Cost reduction techniques for the industrial sector.

1. Muhammad Ubaid
28th November 2020
T: +92 334 4399330, E: qmubaid@gmail.com

2. SCHEME OF PRESENTATION
1 Business rule & equation
3 Textile Business conditions of Pakistan
4
2 Conventional Vs Today’s costing principle
Identifying the Bottlenecks
5
6
Unlocking major Cost Drivers
Cost reduction approach & tools

3. RULE OF THE BUSINESS
WARREN BUFFET
(MOST QUOTED INVESTOR ON THE PLANET)
NEVER LOSE MONEY
NEVER FORGET RULE NO.1
RULE NO.1
RULE NO.2

4. – = Profit
Revenue Cost
BUSINESS EQUATION

5. In business, cost is usually a monetary estimate of :
• Efforts,
• Materials,
• Resources,
• Time and utilities consumed,
• Risks incurred.

6. Conventional Vs Today’s costing
principle

7. CONVENTIONAL COSTING CALCULATION
+
Manufacturing Cost
Profit Margin
Price

8. we increase price, to
maintain the profit
Manufacturing Cost
RS.
Conventional Principle of Costing
Price to Customer
Profit
If the cost
increase

9. TODAY’S COSTING EQUATION
-
Manufacturing Cost
Price
Profit Margin

10. TODAY’S PRINCIPLE OF COSTING
Price to Customer
Manufacturing Cost
So now, we have to
reduce
manufacturing cost
to get the same profit
Market Pressure
RS.
Profit

11. “It is not the big that is
eating the small,
it is the fast that is
eating the slow”

12. Business Profits shrinkage

13. BRANDS SHIFTING FROM PAKISTAN

14. BRANDS SHRINK FROM PAKISTAN

15. “Economical”
Reduce Cost
Customer Price
Net Margin
Production Costs
“Faster”
Reduce Lead Time
“Better”
Improve Quality
The way forward ! . . .

16. Identifying the Bottlenecks

17. Reason of high cost of doing business
Energy waste
Political instability Raw material prices
Deteriorating law and order situation
High interest rates
Frequent power and gas breakdown
Power and gas tariffs
Terrorism
Red-Tapism, corruption and malpractices
Excessive power shortages
Poor infrastructure
High material transport
High Inventory
Unnecessary Motions
Assesses waiting time
Over-Processing
Overproduction
Defects
Material waste

18. Reason of high cost of doing business
.
• Political instability,
• Raw material prices,
• Deteriorating law and order situation,
• High interest rates,
• Frequent power and gas breakdown
• Power and gas tariffs
• Terrorism
• Red-Tapism, corruption and malpractices
• Excessive power shortages
• Poor infrastructure
• High Inventory
• Unnecessary Motions
• Assesses waiting time
• Over-Processing
• Rework
• Overproduction
• Defects
• Material waste
• High transportation of material
• Energy waste
• Rejects
Uncontrollable Factors Controllable Factors

19. Unlocking major Cost Drivers

20. COST
STRUCTURE
Salesmen’s salary
Traveling
Correspondence
Transportation
Packing
Advertisement
Other sales cost
Directors’ salary
Clerk’s salary
Welfare cost
Interest/Rent
Govt. Taxes
R&D
Other admin cost
Sales
Admin
Fuel
Depreciation
Transportation
Insurance
Maintenance
Utilities
Others
Ind. material
Ind. labor cost
Ind. expense
Total
cost
Profit
Mfg.
cost
Sales
Admin
Direct
mfg.
cost
Ind. mfg. c
Material
Labor cost
Utilities
Price

21. THE HIDDEN COST
OF WASTE

22. Cost distribution chart of dyeing mill
65%
11%
9%
8%
7%
Raw Material Dyes & Chemical Overheads
Production Labour

23. COST DISTRIBUTION CHART OF GARMENT
FACTORY
49%
12%
23%
9%
6% 1%
Fabric Cost CMT Embellishment Overheads Trims Others

24. Cost distribution chart of spinning mill
Energy
41%
Raw Material
24%
Labour
10%
Depreciation
9%
Mescleneous
16%

25. Cost distribution chart of leather factory
Leather
60%
Accessories/Fabric
12%
Direct Labor
12%
Frieght/in/out
Commission
2%
Other Direct Cost
1%
Wastages
1%
Overheads
8%

26. . . . What's your cost distribution? ?

27. . . . time to reduce Cost ? ?

28. Cost reduction approaches &
tools

29. What is cost reduction?
“Cost reduction is the permanent reductions in the unit cost of the goods
manufactured without reducing the generation of revenue”.

30. Cost Reduction approaches

31. Balance Approach
Quick Win Approach Transformation Approach

32. What do you think ? . . .
❑ Your organization is at Survival stage ?
❑ Your organization is at Development stage ?
❑ Your organization is at Dominance stage ?

