Cost minimization

1. COST MINIMIZATION & MODELING
(Procurement&MaterialsManagement)
Submitted to:
Dr. Sneha Dohare
Ms. Niharika Prasad
Submitted by:
Siddharth Khanna
(55720)
MAM-650

2. What is Cost Minimization?
◦ Cost minimization is a basic rule used by producers to determine
what mix of labor and capital produces output at the lowest cost. In
other words, what the most cost-effective method of delivering
goods and services would be while maintaining a desired level of
quality.
◦ Cost minimization aims to achieve the most cost effective way of
delivering goods and services to the required level of quality.

3. Benefits of effective cost minimization
Lower Unit Cost (competitiveness)
Higher gross margin
Higher operating profits
Improved cash flow
Higher Return on capital employed.

4. Approaches to cost minimization
• Based on the business model
• Ex: Locating production overseas
• Ex: Core activities vs outsourced
Strategic
• Focused on detailed functions
• Ex: Choice of suppliers.
• Ex: approach to stock holding.
Tactical

5. Possible sources of cost reduction
Eliminating
waste &
avoiding
duplication
(lean
production)
Simplifying
processes
and
procedures
Outsourcing
non-core
activities (e.g.
transaction
processing,
payroll, call
handling)
Negotiating
better
pricing with
suppliers
Pruning
product
ranges and
customer
accounts to
eliminate
unprofitable
business
Using the
most
effective
methods of
training and
recruitment
Introducing
flexible
working
practices
Aggressive
control of
overheads
(e.g. banning
first/business
class travel)

6. Potential problems with cost minimization
Business left with
insufficient capacity
to handle
unexpected or
short-term
increases in
demand.
Cost reductions by
one department
may surprise and/or
annoy other
functions if they are
not properly
communicated and
coordinated.

7. Cost Minimization model
General Expression for the total cost per unit time to operate a queuing system.
TC = SC + WC
Where:
◦ TC - Total cost per hour
◦ SC- Service cost per hour
◦ WC - Waiting cost per hour

8. ◦ Algebraic Expression for Waiting cost per house (WC)
◦ 𝐶𝑤 = Cost of having one customer wait one hour in the queue.
◦ W𝐶𝑤 = The average waiting cost per customer.
◦ λ = Arrival of customers per hour, in steady state, we use L = AW to obtain the total waiting cost
per hour
WC = λ (W𝐶𝑤) = (λW) 𝐶𝑤 = L𝐶𝑤