The strategic areas for a Cost reduction programme may be manifold. The following are a few examples of critical areas of application of cost reduction techniques and methods in a manufacturing company.
(a) Product Design : A well conceived cost reduction programme starts with the design of the product. All possibilities of cost reduction should be investigated by the management while introducing new designs of the products or while seeking improvements of the existing designs. Value analysis can be a very useful technique in this attempt. Cost reduction through the designing of the product will result in future economies at all points, i.e. production, sales, marketing and finance.
(b) Rationalization of Organization : Cost reduction may be brought about by an improvement in the organization structure of the firm. Rationalization of organization requires a clear-cut definition of each function and responsibility, avoidance of overlapping in authority and responsibility, promoting co- operation and close relationship between the various executives working at different levels in the organization, establishing good and efficient communication system, encouraging the employees for cost reduction suggestions and promoting the feeling of involvement among them.
(c) Factory Layout and Plant and Equipment: Factory layout and the plant layout also affect the cost of production to a large extent. The management should examine its factory and plant layout carefully and explore the possibilities of cost reduction by eliminating wasteful and irrelevant system and ensuring maximum utilization of existing facilities.
(d) Production Plan, Programme and Method: An efficient system of production control ensures proper production planning, initiates efficient production procedures and develops economical production programmes. It avoids wastage of time, money and monetary, non-monetary resources, brings about economy in various types of costs.
(e) Marketing Costs : An efficient cost reduction programme must cover marketing field also. It should aim at economizing in selling, advertising, distribution, marketing research, sales- research costs etc. The marketing manager must explore the possibilities of reduction in costs in selling and distribution expenses without impairing the efficiency of the marketing function.
f) Personnel Costs: Various economies may be sought for by the management in the area of personnel management too. It may be possible to cut down the labour costs by introducing training and development programmes, work simplification, improving machine loading improving the morale and productivity of employees, introducing various welfare measures, incentive wage payment and proving better working conditions.
(g) Financial Costs : Finance is also an important and sensitive area for effecting cost reduction. Cost reduction may be effected by improved system of fixed capital budgeting, avoiding over-investment in various current assets, obtaining capital at reasonable interest rate by lowering down the cost of capital, leading to ultimately maximization of return on capital employed in the business.
Thus, we observe that cost reduction programme is an abound attack of management at the increasing cost of production. Standard costing, budgetary control, work study, organization and method studies, standardization, value analysis, simplification in procedures are a few examples of the tools and techniques useful in cost reduction efforts of the management.