33. Balance Approach

34. What is Kaizen ? . . . .

35. Question : is this glass half full or half empty?
This glass is too much for the job.
Kaizen thinking? . . . .

36. ‘Kaizen costing is based on the belief that nothing is ever perfect, so
improvements and reductions in the variable costs are always possible’
✓ Kaizen costing is applied during manufacturing stage.
✓ Kaizen costing focuses on production processes.
✓ Kaizen costing aims to reduce costs of processes through employee involvement.
✓ Employees themselves come up with cost reduction ideas.
What is Kaizen Costing? . . . .
Features of Kaizen Costing :

37. Purchasing Manufacturing Marketing Finance
Top
Management
Buying
units
Plants Branch
sales units
Accounting
units
Typical Functional Structure

39. Kaizen Costing Scope area. . . .

40. Kaizen Costing approach . . . .

41. 11/29/2020
Kaizen Costing sustainable model . . . .

42. Kaizen Costing methodology
The recognized need
for Cost Reduction
1.Planning and
Organization
2.Assessment
3.Feasibility
Analysis
4.Implementation
Successfully implemented
Cost Reduction projects
Sustain
&
Continue
(Cost Reduction)
❑ Obtain management commitment
❑ Develop kaizen costing departmental
teams
❑ Set kaizen costing targets
❑ Arrange bi weekly meetings of KC
teams
❑ Develop kaizen costing committee
❑ Identify sources (WHERE)
❑ Analyse causes (WHY)
❑ Generate possible kaizen options
(HOW)
❑ KC committee evaluate kaizen
options on:
❑ Technical, financial
❑ and social feasibility
❑ Select best options
❑ Option implementation
❑ Monitoring and evaluation
❑ Sustain and continue

43. Cutting Stitching Finishing
KCT 1
Kaizen Costing
Committee
Kaizen
Board
CFO I.E
C.M S.M F.M
Q.M
G.M
KCT 2
Kaizen
Board
KCT 3
Kaizen
Board
Kaizen Costing Implementation procedures
(Example)

44. All Kaizens
Technically
Viable
Financially
Feasible
Socially
Acceptable
Best Kaizens
•Kaizens
received from
all
departments
Kaizen Committee proceedings

45. All Kaizens
Technically
Viable
Financially
Feasible
Socially
Acceptable
Best Kaizens
•Kaizens will
be evaluated
technically
Kaizen Committee proceedings

46. All Kaizens
Technically
Viable
Financially
Feasible
Socially
Acceptable
Best Kaizens
•Kaizens will
be evaluated
financially
Kaizen Committee proceedings

47. •Kaizens will
be evaluated
socially
All Kaizens
Technically
Viable
Financially
Feasible
Socially
Acceptable Best Kaizens
Kaizen Committee proceedings

48. All Kaizens
Technically
Viable
Financially
Feasible
Socially
Acceptable
Best Kaizens
•Received best
Kaizens for
Implementation
Kaizen Committee proceedings

50. Winner team
prize: Rs. 5000

51. Where to Start with ? ? . . . .

52. KaizenCosting (Unit: Rs)
Sales
15,000,000
Cost of product
3,037,498
Cost of waste
1,484,470
Gross Profit
1,047,8032
Selling, General and
8,000,000
Operating Profit
2,478,032
Conventional (Unit: Rs)
Sales
15,000,000
Cost of Product
4,521,698
Gross Profit
1,047,8032
Selling, General and
8,000,000
Operating Profit
2,478,032

53. Identification of Sources of Cost of Waste
Cost Material Energy System Disposal Total Rs.
Product 2,499,944
(68.29%)
57,354
(68.29%)
480,200
(68.29%)
N/A 3,037,498
(67.17%)
Waste
Total
1,160,830
(31.71%)
3,660,774
(100%)
26,632
(31.71%)
83,986
(100%)
222,978
(31.71%)
703,178
(100%)
74,030
(100%)
74,030
(100%)
1,484,470
(32.83%)
4,521,968
912pcs
(100%)

54. PRODUCTION PROCESS
PRODUCTS
WASTE &
EMISSIONS
INPUT MATERIALS
MACHINES
OPERATION
Kaizen Costing zones

55. Option 1: Input material substitution
1/ Material Cost Reduction:
Change INPUT RESOURCES
PRODUCTION PROCESS

56. Option 2: Technology change
TECHNOLOGY
PRODUCTION PROCESS
2/ Technology change:
• Replacing
• Equipment modification
• Optimal process conditions
• Increased automation
• Improved process control
• Improved equipment lay-out
Improve equipment
and process control
New technology

57. Option 3: Good operation practices
PRODUCTION PROCESS
3/ Improved operation practices:
• Production scheduling
• Raw Material Waste reduction
•Working instructions and procedures
•Training and incentives program
• Adequate process control operations
• Proper maintenance and cleaning
OPERATION

58. Option 4: Product modification
PRODUCTION PROCESS
4/ Product modification:
•More efficient, less material intensive packaging
PRODUCTS

59. Option 5: reuse and recycling
PRODUCTION PROCESS
5/ On-site reuse and recycling:
•On site recovery and re-use of raw materials in the process
• Waste segregation and storage
WASTES &
EMISSIONS
Re-use and recycling