COST CONTROL AND COST EFFECTIVENESS

VALUE MANAGEMETN AND COST REDUCTION STRATEGIES

PRESENTATIONBY

V. ARUNAGIRI

The Trainees and the Trainers

Presenter: V Arunagiri

VALUE ANALYSIS

THE PROPERTIES, FEATURES OR ATTRACTIVENESS WHICH CREATE A DESIRE TO POSSES THE ARTICLE BUT ARE NOT NECESSARILY REQUIRED AS FAR AS FUNCTIONAL PERFORMANCE IS CONCERTNED.

ESTEEM ORAESTHERTICOR SELLVALUE:

THE PROPERTIES AND QUALITIES WHICH ACCOMPLISH A USE OR WORK OR SERVICE. THE USE VALUE IS EQUAL TO THE VALUE OF THE FUNCTIONS PERFORMED.

USE VALUE

IMPROVE PRESTIGE

SHOW TIMEWATCH

IMPROVE FINISH

PROTECT SURFACE

COLOUR CEMENT

IMPROVE AWSTHETICS/ IMAGE

ENCLOSE PARTS

BRIEF CASE

SELL FUCTION

USE FUNCTION

PRODUCT

FUNCTION IS THAT WHICH A PRODUCT DOES IN ORDER TO WORK OR SELL. DEFINE FUNCTION IN TWO WORDS, A VERB & A NOUN

VALUE CAN BE INCREASED BY

PV = C

INCREASING PERFORMANCE FASTER THAN COST INCREASES

04.

PV = C

DECREASING COST & INCREASING PERFORMANCE

03.

PV = C

ENHANCING PERFORMANCE AT SAME COST

02.

PV = C

DECREASING COSTS,WHILE ENSURING SAME PERFORMANCE

01.

CUSTOMER COST

VALUE ORIENTATION

FUNCTION ANALYSIS

1. WHAT DOES IT DO?

3. WHAT DOES IT COST?

5. WORTH OR VALUE IN VA PARLANCE IS DEFINED AS THE LOWEST COST TO ACHIEVE THE BASIC FUNCTION.

DECORATIVE LAMINATED SHEET

100120

1015PRICE

4010DESIGN/VARIETY

5075TECHNICAL RELIABILITY

CUSTOMER WEIGHT

%

MANAGEMENT WEIGHT

%

VALUE ATTRIBUTE

COST REDUCTION

1. DEFINITION OF COST REDUCTION Cost Reduction has been defined by the

Ins titute of Cost & Works Accountants , London, as follows:

“cost reduction is to be unders tood as th achievement of real and permanent reductions in the unit cos ts of goods manufactured or services rendered without impairing the ir suitability for the use intended.”

From the above definition the following features could be noted:

Saving in Unit cos t could be brought about by A 1. Expenditure reduction in respect of a given

volume of output. And/or 2. by increas ing productivity, i.e . an increase in

output for a given expenditure .

A. Saving is permanentB. There should be no impairment of functional

performance or deterioration in qualityC. It should not be brouhgt about by external

factors . Thus for ins tance reduction in cos t as a result of reduction in customs or excise duty would not fall within the definition of Cost Reduction.

02. PHILOSPHY OF COST REDUCTION

The term appears to have a negative connotation but is in fact a pos itive dynamic approach for productivity improvement. It is not just a technique but a s tate of mind which embodies the philosophy of giving a thrust to improvement of all aspects of bus iness , by challenging present concepts & methods and innovating new ones .

03. SCOPE FOR COST REDUCTION

Cost Reduction is not limited in its application only to the manufacturing area, but covers Marketing, Adminis tration Des ign, in fact every gamut of Management to ensure optimum utilization of the resources of an organization. The focus is on improvement of e ffectiveness and a quest for savings , enhancing productivity.

COST REDUCTION

TO COVER ALL MS OF MANAGEMENT

01. MATERIAL02. MACHINE03. MONEY04. METHOD

05. MEN

04. MATERIALSB. Raw Materialiii) Substitution of lower priced inputs without

detriment to quality. For example use of fly ash in cement

manufacture .Use of cheaper non-edible oil in making soaps .

Use of Mineral wool and wood pulp in place of Asbestos Fibre in the manufacture of Asbestos Cement products .

