Cost Reduction Strategies for Manufacturing Industries

Procurement or Purchasing  plays an important role in  any  manufacturing industry . Savings can be 
achieved during procurement process by  implementing  ideas mentioned below . Suppliers /Vendors  can also contribute  in suggesting cost reduction' s ideas .Raw material, services   constitutes  major part of cost of product .Procurement  department  has now  prime role  in contributing savings in company .It is obvious from the above table that major expense for any manufacturing unit is  buying raw material .these contribution are approx and vary industry to industry..



Given are few ideas which  can result  in savings
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• BULK BUYING-The companies which have  greater geographical  presence or are multi location can achieve better price by buying bigger volumes  instead of buying for individual units. Central buying policies are recommended for such unit .Bulk buying results in  annual contracts for a period of six - twelve months for entire year requirement with prices being finalised  for the entire period .
  

• OPPORTUNITY  BUYING-Most of the commodities  and raw material  has seasonal  cycle  of prices  as they peak and fall in intervals .Hence we can book maximum amount of our requirement  when prices are low .
  

• LOCAL   VENDORS -Vendors should be located  in close vicinity of company  which helps in keeping low inventory as well as low freight cost .
  

• PARTNERSHIPS  WITH MAJOR VENDORS-It  is highly recommended  to have  partnership  with vendors  in either having equity or technical collaboration so as to pass on savings to  the  customer . Which results in   cost reduction in manufacturing cost. Most of the Automobiles Majors has this kind of arrangement  with  their  vendors .Vendors are assured of business .
  

• E PROCUREMENT-Putting up tenders and requirement  on Internet  and setting up auction for  requirement on web  which helps in reaching out more numbers of  vendor base . This  also helps in cutting cost  when we opt for conventional  way of asking tender /quotation . Most popular  way of procurement strategy is reverse auction , where the lowest price bidder takes away the order
  

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• BUYING  MATERIAL FROM  TAX EXEMPTED AREA .-In several countries the federal/ State govts provide  tax heavens for manufactures for certain period say 10- 15 years .Hence buying from these area s helps in cutting cost .In common parlance it is called TAX HOLIDAYS . Look out for such places prior to placing orders.
  

• ALTERNATE MATERIAL-Select high cost items  and replace it by  some  low cost material . eg ; steel by plastic/aluminium .
  

• TRY MERGE IN TRANSIT- The concept of in-transit product merging—where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment—can be seen as a technique for reducing inventory if the need for the customer to simultaneously receive multiple SKUs is a given. To some extent, merge-in-transit represents an extension of postponement beyond the distribution center walls.
  

• VENDOR MANAGED INVENTORY (VMI). With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.
  

• VENDOR STOCKING PROGRAM (VSP). Used primarily for maintenance inventories but applicable to all, VSPs require a supplier to commit to an extremely high service level for delivery of specific SKUs within a fixed time at a predefined markup. VSPs can reduce or eliminate inventories for slow-moving products. There are numerous ways to take better control of inventory and decrease its associated costs. The key to managing inventory successfully is to continuously measure your performance and look for new ways to improve. These 25 strategies should get your organization thinking about what it can do to lower inventory costs.