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%.
C. Change the components of the rate of costs to reach a lower total rate:
Sometimes it is possible to break the price of a purchase into its component parts. Then the company may seek to substitute a less expensive component for a more expensive component to reduce the effective rate the company pays on its purchases.
Optional components of the rate paid: Penalty/bonus, including equity and profit sharing:
Substitute equity for pay
|1||0||1986||Research on 370 companies in 1980 found that both profits and stock market valuation of companies whose directors owned 5-20% of their stock were significantly higher than those of companies whose boards owned more or less than this share of the equity.|
|2||1041||1993||While top executives at Barrick receive salaries 5-10% below the industry norm, they can qualify for lucrative stock options if the company does well. The program has already made a number of Barrick executives wealthy.|
|3||3334||1986||Union leaders insist that aluminum producers will have to show "dire economic circumstances" before they will consider discussing any concessions. Kaiser broke away from the traditional bargaining group and achieved a $4.50/hr wage-and-benefit reduction in return for stock option rights.|
|4||4213||1991||Truckers have used employee stock ownership plans to reduce direct wage outlays.|
|5||4512||1993||At Northwest, a coalition of pilots, mechanics, and flight attendants unions resulted in negotiations with the airline on a concessions-for-equity swap that enabled NW to restructure its debt load. Only when NW was hours from filing for bankruptcy did the pilots union agree to a deal.|
|6||4512||1996||Northwest in 1993 gave workers a minority stake and board seats in exchange for $883 million in concessions over 3 years.|
|7||4512||2004||Delta has beefed up its trans-Atlantic routes and has been developing its Atlanta hub as a gateway into Latin America. Delta had to beg its vendors, creditors, and pilots union for the concession that allowed it to avert a planned bankruptcy court filing.|
|8||5411||1995||Publix enjoys lower labor costs. Publix has also used aggressive management & tenets of employee ownership to create a culture that values efficiency & service.|
<<Return to Reduce the Rate of Cost