COST REDUCTION
- The objective is to identify areas in which cost reduction can be implemented.
- All direct manufacturing and distribution costs of the product should be included, not just those that would traditionally be used to calculate inventory and cost of goods sold. Direct manufacturing costs are needed to determine product profitability and competitiveness. Direct sales, delivery, warehousing, and similar costs are needed to determine which products and/or customers are too costly to sell and serve.
- Once this information has been laid out on a product-by-product and possibly a plant-by-plant basis, it can then be used to determine the following: areas of cost reduction, cost competitiveness; break-even volumes; volume/capacity utilization and strategies; standard cost system deficiencies; opportunities for reduction.
Explore overhead cost reduction strategies
- The objective of is to identify opportunities to implement cost reduction of overheads.
- Analysis is performed for each plant, division, location, and corporate office. Overhead must be split into those costs that are directly involved in product manufacturing identified above and those that are not associated with specific processes and that therefore may be altered or eliminated. This analysis should include proper allocation factors.
- The above data should produce an analysis of profits and losses which should be used simultaneously to make decisions.
- The objective is to identify opportunities for a continuous improvement in working capital management. This will increase cash to help fund the plan with internally generated cash. Reducing borrowings will also reduce interest expense.
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