Module No 4: Financial Management in micro-enterprises

1. MICRO: Enhancing Competitiveness of Micro-enterprises in Rural Areas Module No 4: Financial Management in micro-enterprises Prepared by the Consortium for the project: “Irish Rural Link – National University of Ireland Maynooth- CDI – EEO GROUP SA- IHF asbl – IDP - Internet Web Solutions SL”

2. Cost Reduction Overview

3. Cost Reduction Unit Aim The Unit provides an Introduction to the definitions and the basic techniques of cost reduction

4. Cost Reduction At the end of this module you will be able to: • Know the definitions of cost reduction and cost control and their differences • Apply the basic techniques of cost reduction • Be aware of non conventional approaches Expected Learning Outcomes

5. Cost Reduction Definition • Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered.

6. Cost Reduction Cost Reduction can be effected by either of the following ways: • By reduction in unit cost of production: This is usually brought about by elimination of wasteful and non-essential elements in the design of products and from techniques and practices carried out. (Any reduction in costs due to changes in Government policy like reduction in taxes or duties or due to price agreements do not come into the area of cost reduction as these are not real and permanent reductions in costs). • (ii) By increasing productivity: This refers to increases in the volume of output with the expenditure remaining the same. But this should not be achieved at the cost of the characteristics and quality of the product.

7. Cost Reduction Areas of Cost Reduction Design Factory organisation and method Product planning Factory layout and equipment Utility services Marketing Finance

8. Cost Reduction Cost Control: Definition Cost control is concerned with keeping the expenditure within acceptable limits. Its major assumption is that costs are in control unless costs exceed budget or standard by an excessive amount.

9. Cost Reduction Differences between cost control and cost reduction

10. Cost Reduction Cost control is effected through budgeting & standard costing Budgeting: A budget may be defined as a comprehensive and coordinated plan of action, expressed in monetary terms. It is prepared and approved prior to the budget period and may show income, expenditure and capital to be employed to attain the objective. Standard costing: In this, standards are set and actual outcomes are compared with the standard. Corrective measures are undertaken for any discrepancy found between the standard and “actuals”.

11. Cost Reduction Techniques of cost reduction 1. VALUE ANALYSIS: Value analysis is the identification of unnecessary cost i.e. cost that neither provides quality, nor use, nor life, nor appearance, nor customer satisfaction. Thus value analysis attacks costs at production stage. 2. ECONOMIC BATCH QUANTITY (EBQ): EBQ is that point where carrying costs equals set up cost approximately. At this point the total cost will also be minimum. 3. ECONOMIC ORDER QUANTITY (EOQ):EOQ is the quantity fixed at a point where total cost of ordering and the cost of carrying the inventory will be minimum

12. Cost Reduction Activity Based Cost management (ABC): ABC assumes that resource-consuming activities cause costs. Its aim is to directly control the activities that cause costs, rather than cost. By managing activities that cause costs, costs will be managed in the long run. Cost causing activities – designing, engineering, manufacturing, marketing, etc

13. Cost Reduction Just-in-time approach: (JIT): • The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required. • JIT helps in cost reduction by – • elimination of non-value-added activities, • b. zero inventory, • c. zero defects, • d. zero breakdowns, • e. single batch ordering. • though the above goals are unlikely to be achieved, it represent targets and create a climate for continuous improvement and excellence.

14. Cost Reduction Total Quality Management: (TQM) TQM works on the philosophy that all business functions are involved in a process of continuous quality improvement. TQM reduces cost by producing the products correctly the first time rather than wasting resources making substandard items and incurring additional expenditure on inspection, rework and scrapping. It helps organisations to achieve their quality goals by providing reports and measures that will improve quality. TQM targets a customer-oriented process of continuous improvement that focuses on delivering products or services of consistent high quality in a timely fashion.

15. Cost Reduction Non-Conventional Approach • Material Cost • Manpower Cost • Cost Management Initiatives • Selling and Distribution • Funding Cost

16. Cost Reduction Non-Conventional Approach (Contd) • Material cost – Cost reductions through • E-sourcing • Discovery of new sources • Competitive pressures • Rationalisation of suppliers • Thrust on Value Engineering • Re-Visiting Designs • Application oriented engineering • Product Life Cycle Management

17. Cost Reduction Non-Conventional Approach (Contd.) • Manpower Cost • Right-sizing of Employees – VRS Schemes • Optimum utilisation of Manpower • Transition from Machine engagement time to Man-Engagement time. • Productivity-linked wage settlements • Adopting new concepts • MOST • CELL Layout

18. Thank you for your attention  End of Module