CHAPTER 20 Improving Productivity Through Cost and Inventory Control

The Supervisor’s Role in Cost Reduction and Control Supervisor can suggest means of cost reduction and control Supervisor oversees the implementation and measurement of cost reduction and control Supervisor has a direct influence over many costs The attitude of the supervisor toward costs sets the tone for the entire department Establishing the proper environment

The Supervisor’s Role in Cost Reduction and Control The following general guidelines should be used when a cost reduction program is being implemented: 1. Cost reduction should be a part of the normal routine 2. Cost reduction should cover all areas 3. A climate and format for encouraging employee suggestions should be provided 4. Cost objectives should be established and communicated 5. Individual responsibility for cost reduction should be made 6. Incentives for cost reduction should be offered

Figuring Costs Costs are everything expended to provide the product or service. They can generally be broken down into several categories: Direct labor costs Raw material costs Indirect labor costs Operating supplies Maintenance costs Scrap or waste costs Energy costs Overhead costs

Cost Budgets A statement of expected results or requirements expressed in financial or numerical terms The supervisor should establish goals for preparing a cost budget for each major cost category Budgets for lower levels must fit within the general constraints established from above The purpose of a budget is not to punish or restrict the supervisor but to provide the supervisor with guidance

Cost Reduction Strategies Cost reduction should begin in the areas where the greatest saving can be realized. Small cost reductions are important if they can be repeated frequently. Several general strategies are: General strategies for cost cutting: 1. Increase output 2. Improve methods 3. Regulate or level the work flow 4. Minimize waste 5. Reduce overhead 6. Analyze all control points 7. Ensure adequate storage space 8. Minimize downtime 9. Invest in employee training 10. Work closely with suppliers

Cost Reduction Strategies Cost reduction resources Staff specialists, such as cost analysts, industrial engineers, and others can offer expertise in certain areas Employees often represent the greatest potential for cost reduction ideas A cost reduction committee offers the benefits of group thinking and heightens its members’ interest in cost reduction

A Nine Step Plan for Cost Reduction This plan contains the essential ingredients for a successful cost reduction program Identify areas with high cost reduction potential Generate specific savings ideas Develop a way to measure actual savings Review your ideas with your boss Establish an implementation committee Communicate the program Put the program into action Make necessary revisions Periodically check the program’s progress

Cost Areas That Frequently Cause Problems Some areas are more susceptible to cost overruns than others and have historically caused problems for supervisors Overtime -- Overtime has hidden as well as direct costs and should be handled carefully. If overtime seems necessary, there are several things a supervisor should do: Determine the cause of the overtime Consider the alternatives Explain why overtime may be necessary Have sufficient raw materials and supplies on hand Include work breaks when overtime is utilized Be alert as a supervisor

Cost Areas That Frequently Cause Problems Absenteeism 1. Cannot be completely avoided 2. Tends to be low when employees are satisfied with their job and are loyal to the organization B. Tardiness 1. Indicates a lack of job satisfaction and loyalty 2. Habitual tardiness should be dealt with directly and consistently

Cost Areas That Frequently Cause Problems Employee theft Major contributors are lax selection and hiring practices, readily accessible money and products, and managers and supervisors who project a callous and uncaring attitude. The following guidelines should be followed to establish a corporate culture that supports an honest workforce: 1. Establish a clear, explicit policy on corporate theft 2. Set a good example in terms of not taking liberties at the expense of the company 3. Watch for warning signs of abuse 4. Be consistent in dealing with those employees who violate theft policies 5. Do not become overly aggressive, conduct a thorough investigation before accusing an employee 6. Do not police the workplace, be trustful of employees

Cost Areas That Frequently Cause Problems Materials handling 1. Costs associated with materials handling includes the cost of physically moving things and the costs of not moving them in a timely manner 2. Figure 20.3 in the text suggests specific ways that materials handling problems might be reduced

Inventory Control Costs of poorly managed inventories can be extremely high 1. Excessive inventory ties up money and storage space 2. Stored inventory can spoil or become obsolete 3. Stored inventory can increase taxes and insurance 4. Inadequate inventory may lose customers or slow production

Inventory Control Inventory Classifications 1. Raw material inventories 2. In-process inventories 3. Finished goods inventories

Inventory Control Inventories add flexibility and efficiency to the production system by allowing the organization to do the following: Purchase, produce, and ship in economic batch sizes. Produce on a smooth, continuous basis Prevent major problems when forecasts of demand are in error or there are unforeseen stoppages in supply or production

Inventory Control Inventory decisions include the following: What items to carry in the inventory How much of the selected items to order and carry When to order the items

Inventory Control Just-in-Time Inventory Control A philosophy for production so that the right items arrive and leave as they are needed Applies to the production of subassemblies and final products as well as to incoming raw materials It is a demand pull system because items are produced or ordered only when they are need