VISAKA:

Raw Material cost per MT of Finished Product Rs . 1,788.00

658.96224129,402c. Total

294.00113225,961b. Cement

364.96106063,441a. Asbestos Fibre

ValueRs. l

Rate Rs . /MT

Qty/MTRaw Material Consumption

36860 MTProduction

EVEREST:Production 178,375 MTRaw Material Consumption

Raw Material cost per MT of Finished Product Rs. 1,621.00DATA TAKEN FROM BALANCE SHEET OF 1986

2891.872,081138,987d. Total

173.681,13915,248c. Other materials

1204.421,103109,206b. Cement

1513.7710,41614,533a. Asbestos Fibre

WHEELS OF STEEL TRANSFER CARS

69,1901,92,530COST PER WHEEL IN RUPEES

41.5078.15MACHINING TIME PER WHEEL IN HOURS

20933192WT. IN KG PER WHEEL

CASTING162644/CS700

FOREINGSAE 5160

MATERIAL USED(LEARNT FROM AUTOMOBILE MFG CO ABOUT CASTING FOR EVEN WHEEL HUBS)

AFTER V.EBEFORE V.E

BENEFIT: Rs .1,23,340 SAVED PER WHEEL WITH IMPROVED AVAILABILITY OF PARTS & REDUCED PROBEMS ON THE SHOP FLOOR.

SOURCE: “GETTING MORE AT LESS COST”

BYG. JAGANNATHAN

(TATA McGRAW-HILL PUBLISHING)

BELT CONVEYOR GALLERY

800 1400 800

EXISTING DESIGN PROVIDED FOR A GANGWAY ON EITHER SIDE OF THE BELT SYSTEM TO A WIDTH OF 800 MM EACH

BASIC FUNCTION WAS TO ‘PROVIDE SPACE’

PROPASAL: TO REDUCE GANGWAY ON ONE SIDE TO 450 MM.

SAVING : Rs . 297 PER METRE LENGTH OVER ALL SAVING IN A YEAR Rs. 8.32LE

PACKING MATERIALSi. OBTAINING MATERIAL IN BULK INSTEAD

OF IN SMALL PACKS. Eg. CEMENT CAN BE PRODUCED IN BULK

THROUGH RAKE LOAD OR JUMBO BAGS INSTEAD OF IN GUNNY BAGS.

iii. USE OF CHEAPER PLY OF CARTON.iv. RECYCLING OF USED BOTTLES.v. PACKING COST VS BREAKAGE.

C. Cons umablei. Recycling used lubricating oil.ii. Prolonging life of tool by carbide impregnation process .

D. Energyi. Use of capacitors to improve power factor.ii. Provis ion of boosters in class melting furnaceiii. Waste heat recovery systems.

E. Inventory Control A s tudy carried out by ICWAI, at the ins tance of the

Bureau of Public Enterprises , has found that in se lect 20 Public Sector Companies , alone , as much as Rs . 1000 Crores of additional working capital is lying idle .

The s tudy identifies primarily 3 factors respons ible for the huge working capital blocked in these enterprises .

i. There has been a large inventory build up of spares and parts as a result of going in for “packaged” imports of machinery. Usually, the imports of such spares constitutes 20% to 30% of the value of the plant or machinery.

iii. Lack of any regular review of inventory in these public enterprises .

v. There is no proper coordination among units in multi unit public sector companies with regard to s tocks of various items

ii). Adopting value Engineering Technique by looking at the following points:

a) Does its use contribute valueb) Is its cos t proportionate to its use fulnessc) Does it need all of its featuresd) Is there anything better for the intended usee) Can a usable part be made by a lower cas t

methodf) Can a s tandard product be found which will

be usable .g) Is it made on proper tooling cons idering

quantitie s used.

CONSTRUCTION COST REDUCTIONA. ‘z’ purlins are about 50% lighter in weight

as compared to conventional s tee l sections and are approx 30% cheaper.

B. In cases where the span is limited to 5.5 mtrs savings in super s tructure cost could be brought about by use of curved sheet construction. Curved sheets e liminate trusses /rafters /purlins .

C. By proper des ign and se lection of Building Materials s ignificant economy could be brought about in the cos t of foundation/

A. In constructing factory sheds , procurement of sheets based on s tandard lengths would minimize cos t. For ins tance to cover a dis tance of 6 M by getting 2 sheets of 3 M lenth each, ins tead of 3 sheets of 2M length each, there will be a saving of 2Nos of purlins and thereby cost is reduced.

B. While planning res idential quarters , the factor of safe ty to be built into the s tructure has to be thought about and providing for excess ive leve l of safe ty would add to needless cos t.

C. Use of s tee l frames ins tead of timber would minimize cost.

D. Time control in Project Management.

7. MACHINEA. Removal of imbalances in production capacityB. Minimum s ize of plant keeping in view

economies of scale .C. Stage of process ingD. Sub-contracting Vs own manufacture .E. Outsourcing - S ingareni Collieries Ltd

outsourced removal of overburden.

