Managerial Economics
Cost drivers, as propounded by Porter (1985) are the structural causes of the cost of an activity in the value chain. They determine the behaviour and level of costs within an activity. A cost driver can be completely, partly or not at all under the control of a firm. It is therefore important for a manager to understand these factors because according to the Neo-classical model of the firm, the firm’s objective is to maximise profit by producing a given level of output at the minimum cost level. Therefore in pursuit of this, factors such as learning effects, linkages and interrelationships between activities carried out by the firm, timing within the business cycle or with respect to other firms’ actions geographical location and the firm’s discretionary policies should be taken into account and asses their impact on the firm’s cost levels.
Learning effects and spill overs suggest that the cost of a value activity often declines over time due to the learning or improvements that increase efficiency or due to knowledge acquired from suppliers, consultants, former employees or reverse engineering. These savings derive from “learning by doing”. According to GHEMAWAT (1985),”increased efficiency can be achieved through the successful repetition of numerous tasks by the firm’s employees: thus learning. In this regard, costs can be reduced through various systematic ways such as improved scheduling, product design modifications that facilitate manufacturing, processes and procedures that allow utilisation of assets and probably better tailoring of raw materials to relevant processes as well as inspection.
In my organisation Tunnel Engineering, they inspect production at different points in the production process. They take a few products out of every batch and inspect them to determine the overall quality of the products produced. Similarly, scheduling is improved by calculating well in advance the time required to perform each activity in the manufacturing process
Learning effects and spill overs suggest that the cost of a value activity often declines over time due to the learning or improvements that increase efficiency or due to knowledge acquired from suppliers, consultants, former employees or reverse engineering. These savings derive from “learning by doing”. According to GHEMAWAT (1985),”increased efficiency can be achieved through the successful repetition of numerous tasks by the firm’s employees: thus learning. In this regard, costs can be reduced through various systematic ways such as improved scheduling, product design modifications that facilitate manufacturing, processes and procedures that allow utilisation of assets and probably better tailoring of raw materials to relevant processes as well as inspection.
In my organisation Tunnel Engineering, they inspect production at different points in the production process. They take a few products out of every batch and inspect them to determine the overall quality of the products produced. Similarly, scheduling is improved by calculating well in advance the time required to perform each activity in the manufacturing process