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.
Use the spot market
|1||0||2007||In order to reduce costs, some small businesses are turning to derivative trading to insulate themselves from certain economic risks. While the buyer may not always get a bargain when they negotiate contracts, it does reduce the risk of volatile prices which can destroy a business. Kraken Group negotiated to buy $500,000 worth of ink. Half would be delivered immediately while the other half would be delivered at a later date at a set price. Kraken managed to lock in low prices.|
|2||1041||1997||Amax employs one of the most successful and complex hedging strategies in the gold mining industry.|
|3||2015||2006||Tyson Foods Inc. is trying to think more like energy companies by participating more actively in the commodities markets to protect the company from price swings in raw materials and in final products. Tyson is trying to minimize cost swings by making trades aimed at locking in lower prices for commodities. It trades to lock in lower grain and propane costs to raise chickens. In 2004, Tyson saved $127 million through grain-hedging strategies. Tyson is now implementing software from a company that typically serves energy companies, SolArc Inc., to track grains, energy, and freight markets.|
|4||4512||2004||As oil prices continue to reach new highs almost daily, Delta Air Lines' decision to sell its fuel hedges in February is looking more costly. And Continental Airlines' decision to buy hedges at the highest prices the airline has ever paid is looking more and more like a good deal. Price swings of oil are the main reason Delta Air Lines' fuel costs will rise by around $650 million this year compared with last. At the beginning of the year, Delta owned hedges covering 32% of the airline's fuel needs at prices that corresponded to 76.5 cents for a gallon of jet fuel. Delta freed up much-needed cash by selling the hedges for $83 million. But if the airline had kept the hedges, it would have saved about $150 million this year.|
|5||4512||2006||In industries from airlines to glass-making, companies are curbing usage, revamping machinery, and shifting production schedules to offset energy costs. The International Air Transport Association recently noted that efficiency improvements world-wide would have made it possible for the industry to break even with oil priced at $48 a barrel in 2005, compared with $22 a barrel in 2003. That's still far below current prices, but underscores the drastic changes sweeping the industry. The few airlines with the financial muscle to do so have increased hedging. AMR Corp., now has 30% of its fuel consumption hedged for the second quarter at an average price equivalent to $62 per barrel of oil. Other strategies include retrofitting planes with "winglets," the upturned tips on wings that help reduce fuel consumption, and carrying extra fuel to avoid refueling at airports where prices are higher. Some airlines have even pooled resources through alliances to buy fuel in bulk.|
|6||4512||2008||Rivals are not copying Southwest's hedging tactics for many reasons. So far, Southwest has locked in more than 70% of its jet-fuel requirements this year at a price equivalent to $51 a barrel for crude oil. By contrast, other big carriers have hedged 30% or less of their fuel needs this year. They are expected to pay $85 to $100 per barrel of oil under their hedging programs. Southwest's hedging has had huge payoffs and was the only airline to post an increase in profits while others have been in the red.|
|7||6200||2007||Traders are turning to options which give them the right to buy or sell crude-oil futures at a certain price as a way to insure against, and bet on, the big price moves in oil futures. The options-trading is done through Nynex which has reduced the cost of trading in the pit. The volatility in the crude oil market makes it profitable to use an option.|
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