Cost reduction

From Wikipedia, the free encyclopedia

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[]

  1. ^ 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
  2. ^ Designing Buildings Wiki, Cost control in building design and construction, last updated 15 August 2021, accessed 11 September 2021
  3. ^ Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021
  4. ^ Turney, P., Activity-Based Costing: A Tool for Manufacturing Excellence, Association for Manufacturing Excellence, published summer 1989, accessed 13 September 2021
  5. ^ 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. hdl:1721.1/11020.
  • Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry". MIT DSpace. hdl:1721.1/60836.
  • Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools". MIT DSpace. hdl:1721.1/12092.

See also[]

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