8. MONEY

1. Finance Management has become such a key area that the Finance Divis ion is no longer treated as a cost center but as a profit center. This will become amply clear from te examples given be low:

2. In the recent past, there has been a shift from debt to equity financing large ly due to the free pricing of equity. The cardinal benefit of equity is that its share premium comes free . Thus , it is not unusual for a shar of Rs . 10/- be ing offered at over Rs . 300/- as happened in the case of Indian Aluminium Company Limited

GDR issue by Indian Aluminium Company Ltd.

b. 1 GDR = 1 share of Rs. 10/-

c. 1 GDR was sold at US $ 10.15 or Rs. 318.41 ($ 10.15 x Rs. 31.37)

d. Hence share premium per share = 308.41

e. No. of shares issued 59,11,330

f. Hence share premium amount – Rs. Crores 182.31

g. Share capital account – Rs. Crores 5.91

3. Mr. S.V. Venkatesan, Group Director – Finance of Essar Group, prefers equity to debt, as a financial strategy, especially in the global context. He feels that the difference in interest costs between India and the developed countries affects an Indian Firm competitiveness . For instance, American Steel Company Necor, pays only $ 10/- as interest cost out of the total cost of $ 290/- per tonne of steel; in contrast, an Indian Company with a debt-equity ratio of 1.5 incurs an interest cost of $ 45/- per tonne. Essar Steel is re lying largely on export credit and Euro convertible Bonds priced at the rate of 5.5%for rais ing resources .

4.Forex Management: This is another area which offers considerable scope for saving in

financial costs by techniques such as hedging, currency swap etc.

5. Tax Planning – Income Tax - Excise - Sales Tax

6. Saving interest by bonding imported material.

7. Giving Bank Guarantee ins tead of making earnest money depos its , in the case of tenders .

8. Fast transfer of funds to avoid interes t los t on float funds .G.I.F.T.S . Scheme of Grindlays Bank for transfer of funds .

9. ENERGY1. Century Mills , Bombay replaced its

Lancashire boilers which gave a thermal e fficiency of around 78% with 2 IAEC package boilers giving a thermal e fficiency of 83%.

2. Further they reduced consumption of e lectricity through ins tallation of additional capacitors , rewinding of motors , replacement of tapes and be lts and inefficient water pumps. This improved the ir power factor from 0.96 to 0.99 and the load factor from 86.9% to 93.9%.

1. Mafatlal Fine Spinning & Mfg. Company Ltd., replaced the ir old inefficient boilers with fluidized bed combustion boiler which burns conventional and non conventional fue l under special hydrodynamic conditions , achieving marked increase in e fficiency.

2. Mafatlal also uses Thermo Pac Boilers which replaced e lectrical heating with direct heating, us ing oil or coal. Savings achieved through boiler replacement alone works out to Rs . 1.00 crore .

1. Heat generated by the compressed air system is used to heat the boiler feed water which thus enters the boiler at around 83 Degree Centigrade as opposed to water at room temperature .

3. BHEL achieved enoromous savings by switching over to more e fficient lighting sys tems . For example , the change over from 8850 fluroscent and incandescent lamps to 2000 high pressure sodium vapour lamps in the Bhopal Divis ion saved 2.5 MW or Rs . 36 lakhs per year.

1. The compact fluroscent lamps manufactured by Philips has a 9 watt bulb but gives light equivalent to 60 Watt Bulb. It consumes one-s ixth of the energy but has a life e ight times that of an ordinary bulb.

3. Electronic choke and ballas ts are also energy savers . Electronic bulbs use le ss than one watt as against 4 watt used by conventional ballas ts . The e lectronic choke does not require ballas ts .

10. MEN

1. Make men work smarter: than harder2. Effective time utilization3. O& M Study

11. WASTE

“Waste is the cos t of e fforts that cannot produces results . The cos tlie s t waste is “not-doing” – machine downtime for ins tance or a tanker re turning in ballas t or a 150 – seat je t plane flying with only 15 cus tomers . There is only one sens ible thing to do with waste -creating activitie s ; drop them.”

- Pe ter Drucker.

12. ORGANISING COST REDUCTION PROGRAMME

1. It should be planned, organized and coordinated e ffort and not an occas ional ‘drive ’ or a “loose directive to economise .”

2. Involvement of all leve ls of Management is e ssential to ensure success .

3. Human aspects 4. Cost Culture in the Organization

THANK YOU