Cost minimisation approaches and benefits:
Strategic approach - Based on the business model. e.g. locating production overseas or core activities vs outsourced.
Tactical approach - Focused on the detailed business functions. e.g. choice of suppliers or the approach to stock holding.
Cost minimisation leads to - Lower unit costs, higher gross profit margin, higher operating profits, improved cashflows and a higher rate on capital employed (ROCE)
Key sources of cost reductions:
- Eliminating waste and avoiding cuplication - Lean production
- Simplifying processes and procedures
- Outsourcing non core activities. e.g. transaction processing, payroll and call handling
- Negotiating better prices from suppliers
- Pruning product ranges and customer accounts to eliminate unprofitable business
- Introducing flexiable working practices
Profit centres - separately-identifiable part of a business for which it is possible to identify revenues and costs (e.g. calculate profit)
- Shows where the profit is being earnt within the business
- Supports setting profit…