Tools And Techniques Of Cost Reduction

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The following are the widely used techniques of cost reduction:

1. Just-In-Time (JIT) System
The main aim of JIT is to produce the required items, at the required quality and quantity, at the precise time they are required. JIT purchasing requires for the items where too much carrying costs associated with holding high inventory levels. purchasing system reduces the investment in inventories because of frequent order of small quantities.

2. Target Costing
Target costing refers to the design of product, and the processes used to produce it, so that ultimately the product can be manufactured at a cost that will enable the firm to make profit when the product is sold at an estimated market-driven price. This estimated price is called target price.

3.Activity Based Management(ABM)
Activity based management is the use of activity based costing to improve operations and to eliminate non-value added cost. The main goal of ABM is to identify and eliminate non-value added activities and costs.

4.Life Cycle Costing
Life cycle costing estimates and accumulates costs over a product's entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the costs incurred during the pre-and-post manufacturing stage.

5. Kaizen Costing
Kaizen costing is the process of cost reduction during the manufacturing phase of an existing product. The Japanese word 'Kaizen' refers to continual and gradual improvement through small activities, rather than large or radical improvement through innovation or large investment technology.

6.Business Precess-re-engineering
Re-engineering is a complete redesign of process with an emphasis on finding creative new ways to accomplish an objective.The aim of business process re-engineering is to improve the key business process in an organization by focusing on simplification, cost reduction, improved quality and enhanced customer satisfaction.

7.Total Quality Management(TQM)
Under the TQM approach, all business functions are involved in a process of continuous quality improvement.

8. Value chain
Value chain analysis is a means of achieving higher customer satisfaction and managing costs more effectively. The value chain is the linked set of value creating activities all the way from basic raw materials' sources, component suppliers, to the ultimate end-use product or service delivered to the customer.

9. Bench Marketing
Bench marketing is a continual search for the most effective method of accomplishing a task by comparing the existing methods and performance levels with those of other organizations or other sub-units within the same organization.

10. Management Audits
Management audits, also known as performance audits, can be used to facilitate cost reduction in both profit and non-profit organizations. Management audits are intended to help management to do a better job by identifying waste and inefficiency and recommending a corrective action.

Related Topics
Concept And Meaning Of Cost Control
Concept And Meaning Of Cost Reduction
Difference Between Cost Control And Cost Reduction
Cost Reduction Areas
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