cost reduction and cost avoidance
Cost reduction
Generally defined as the act of cutting costs to improve profitability.
Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith.
In other words, the essential characteristics and techniques and quality of the products are retained through improved methods and techniques used and thereby a permanent reduction in the unit cost is achieved. The definition of cost reduction does not however include reduction in expenditure arising from reduction or similar govt. action or the effect of price agreements.
The three fold assumption involved in the definition of cost reduction may be summarized as under:-
1. There is saving in a cost unit
2. Such saving is of a permanent nature
3. The utility and quality of goods remain unaffected, if not improved
A cost reduction, which is a "hard" cost saving, usually takes the form of a tangible year-over-year bottom-line cost reduction such as: the direct reduction of a capital or operating expense, such as a decrease in the annual lease payments, a reduction in the telecommunications cost, or a reduced annual IT maintenance fee a process improvement that results in real and measurable cost reductions, such as a process improvement that allows more units to be produced on the line in the same time-frame (productivity improvement) and/or with the same amount of raw material inputs (waste reduction) a net reduction in prices paid for the raw materials procured when compared to prices paid in the previous year
Generally defined as the act of cutting costs to improve profitability.
Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith.
In other words, the essential characteristics and techniques and quality of the products are retained through improved methods and techniques used and thereby a permanent reduction in the unit cost is achieved. The definition of cost reduction does not however include reduction in expenditure arising from reduction or similar govt. action or the effect of price agreements.
The three fold assumption involved in the definition of cost reduction may be summarized as under:-
1. There is saving in a cost unit
2. Such saving is of a permanent nature
3. The utility and quality of goods remain unaffected, if not improved
A cost reduction, which is a "hard" cost saving, usually takes the form of a tangible year-over-year bottom-line cost reduction such as: the direct reduction of a capital or operating expense, such as a decrease in the annual lease payments, a reduction in the telecommunications cost, or a reduced annual IT maintenance fee a process improvement that results in real and measurable cost reductions, such as a process improvement that allows more units to be produced on the line in the same time-frame (productivity improvement) and/or with the same amount of raw material inputs (waste reduction) a net reduction in prices paid for the raw materials procured when compared to prices paid in the previous year