that the quality will not change.

A range of products may be basically standardised but with minor differences between models. Again, using the car industry as an example,a particular model of a car may be available in, say, 20 different colours - but apart from this all of the cars are identical.

The policy can produce disadvantages, such as the following:

(i)The manufacturer may feel safe in doing what he knows best and may become complacent about the success of the product, so that when the product faces new competition or the public becomes disloyal, he is too slow to recognise it.

(ii)If the product has to be altered because of the above circumstances, then equipment, technical knowledge and managerial experience may be too fixed to adapt successfully.

(iii)If production is continued to a level beyond the reduced demand and that demand does not rise, there will be surplus components, materials and finished goods.

Using a cost reduction team

A cost reduction team can be used to identify scope for achieving cost reductions but care must be taken so that costs saved are not outweighed by the costs of the team itself.

A well-defined programme must be instituted so that the cost reduction teams spend their time in fields where there is scope for savings. Furthermore, it is important that a fixed time is allocated to a particular exercise. There may well be a request to continue the exercise in order to complete the study and obtain extra savings, but these may be quite marginal, and the law of diminishing returns will begin to operate. A cost/benefit approach to a cost reduction programme is essential.

Another aspect is the time and trouble taken by line management to accommodate changes brought about by a cost reduction scheme. Departments and whole functions must be given time to adjust and consolidate agreed changes. A permanent state of change may harm morale and upset the proper working of departments. It is important to recognise that cost reduction implies a specific programme aimed at reducing costs at a given time. The concept does not relate to a continuous situation; it should have a definite start and finish and should incorporate well-defined targets. The activity of cost control is a continuous function of management.

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