Cost Reduction : Key Concepts

Concepts of Cost

• Amount of expenditure (Actual or notional) incurred on or attributable to a specified article, product or activity.

• Cost objects : Product, Services, Project

Classification of Costs

• By Nature or elements Overheads• Material Cost : Direct Indirect• Labour Cost : Direct Indirect• Other Expenses: Direct IndirectOverheads :

Production or works :Rent , PowerAdministration : Lighting ,Telephone, Office RentSelling : AdvertisementDistribution: Warehousing, packing, loading unloading charges

By Variability or behavior

• Fixed costs

• Variable costs

• Semi- Variable costs

By Controllability and normality

• Controllable Costs• Uncontrollable costs• Normal costs• Abnormal costs• Pre determined costs• Standard costs• Estimated cost• Product cost• Capitalized costs : Initially treated as asset

subsequently as expense

Other Concepts

• Opportunity cost

• Shutdown cost

• Out of pocket cost

• Sunk cost

• Discretionary cost

• Engineered cost : By design

• Explicit costs

• Implicit costs

Productivity Challenge

Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as

labor and capital)

The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency. Productivity deals with efficiency

Feedback loop

Outputs

Goods

and

services

Processes

International experience

In advanced countries

Transforms inputs to outputs

at about an annual 2.5%

increase in productivity per

year. The productivity

increase is the result of a

mix of capital (38% ), labour

(10%), and management

(52%)

The Economic System

Inputs

Labor,

capital,

management

Measure of process improvement

Represents output relative to input

Only through productivity increases can our standard of living improve

Productivity

Productivity =Units produced

Input used

Productivity Calculations

Productivity =Units produced

Labor-hours used

= = 4 units/labor-hour1,000

250

Labor Productivity

One resource input single-factor productivity

Multi-Factor Productivity

Output

Labor + Material + Energy + Capital + Miscellaneous

Productivity =

Also known as total factor productivity

Output and inputs are often expressed in RsVALUE

Multiple resource inputs multi-factor productivity

Measurement of Out puts

• Value of output

• No. of documents processed

• Time taken to carry out a job

• No of jobs attended

• No. of customers served

EXAMPLES OF INPUTs

• Labour force or man hours, man days. Labour cost (Rs)

• Area of land(in hectares)

• Kg. Of material or material cost in Rs.

• Volume of material or fluid

• Length of material

• square area of space

• Units of power

• Time etc.

OTHER THOUGHTS ON PRODUCTIVITY

• “Productivity is an attitude of mind”

• “Productivity means doing something better today than yesterday”

• “Productivity means continuous improvement”

IMPROVING PRODUCTIVITY

Benefit/

Cost

• Increase output while input remains same

• Decrease input while output remains same

• Increase input resulting in a very large increase in output

• Decrease input by a very large amount with a resultant small reduction in output

Seven Sources of Waste

• Over production

• Waiting

• Transport

• Extra processing

• Extra Inventory

• Unnecessary motion

• Defects

• 8th waste is added now: The under utilized employee creativity

Tools

• Poka yoke mistake proofing

• Kanban : Produce to demand

• 5S : Sort, Systematize ,Shine Standardize, Sustain

All these require

• Top management commitment

• Process management

• Customer ( External and Internal) Orientation

• Team work : Commitment and involvement of all employees, quality circles, suggestion schemes

• Personal Discipline, Improved Morale

BEWARE OF 3 M s

• MURI : In-convenience

• MUDA : Waste

• MURA : In consistency

Impact of Industrial and systems engineering

on automobile assembly line

Value

Early Moving Assembly Line at Ford

A Glimpse of a Car Assembly Line

Robots at Work in Car Assembly

Robots at Work in Car Assembly

A Modern Car “Assembly Line”at Volks Wagon factory