ENGINEERING MANAGEMENT

REDUCING INDIRECT COST IN MANUFACTURING

INDUSTRY.

Before we proceed…

We will have to clear some fundamentals about Manufacturing industry

• Almost every organization is a PROFIT ORGANIZATION it always tries to MAXIMIZE THE PROFITelse they will be ultimately in loss.

MAXIMIZING PROFIT INCLUDES MANY METHODS ,it includes

REDUCING INDIRECT COST AS ONE OF THE MOST VITAL FACTOR

We know that

PROFIT=REVENUE-EXPENSE

EXPENSE INCLUDES1. DIRECT COST/EXPENSE2. INDIRECT COST/EXPENSE

i.e.

“NET COST=DIRECT COST + INDIRECT COST”

Now if we are succeeded to reduce indirect cost thenIn turn our NET COST will be reduced In this way we can make a tough competition in market by offering a reasonable product price ORBy keeping sale price constant we can get more profit.

WHAT is DIRECT COST?

Direct costs are usually better recognized and

understood .

Managers can see the direct relationship between the output and the efforts and materials applied as an input.

Direct costs refer to materials, salaries for project staff and expenses related to the production of a product , without which a finished product is unable to be produced.

WHAT is DIRECT COST?

Because these activities are easily traced to projects, their costs are usually charged to projects on an item-by-item basis.

FOR EXAMPLE

COSTS INVOLED FOR

Project staff, Project consultants, Project supplies, Publications, Travel, Project Labor, Raw materials e.t.c

WHAT IS INDIRECT COST?

• Indirect costs are not directly attributable to a product.

• OR IN OTHER WORDS the costs not directly assignable to the end product or process.

• Indirect costs do not vary substantially within certain production volumes and so they may sometimes be considered to be fixed costs.

Major Indirect costs are• A)for indirect supervision(INDIRECT

ADMINISTRATIVE ACTIVITIES ) and.B)for overheads for example taxes , legal advisors, retirement plans, health andLife insurance, office supplies, telephone,Employee welfare, material handling e.t.c

WHAT IS INDIRECT COST?

STEPS TO REDUCE COSTS ON ADMINISTRATIVE INDIRECT ACTIVITIES

1)A SYSTEMATIC REVIEW OF THE STRUCTURE OF STAFFING, how they are related and how many can control better, is an essential part of any serious attempt to cut costs.WHY COST OF STAFFING IS GROWING????

steps IMPORTANT IN THIS CONTEXT are as follows:-

It is seen that in the last fifty years, just as productive processes have been automated, manual accounting, manual typewriters, and the calculation and payment (of wages and bills) in cash are all gone. And the massive investment in computers is supposed to transform administration, financial control, marketing and selling on buttons. So why have the staffing and cost of supporting activities continued to grow?

PROBLEMS AND THEIR SOLUTIONS RELATED TO EXPENSES ON INDIRECT ADMINISTRATIVE ACTIVITIES

We have observed in our Local industries that

Since latest technology gives easy access to managerial information and data on performance, Most managers, can now deal with the vast majority of their ‘correspondence’ themselves in form of emails , IN VIEW OF THIS

1.)Organizations still contain so many secretaries and administrators.

2.) lengthy reports that repeat information get written, printed and copied by supporting staffs.

3.) there is still so much duplication and overlap in activities. .

IMPROPER USE of TECHNOLOGY for management 2/2

SO there is Not only the technology not being exploited ful ly , i t is sometimes unnecessari ly modif ied to provide so-cal led enhancements that on closer examination turn out to be unnecessary fr i l ls or even downright distract ions that waste effort and money .

ORGANIZATIONAL CAPABILITIES ARE NOT TRIED TO UNDERSTAND AND EVALUATED CORRECTLY IN OUR LOCAL MANUFACTURING INDUSTRIES

Organizational capabilities specify what an organization can do.

Companies that want to remove indirect costs in the long term must consider this factor repeatedly.

If it has surplus staff present, it must utilize them to increase productivity, else THIS SURPLUS STAFF WILL BE CONSIDERED INDIRECT in context of their wages and welfare.

SHAPE THE ORGANIZATIONAL CAPABILITIES TO STRATEGY

Managers must examine the ‘what’ (the goal set by each organizational unit) before analyzing the ‘how’ (the way the organization seeks to achieve that goal). (must have a clear image of goal)

There is no magic formula for spotting waste in supporting functions (such as Finance, Personnel, and IT). Only detailed scrutiny will reveal which activities to keep and which to cut.

Cost-cutting should sharpen a business’s focus and must regenerate supporting functions that clearly add value to the operating units.

In this way we will reduce a segment of indirect administration cost

IT IS BEST TO RESHAPE ORGANIZATIONAL FUNCTIONS

To avoid resistance by workforce / unions, against cutting indirect administrative staff, it is better to reshape organizational functions to SET MORE GOALS AND INCREASE PRODUCTIVITY.

A company should tell its employees how the reshaping of functions will help it to sustain itself, survive, and grow, focuses attention on the positive aspects of change. To undergo the discomfort associated with any effort to reduce costs, employees must understand what’s in it for them.

In order to reshape functions a review of organizational capability can highlight opportunities to reshape functions radically.

REMOVING INTERNAL MANAGEMENT CENTRES AND LAYERS

We observe in de-centralized manufacturing industries that geographic expansion tends to produce anomalies in reporting relationships and spans of control . So De-layering by drawing the staff into broader groups of pooled expertise cuts costs and eliminates the need for dispersed skills in diverse locations. It also enhances the professionalism of the people who remain.

