Lowering of production expenses

Classification of expenses

  1. Effective and non-effective. There are effective expenses (refer to getting a profit from selling of products which have been produced by means of these expenses) and ineffective expenses (refer to objectives which are not connected with getting of profits, suppose losses). Non-effective expenses are any kinds of losses: due to defective goods, thefts, dormancy, etc. That’s why you should focus on eliminating of the number of non-effective expenses. Consequently, it is necessary to set allowable technologic expenses and to define the level of responsibility for violation of allowable norms.

The other direction of expenses reducing is the analysis of effectiveness of secondary works with involving of outsourcing companies in some fields of business. Involving of outsourcing companies on a competitive basis is an effective variant of lowering expenses of large and medium companies.

Although sometimes it is more profitable for a company to have its own divisions than to cooperate with outsourcing companies, but such situation is more like an exception than a rule.

  1. Relevant and irrelevant. Any chief should know whether control and planning depend on his management decisions. If they depend, so they are relevant, if don’t – they are not. In particular, expenses during the past periods are irrelevant, because the chief manager cannot influence on them by his decision. And alternative expenses are included into the group of relevant, that’s why higher management should pay attention to them.
  2. Direct and indirect. Direct expenses are expenses on a certain kind of a product or service. Indirect expenses don’t have any direct connection with products of certain kinds. Indirect expenses are aimed at providing of management and maintenance of divisions.

How to start the process of expenses lowering

The first step is classification of expenses according to distinctly defined categories.

The second step is defining of business processes to be optimized.

The third step is planning and reducing of expenses.

3 ways of expenses lowering

  1. Reducing of labor costs. Reducing of labor costs means reducing of the number of personnel or wage levels. This way requires paying attention on optimization of business processes in the sphere of human resource management. Otherwise, a company can suffer from the low level of personnel motivation.
  2. Reducing of costs on raw materials, including:
  • Optimization of business processes in logistics
  • Searching for new suppliers
  • Self production of certain kinds of materials
  1. Reducing of expenses on production itself. This activity can include optimization of business processes in the sphere of production. For example, automation of some production processes can reduce expenses on production significantly.

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