Reduce the Rate of Cost for the Input Used to Produce the Output
Use the same type of input and the same activities, but pay less for the unit of input employed in producing the output. A reduction in rate is equivalent to a reduction in the number of inputs for the same ICD. For example, if a person who makes $10 per hour could produce the same amount of output as a person making $20 an hour, the substitution of the $10 person for the $20 person in the process would be equivalent to cutting the number of people required to do the work by 50%.
A. Purchase in Larger Quantities:
Purchase in larger quantities to get lower unit prices. In most markets a customer who purchases in larger quantities gets a lower unit price than one who purchases in smaller quantities. These concepts increase the amount of purchases the company makes at one time.
Coordinate all company purchases from one or a few locations
|1||1521||2005||Pulte Homes Inc. is insulating itself from downturns. In rethinking what a homebuilder should look like, Pulte has plucked ideas from all over the business world. It seeks to use its scale to build a more efficient supply chain, using Wal-Mart Stores Inc.|
|2||2834||2007||As Medicare reimbursement procedures become more complicated, some doctors are taking part in the government's Competitive Acquisition Program which allows doctors to order drugs directly from a vendor which then bills Medicare. The doctors are then paid only to administer the drug. However, it has been criticized for being complicated and requiring uncompensated administrative work.|
|3||3312||2004||The purchase of International Steel Group by Mittal Steel will displace Arcelor as the number one producer of steel. The combined operation will have $30 billion in revenue and 165,000 employees throughout the world. The deal could encourage consolidation in the still fragmented industry. Strong demand from countries like China and rising prices are spurring interest in acquisition. Ispat International will merge with LNM Holdings which is controlled by Mittal. The combined company will have strong positions to negotiate in raw material pricing, such as coal, coke and iron ore. This access will be invaluable for ISG which has been undermined by insufficient coke and iron supply. Despite the mergers, Mittal will account for less than 6% of the global output, illustrating how fragmented and large the market is.|
|4||3571||2006||Hewlett-Packard is making sweeping changes in the way of HP operations. The company will soon replace 85 loosely connected data centers around the world with six-cutting edge facilities. It will also be slashing thousands of smaller projects at the decentralized company to focus on a few corporate-wide initiatives – including scrapping 784 isolated databases for one companywide data warehouse. If the changes are successful, HP's annual spending on tech should be cut in half in the years ahead, from $3.5 billion in 2005.|
|5||3711||2008||BMW and Daimler's Mercedes-Benz division are in talks to explore teaming up developing, producing, and purchasing car components. Other rival companies that have parent companies, such as Audi of Volkswagen, Ford Motor's Volvo, and Lexus of Toyota, are able to leverage the resources and scale. Sharing parts and research, plus making bulk purchases of raw materials such as steel allow them to squeeze costs. Audi has been able to use VW's diesel-engine technology and is benefiting from VW's economies of scale purchasing. Lexus has been able to launch a hybrid luxury sedan thanks to hybrid technology pioneered for Toyota.|
|6||3845||1992||Coulter found that the same 3-way solenoid valve cost $20.87 in France, $17.50 in the UK, and $10.54 in the U.S. By consolidating the purchasing of this valve, Coulter saved over $100,000 annually.|
|7||5122||2006||Pharmacy benefit managers (PBMs) say they are saving employers money while their own profits are rising. A big part of the PBMs' strategy is selling employers on the idea of requiring patients to fill all prescriptions, except in emergencies, through the mail-order pharmacy. General Motors Corp., IBM Corp., and Southwest Airlines have “mandatory mail” programs. About 8 million beneficiaries served by Medco come from employers with such rules. Medco says clients save 8% to 10% with the program because it has a good track record of switching mail-order patients to generics. According to Medco, the current generic substitution rate for chronic medicines through its mail pharmacy is 95.3% while at a retail pharmacy it is 92.6%.|
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