Innovation Ideas: Reduce the Rate of Cost for the Input Used to Produce the Output

Reduce rates paid for the Input (I), which reduces the total number of I. This action reduces the amount of Input used for a particular ICD because using an Input with a lower rate of cost is equivalent to using a fraction of the original Input. A less expensive person, one with a lower rate of cost per time worked, is equivalent to the work center’s using only a fraction of the original Input (I). For example, a person earning $10/hour is effectively half of the person earning $20/hour.

Advisories: These examples contain warnings and advice that should be considered as you are using the approach to cost improvement described below.

Examples: These are brief write-ups for each cost management concept, describing a situation where the concept is used or implied. Use these supporting examples in order to expand your range of ideas. These examples are neither mutually exclusive nor collectively exhaustive. There may be other illustrations of the concept in the outline.

We offer you both a short version and a long version of some of these cost management concepts. We have enough examples of some of these concepts to expand the concept into more specific concepts with their examples. Use the short version to complete your innovation in less time. Use the long version for more in-depth innovation.

A. Purchase in Larger Quantities:

Purchase in larger quantities to get lower unit prices. In most markets a customer who purchases in larger quantities gets a lower unit price than one who purchases in smaller quantities. These concepts increase the amount of purchases the company makes at one time.

Warnings and advice: Advisories>>
Offer security in return for lower rate Short Examples>> Long Examples>>
Reduce number of suppliers to buy more from a few Examples>>
Combine purchases with another purchaser Short Examples>> Long Examples>>
Coordinate all company purchases from one or a few locations Short Examples>> Long Examples>>
Purchase further in advance of need Examples>>

B. Reduce the quality of the input used by using a cheaper form of the input.

The reduction in quality should bring with it a reduction in the rate paid for the input.

Warnings and advice: Advisories>>
Use input with lower Performance Short Examples>> Long Examples>>
Separate tasks into high and low skill levels and substitute low rate skills for some high rate skills Examples>>

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.

Warnings and advice: Advisories>>
Minimum performance required for the standard rate Short Examples>> Long Examples>>
Optional components of the rate paid Short Examples>> Long Examples>>
Change the basis of payment Short Examples>> Long Examples>>

D. Use subsidies offered by third parties to reduce total rate.

While the company may pay the regular price to the vendor of the product, subsidies available in the market place may reduce this effective rate by offsetting part or all of the purchase price.

Warnings and advice: Advisories>>
Use government sponsored programs Short Examples>> Long Examples>>
Use spousal benefits Examples>>
Use supplier subsidies Examples>>

E. Request supplier to lower price of the input.

Negotiations with the supplier may sometimes result in a lower unit price for the input.

Warnings and advice: Advisories>>
Impose rate reductions on suppliers Examples>>
Request productivity pass-through Examples>>
Reduce supplier cost in return for lower rate Examples>>

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: Advisories>>
Source from new suppliers in better locations for costs Short Examples>> Long Examples>>
Eliminate intermediary margin by purchasing direct Examples>>
Use supplier with larger scale or lower profit requirements Examples>>
Move inside or outside boundaries to purchase without tariffs and regulations Examples>>
Use sources related to the company Examples>>
Use customers Examples>>
Use the spot market Examples>>
Use suppliers Examples>>
Use general public Examples>>

G. Expand in-house ICDs to reduce rate on purchased ICDs.

Sometimes it is better for the company to increase the activities (ICDs) inside the company in order to reduce the effective rate paid on purchased ICDs. This occurs when the price on purchased ICDs is high enough to allow the company to make a return on its investment by producing the same ICDs in-house rather than purchasing them from third parties.

Warnings and advice: Advisories>>
Create rather than license designs and products Examples>>
Make rather than buy ICDs Short Examples>> Long Examples>>
Sell direct rather than through intermediaries Short Examples>> Long Examples>>
Service in-house rather than through outsiders Examples>>

<<Return to Improve Costs/Innovation Ideas

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For a greater overall perspective on this subject, we recommend the following related items:

Perspectives: Since 1985, we have conducted an ongoing in-depth study of companies and industries who face particularly competitive marketplaces. This section of the website enables you to apply the results of this extensive research to your business situation.

	List of Return Management Perspectives
	List of Price and Margin Levels Perspectives
	List of Competition Perspectives

Symptoms and Implications: This section allows you to check current developments in your industry in order to understand their implications for the future of your marketplace.

	List of Return Management Symptoms and Implications
	List of Price and Margin Levels Symptoms and Implications