Methods of reducing cost

Competitive manufacturing is a system of reducing costs, achieving efficiencies and maintaining continuous improvement. When all staff take responsibility for reducing costs and improving efficiencies significant cost reductions can be achieved. Streamlining work processes, reducing inventory and improving employee morale can reduce costs by as much as 75%. Focusing on improving efficiencies provides:

• tangible benefits, or improvements that can be directly measured for example time, labour utilisation, maintenance costs
• intangible benefits, or improvements that are more difficult to measure. Examples of these intangible benefits are employee and customer satisfaction.

Being able to reduce costs is linked to an understanding of how customers value a product or service. A customer measures the value of a product or service by the value they place on the benefits that can be derived from the product or service.
Perceived benefits must be greater than or equal to the price. It can be represented as:

Perceived benefits >/= Price.

By delivering a product that the customer values, the organisation will reduce their costs as they will not be wasting their resources on a product the customer does not value.
Benefits that may influence value, other than cost and quality, include:

• availability
• personalisation – uniqueness of product
• prestige they feel from owning the product.
• product image
• supplier reputation
• warrantee
• personality of the sales representative.

In some instances for a small increase in cost the perceived value can be dramatically increased enabling the final price to be increased.
Pricing policy is driven by what customers will pay for the product or service being offered. This means that costs of production control the amount of profit the company can make.
How do organisations deal with this issue?

• Add more value to the product or service so the customer is happy to pay more.
• Reduce the costs associated with producing the product or service.

Most organisations focus on reducing the labour or materials component of the variable costs with the overhead costs usually ignored. A company that is applying the competitive manufacturing strategies will measure all the components of cost of the products or services, then systematically look at ways to reduce these costs.
By focusing on what customers value, competitive manufacturing understands that an organisation is either adding value or adding cost. This means that anything in the company will add to the cost burden if, or when, it is not being used to create products and services the customer currently wants to buy. Producing products the customer does not value will add to the cost burden of the organisation which is measurable in tangible or intangible benefits.