HOW TO INCREASE EFFICIENCY OF REMAINING NECESSARY INDIRECT ADMINISTRATION

Once managers have worked out which indirect activities to cut and reduced demand for indirect staff’s services, they should consider the efficiency of the remaining indirect services.

It to clear that indirect services include indirect staff and indirect activities.

Indirect services that have many employees but are used only part of the time can be concentrated into shared services with fewer employees, lower costs and higher efficiency.

MAKE APPROPIRATE LAYERS OF ADMINISTRATION TO AVOID UNNECESSARY ADMINISTRATION 1/3

In our local industries it is a common mistake to assign one manager to each separate task or type of task irrespective of the number of managerial jobs(nodes) this practice generates.

Too many nodes will result in too deep a structure and narrow spans.

For example, a design department of twenty people might give rise to eight managers in four layers, while a correctly shaped structure would be more likely to have four managers in two layers. One common feature of bad shape is one-to-one reporting of the type shown overleaf.

MAKE APPROPIRATE LAYERS OF ADMINISTRATION TO AVOID UNNECESSARY ADMINISTRATION 2/3

MAKE APPROPIRATE LAYERS OF ADMINISTRATION TO AVOID UNNECESSARY ADMINISTRATION 3/3

An unnecessary number of managers creates fertile conditions for an uncontrolled increase in the whole staff – a ballooning of the numbers employed – usually needlessly. So it is particularly important that spans should not be allowed to be too narrow or levels too numerous, because the proliferation that follows inflates the size and cost of the payroll.

CUT OUT ‘MANAGERIAL’ JOBS THAT HAVE NO MEASURABLE OUTPUT

Nearly all objective reviews of organizational structure reveal managerial jobs that could be eliminated. Some have indistinct targets and no real accountability. Others supervise few or no other people – and are better classified (and paid) as specialists. Think twice before creating new managers.

REVIEWING ORGANIZATIONAL STRUCTURES

REVIEWING ORGANIZATIONAL STRUCTURES

LAST SHOWN STRUCTURE almost certainly has too many layers and arguably too large a staff as a result. So it is possible to challenge it and to consider an opportunity to delayer by insisting on the correct design of jobs. It could be reworked as shown on the next SLIDE.

Jaques’ MODEL OFSEVEN LEVELS OF

WORK

USING THE JAQUES’ LEVELS OF WORK METHOD

The following steps can be taken to apply the levels of work principle to the task of radically reorganizing a structure or creating one from scratch.

Recognise the current problems: duplication, too many levels, too many layers, too much management (over-managed environment), excessive cost.

Examine the characteristics of every managerial job.

Define jobs by title, job code and function and map them to levels of work.

REDUCING 2ND COMPONENT OF INDIRECT COSTS I.E. OVERHEADS

It includes Costs of bills (telephone, electricity not

involved with production, food) Retirement Plans(pensions, land or

houses)for employees. Breakage of machines, products while

handling. Suitable storage costs for products/shelter Insurance of Labour Any incident, Security , Deterioration of

machines Unnecessary office facilities e.t.c.

CONTRACT BILLING

Billing rate estimates will affect the need for cost adjustment during final contract pricing.

When a contract involves progress payments or cost reimbursement, Management must monitor contract billing rates to assure that payments or reimbursements based on those rates are reasonable.

CONTRACT BILLING

During each cost accounting period, rates should become more accurate as more actual cost data become available.

Has rate accuracy consistently improved throughout the allocation cycle?

EMPLOYMENT BENEFITS MANAGEMENT

Most Employment Benefits include Insurance Pension Health & Safety Transport and Residence

INSURANCE

It is a safety Guarantee for the employers working in Probably Hazardous Environment by Organization.

Management of this cost include steps such as

Compensating such benefits in Pension etc. so that no extra costs are involved.

Proper Registration of industrial locality from Concerned Departments or international organizations for maintaining Standards of Safety.

PENSION AND OTHER SOCIAL BENEFITS

Usually the most expensive benefit is a pension.

Bright young people with the new skills, which you might need for the future, will join you accepting what is on offer now,& will not be concerned about pension.

However Many organizations have closed their defined benefit schemes to offer a much less risky and simpler defined contribution pension.

TAXES REDUCTION

Invest in dividend-paying stocks. Hold stocks for the long term. Reduce your income Deductions and credits for non-

itemizers. Charitable contributions Mis-present facts and figures

BREAKAGE AND DETERIORATION

Deterioration In Machinery occurs with time or due to Breakage.

Cost reduction in Breakage and Deterioration involves

Breakage Guarantee of equipment must be purchased if possible

Replacement Warrantee Maintaining Deterioration reserve (Mostly

Sinking Fund reserve with appropriate rate of return)

CONCLUSION Today indirect cost constitute most of the

product’s total cost. So, there is a clear need to improve their

control and management. We presented a systematic approach toi. Analysis and understanding the causes of

indirect cost.ii. An analysis of modern characteristics of

manufacturing environment.iii. Formulation of general performance levels.

CONCLUSION Tighter management and control of indirect

cost are a challenge for which the effort of every manager is required.

Management accountants must get down to production floor and be fully involved in production process.

In present world the production cost is a challenge and true differentiator between competitors.

CONCLUSION Successful managers create a sustained

pressure and maintain the product cost. So by planned calculation and applying the

explained production methods indirect cost in any industry can be reduced.

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