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.
Change the basis of payment
|1||2800||2004||Procter & Gamble moved to entirely sales-based compensation for its advertising agencies four years ago.|
|2||3312||2004||ISG offered $1.5 billion to buy Bethlehem Steel Corp. out of Bankruptcy. ISG produced 7 million tons of steel using 3,200 workers while Bethlehem's 13,000 employees were producing 8.5 million tons a year. The union's agreement to accept job cuts and compensation that was tied to profitability constituted the most dramatic thing that has happened in the American Integrated steel industry. ISG will become the biggest U.S. producer if its current agreement to buy bankrupt Weirton Steel succeeds. In buying the firms out of bankruptcy, the company has benefited from the new labor contract and is relieved of the heavy burden of retiree benefits which were covered by Pension Benefit Guarantee Corp.|
|3||4522||1997||Variability of expenses is minimized through long-term agreements whereby KLM Royal Dutch and GE provide aircraft and engine maintenance at a fixed cost per flight hour.|
|4||5122||2006||Distributors have forged new agreements with distributors in recent years, changing the ways they do business. Manufacturers have created a fee-for-service model. Drug makers pay distributors out-right for the work they do. In the past, distributors were compensated indirectly, via fatter gross margins and discounting. The manufacturer pays the wholesaler for the distribution function, the wholesaler provides a bit of data and insight and does not hoard inventory, and distributors, such as AmerisourceBergen, end up with a very efficient distribution model with a lot less inventory than before.|
|5||7374||2004||Ditto Dailey's latest venture, launched in 2000 with $5 million from profits on the PMT sale and $10 million from investors. It's called Ipayment. Last year it hauled in $226 million in revenue from 72,000 little guys like auto repair shops and restaurants. While First Data tends to use salaried sales forces, Ipayment relies on independent contractors, who bear the costs and may also sell a point-of-sale credit card reader, which Ipayment doesn't provide.|
|6||7999||2006||StubHub Inc. is a leading Internet player in the burgeoning market of ticket reselling. StubHub also altered its initial strategy for its agreements with pro teams that help match season ticketholders with StubHub. Originally, the company would split commissions with the teams on sales of season ticketholders' extra seats. But under the newer deals it has been striking with teams, StubHub keeps all of the commissions and instead pays the teams a straight fee for promoting its Web site and providing contact information on their season ticketholders.|
|7||8082||1997||Importantly, the company has been able to make adjustments to its captitated relationship with Cigna — a contract that covers more than 3.5 million lives — so that certain specialty services are reimbursed on a fee-for-service basis, improving the profit.|
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