CHAPTER
Improving Productivity
Through Cost and Inventory Control
20-3
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
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20-4
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
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20-5
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
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20-6
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
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20-7
Cost Reduction Strategies
•
A.
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
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20-8
Cost Reduction Strategies
B. Cost reduction resources
1. Staff specialists, such as cost analysts, industrial
engineers, and others can offer expertise in certain
areas
2. Employees often represent the greatest potential for
cost reduction ideas
3. A cost reduction committee offers the benefits of
group thinking and heightens its members’ interest
in cost reduction
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20-9
A Nine Step Plan for Cost
Reduction
•
This plan contains the essential ingredients for a
successful cost reduction program
1.
2.
3.
4.
5.
6.
7.
8.
9.
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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
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
20-10
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
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20-11
Cost Areas That Frequently
Cause Problems
A. 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
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20-12
Cost Areas That Frequently
Cause Problems
C.
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
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20-13
Cost Areas That Frequently
Cause Problems
D. 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
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20-14
Inventory Control
A. 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
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20-15
Inventory Control
B. Inventory Classifications
1. Raw material inventories
2. In-process inventories
3. Finished goods inventories
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20-16
Inventory Control
C. 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
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20-17
Inventory Control
D. 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
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20-18
Inventory Control
E. Just-in-Time Inventory Control
–
–
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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
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