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%.

F. Change source of supply to a less expensive supplier:

A change in the supplier relationship may enable the company to switch to a less expensive supplier. The supplier may be less expensive because it has lower costs or because it reduces the company’s logistic expenses.

Warnings and Advice

No. Industry SIC Year Notes
1 0 1987 It takes 3 years at most for a maquiladora to attain the labor productivity of a well-run American or Japanese plant-and it pays workers less than $2 an hour.
2 0 2007 Outsourcing can require a significant investment of time and money and many deals fail to meet expectations because they focus on reducing costs rather than improving quality of service. Many companies want to outsource but as they research the process, they change their minds, realizing that it would require serious reorganization.
3 0 2008 Supply-chain managers must develop a new set of skills to meet outsourcing and globalization problems. Mangers must know the differences in legal and economic environments and trade practices in different countries, and they must be able to communicate across cultural barriers, or hire people who can. For instance, many managers are hiring Chinese students who get M.B.A.s in the U.S. to return home and negotiate deals with key suppliers.
4 3571 1988 Tandy faced battle between rival unions in S. Korea, so it moved its small electronic parts production out of the country.
5 3621 2989 Baldor didn't move production offshore. CEO feared that when updrafts buoying the dollar subsided, Baldor would lose any price advantage gained by moving. Also feared loss of quality reputation if moved over seas.
6 3674 1988 Motorola's South Korean plant faced illegal strikers threatening to storm front gate and ignite selves.
7 3677 1993 Quality Coils shut a CT factory and opened one in Mexico, where it could pay 1/3 the wage rates. It lost money in Mexico because of high absenteeism, low productivity, and problems with long-distance management.
8 3711 1988 A well-tested rule says that offshore production must be at least 5%, and probably 7.5%, cheaper than production nearby to compensate for the considerable costs of distance: transportation, communications, travel, insurance, finance. If wage costs fall below 15% of total cost, it takes a 50% wage differential–at the same labor productivity–to offset the costs of distance.
9 7372 2004 Intentia International is a $430 million business-software company that outsourced a software-programming project to India in 2002, hoping to cut costs by 40%. The result was a software riddled with errors that caused company to completely redo it from scratch. A lot of U.S. companies are experiencing the same; hoping to get a savings of 25-75% but are being rewarded with bad quality and poor customer service.
10 9700 2007 The Department of Defense realized that its heavy reliance on fuel, especially from foreign sources in unstable regions, has made it vulnerable. It will invest in energy saving initiatives, including hybrid power stations.

<<Return to Reduce the Rate of Cost