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Cost Reduction - Get Extra 10-20% Profit

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1. Elimination of waste.

The single most important factor contributing to costs is wastage. Eliminating waste can by itself cut costs from 10 to 20%. The main areas of waste are:

(a) Input Waste: Substandard quality rawmaterials and other inputs while appearing cheaper work out to be very costly in the long run. They affect the end-product's quality directly. Indirectly they cause frequent damages to men and machinery and add to maintenance costs. Frequent purchase returns, consequent alternate sourcing, resulting delay in production, involve additional costs. A system to screen all inputs for quality compliance is a must in addition to a good quality policy with reference to all inputs.

(b) Process Waste: While converting the rawmaterials into finished products wastage is very common in all industries. Providing for process waste is taken for granted. While a certain amount of waste is inevitable in the process there is always the possibility to minimise waste. How much is subject to the type of processing and specific to the industry. Avoidable waste will include improper storage and handling, inputing excess quanitties of rawmaterials, interrupted process flows, avoidable movement of materials, mix up among works in process at various stages etc. The resident time of materials inside the processing area may also matter.

(c) Product Waste: Defective products, second quality products, damaged products come under this category. Minimising or rather avoiding seconds production by implementing an optimum quality system should be given first priority since the cost of making a second grade product equals that for a good one. Interchanging of components to get good ones from out of a lot of seconds may be a choice. Damage or deterioration due to improper storage is another common cause for wastage of finished product. Coordination of order position with production schedule so as to minimise finished product inventory would be advised here.

(d) Logistics Waste: This is another common waste taken for granted. Merely insuring the product for transit risks and damage may not be advisable. It will only recover the cost at a later date. There will also be another cost for resending the product to the intended destination. The customer will not be served on time and will create doubt on the reliability of supplies. Proper packaging for transport as well as storage in shelves of sales points is to be carefully planned without increasing the cost of packaging. Outsourcing logistics services with assurances of safe and timely deliveries will eliminate such wastes.

1. Maximising Productivity.

(a) Production per unit machine capacity: Adequate engineering and maintenance practices will maximise the productivity per unit of machine capacity used. Relating the production schedule with the production capacity will help in planning for full capacity. Identifying idle capacities and putting that capacity into use is essential. Idle capacity can be put into production of increased number of the same product, add new products, add value addition (quality, functional advantage etc) to the existing products, or do jobworks for outsiders.

(b) Production per unit manpower: This is a tricky issue but is necessary in almost all businesses. Preliminary determination of skills, aptitude and efficiency while recruiting is necessary in all employments. While allocating duties and responsibilities to employees their fitness to particulars tasks should be checked. A lot of ground work has to be done while planning the manpower requirements which should be optimised to provide various administrative, production, supervisory and managerial functions within a minimum over all workforce. Utilisation of human resources should also be properly planned to provide for substitutes and alternates, even among departments to ensure uninterrupted flow of work. Avoidance of duplication of work, automatic check of ones work by another in the natural flow of the job, automation wherever possible, ensuring an error free documentation, proper management information systems will provide minimum hindrance to people in their prompt accomplishment of the tasks.

(c) Production per unit investment: Investments made in machinery, equipments, buildings, and other fixed assets, vehicles and supporting infrastructure, investments in working capital including cost of carrying inventory, costs of financing etc should all be taken into account. Turnover or Profit on Total investment and also on individual components of investments should be worked out to find out where the return is not optimal. Care should be taken not to indulge in too much arithmetics which are of statistical importance only. When areas of sub-optimal profitability or productivity is noticed, measures to minimise investments in these areas or ways to increase their individual productivity should be explored. This is more difficult than it sounds and a careful judgement has to be made to recover monies invested already.

These principles apply to any business whether they are manufacturing or marketing or provide of services. A simple study is normally enough to find out where there is possiblity of cost reduction. A better approach would be to make such an analysis a regular affair because the real world conditions are not static.

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