STAGES IN COST REDUCTION Dennis Geyer Geyer Management Associates Tel: 925 246 9887 Email:  [email_address] © Copyright 2007
Stages in Cost Reduction Cost Cutting Cost Management Cost Design Cost Positioning
Stage 1. Cost Cutting <ul><li>Cost Cutting  involves cuts in spending based on arbitrary criteria. </li></ul><ul><li>Costs...
Limitations of Cost Cutting <ul><li>Impairs critical constraint resources </li></ul><ul><li>Sacrifices long-term strategic...
Stage 2. Cost Management <ul><li>Cost Management  involves a systematic approach to cost reduction that involves an unders...
Standard vs. Kaizen Costing <ul><li>Standard Costing  focuses on controlling costs by setting realistic standards in cost ...
Standard vs. Kaizen Costing <ul><li>Standard Costing </li></ul><ul><li>Goal to meet cost performance standard </li></ul><u...
Stage 3. Cost Design <ul><li>Cost Design  involves an evaluation and redesign of the internal value chain.  It seeks to im...
 
Stage 4. Cost Positioning <ul><li>Cost Positioning  involves an evaluation and redesign of the external value chain. It se...
 
Comparison of Stages
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Gma Web Site 2007 Cost System Stages.65172043

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Gma Web Site 2007 Cost System Stages.65172043

  1. 1. STAGES IN COST REDUCTION Dennis Geyer Geyer Management Associates Tel: 925 246 9887 Email: [email_address] © Copyright 2007
  2. 2. Stages in Cost Reduction Cost Cutting Cost Management Cost Design Cost Positioning
  3. 3. Stage 1. Cost Cutting <ul><li>Cost Cutting involves cuts in spending based on arbitrary criteria. </li></ul><ul><li>Costs are divided into committed and discretionary categories. </li></ul><ul><li>Cuts target discretionary before committed; large before small; expedient before sensitive. </li></ul><ul><li>Performance measured against historical standards. </li></ul>
  4. 4. Limitations of Cost Cutting <ul><li>Impairs critical constraint resources </li></ul><ul><li>Sacrifices long-term strategic objectives </li></ul><ul><li>Induces “padding” of budgets </li></ul><ul><li>Demoralizes employees & supplers </li></ul><ul><li>Reduces customer service </li></ul><ul><li>Expansion/contraction cycles create waste </li></ul><ul><li>Influenced by politics not mission </li></ul><ul><li>Lack of organizational learning </li></ul>
  5. 5. Stage 2. Cost Management <ul><li>Cost Management involves a systematic approach to cost reduction that involves an understanding of relevant cost drivers. </li></ul><ul><li>Costs are organized by resources, activities, and cost objects. </li></ul><ul><li>Reductions achieved by eliminating unused capacity, nonvalue-added activities, and reducing activity cycle times. </li></ul><ul><li>Performance measured against long-term target standards. </li></ul>
  6. 6. Standard vs. Kaizen Costing <ul><li>Standard Costing focuses on controlling costs by setting realistic standards in cost performance for each period and monitoring deviations from these performance standards. </li></ul><ul><li>Kaizen Costing focuses on reducing costs by setting achievable goals in cost reduction for each period and monitoring progress towards these goals. </li></ul>
  7. 7. Standard vs. Kaizen Costing <ul><li>Standard Costing </li></ul><ul><li>Goal to meet cost performance standard </li></ul><ul><li>Standards set annually </li></ul><ul><li>Compare actual with standard costs </li></ul><ul><li>Investigate when standards not met </li></ul><ul><li>Managers & engineers set standards </li></ul><ul><li>Assumes process stability </li></ul><ul><li>Kaizen Costing </li></ul><ul><li>Goal to achieve cost reduction standard </li></ul><ul><li>Standards set monthly </li></ul><ul><li>Compare actual cost reduction with target </li></ul><ul><li>Investigate when target cost reduction not achieved </li></ul><ul><li>Workers set kaizen standards </li></ul><ul><li>Assumes continuous improvement </li></ul>
  8. 8. Stage 3. Cost Design <ul><li>Cost Design involves an evaluation and redesign of the internal value chain. It seeks to improve the relationship among resources required and work performed to satisfy customer requirements. </li></ul><ul><li>Costs are organized by process and subprocess. </li></ul><ul><li>Reductions achieved by eliminating redundancy and conforming to operational strategy. </li></ul><ul><li>Performance measured against best-in-class standards of performance. </li></ul>
  9. 10. Stage 4. Cost Positioning <ul><li>Cost Positioning involves an evaluation and redesign of the external value chain. It seeks to improve the relationship among supply chain members to enhance competitiveness. </li></ul><ul><li>Costs are organized by links in the value chain. </li></ul><ul><li>Reductions achieved by consolidation of links, sharing information, better coordination, and exploiting synergies among supply chain members. </li></ul><ul><li>Performance measured against strategic objectives such as market share and price targets. </li></ul>
  10. 12. Comparison of Stages

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