Unit 6: Cost Reduction and Value Improvement
Expert-defined terms from the Professional Certificate in Value Engineering course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
Activity #
Based Costing: This is a method of costing that assigns costs to activities and then to products based on their usage of those activities. The main concept of Activity-Based Costing is to provide a more accurate picture of costs by assigning them to specific activities rather than just to departments or projects. Related terms include Cost Driver, Cost Pool, and Activity Dictionary. For example, a company that produces both cars and trucks can use Activity-Based Costing to assign costs to the different activities involved in producing each type of vehicle, such as design, manufacturing, and marketing.
Benchmarking #
This is the process of comparing an organization's performance to that of other organizations, usually best-in-class companies, to identify areas for improvement. Benchmarking can be used to compare costs, quality, and other performance metrics. Related terms include Best Practices, Gap Analysis, and Performance Metrics. For example, a company that wants to improve its manufacturing process can benchmark itself against other companies in the same industry to identify areas where it can improve its efficiency and reduce costs.
Brainstorming #
This is a technique used to generate a large number of ideas or solutions to a problem. Brainstorming is often used in value engineering and cost reduction initiatives to identify ways to improve processes and reduce costs. Related terms include Mind Mapping, SWOT Analysis, and Idea Generation. For example, a company that wants to reduce its energy costs can use brainstorming to generate a list of potential solutions, such as installing solar panels or implementing energy-efficient lighting.
Break #
Even Analysis: This is a financial analysis technique used to determine the point at which an organization's revenue equals its costs. Break-Even Analysis is often used to evaluate the viability of new products or projects. Related terms include Contribution Margin, Fixed Costs, and Variable Costs. For example, a company that is considering launching a new product can use Break-Even Analysis to determine how many units it needs to sell to cover its costs and start generating profit.
Capital Budgeting #
This is the process of evaluating and selecting investment projects that require significant capital expenditures. Capital Budgeting is often used to evaluate the costs and benefits of different projects and to prioritize them based on their expected return on investment. Related terms include Net Present Value, Internal Rate of Return, and Payback Period. For example, a company that is considering investing in a new manufacturing facility can use Capital Budgeting to evaluate the expected costs and benefits of the project and to determine whether it is a worthwhile investment.
Cost #
Benefit Analysis: This is a technique used to evaluate the costs and benefits of a project or initiative. Cost-Benefit Analysis is often used to determine whether a project is worthwhile and to prioritize projects based on their expected return on investment. For example, a company that is considering implementing a new software system can use Cost-Benefit Analysis to evaluate the expected costs and benefits of the system and to determine whether it is a worthwhile investment.
Cost Driver #
This is a factor that influences the cost of an activity or product. Cost Drivers are often used in Activity-Based Costing to assign costs to products based on their usage of activities. Related terms include Activity-Based Costing, Cost Pool, and Activity Dictionary. For example, a company that produces both cars and trucks can use Cost Drivers to assign costs to the different activities involved in producing each type of vehicle, such as design, manufacturing, and marketing.
Cost of Goods Sold #
This is the direct cost of producing a company's products or services. Cost of Goods Sold is often used to calculate a company's gross profit and to evaluate its pricing strategy. Related terms include Gross Profit, Gross Margin, and Operating Expenses. For example, a company that produces and sells widgets can calculate its Cost of Goods Sold by adding up the direct costs of producing the widgets, such as materials and labor.
Cost Pool #
This is a group of costs that are related to a specific activity or department. Cost Pools are often used in Activity-Based Costing to assign costs to products based on their usage of activities. Related terms include Activity-Based Costing, Cost Driver, and Activity Dictionary. For example, a company that produces both cars and trucks can use Cost Pools to assign costs to the different activities involved in producing each type of vehicle, such as design, manufacturing, and marketing.
Cost Reduction #
This is the process of reducing an organization's costs without sacrificing its quality or performance. Cost Reduction is often used to improve an organization's profitability and competitiveness. Related terms include Value Engineering, Cost Improvement, and Efficiency Improvement. For example, a company that wants to reduce its energy costs can implement energy-efficient lighting and equipment to reduce its costs without sacrificing its quality or performance.
Cost Savings #
This is the amount of money that an organization can save by reducing its costs or improving its efficiency. Cost Savings is often used to evaluate the effectiveness of cost reduction initiatives and to prioritize projects based on their expected return on investment. Related terms include Return on Investment, Net Present Value, and Internal Rate of Return. For example, a company that implements a cost reduction initiative can calculate its Cost Savings by comparing its costs before and after the initiative.
Decision Tree #
This is a graphical representation of a decision-making process. Decision Trees are often used to evaluate different options and to identify the best course of action. Related terms include SWOT Analysis, Risk Analysis, and Sensitivity Analysis. For example, a company that is considering investing in a new manufacturing facility can use a Decision Tree to evaluate the different options and to identify the best course of action based on its expected return on investment.
Design for Manufacturability #
This is a design approach that aims to minimize the cost and complexity of a product's manufacturing process. Design for Manufacturability is often used to improve a product's quality and to reduce its cost. Related terms include Design for Assembly, Design for Testability, and Concurrent Engineering. For example, a company that produces electronic components can use Design for Manufacturability to design its products in a way that minimizes the cost and complexity of its manufacturing process.
Design for Six Sigma #
This is a design approach that aims to produce products that are defect-free and meet customer requirements. Design for Six Sigma is often used to improve a product's quality and to reduce its cost. Related terms include Six Sigma, Lean Manufacturing, and Total Quality Management. For example, a company that produces electronic components can use Design for Six Sigma to design its products in a way that minimizes defects and meets customer requirements.
Design of Experiments #
This is a statistical technique used to evaluate the effect of different variables on a process or product. Design of Experiments is often used to improve a product's quality and to reduce its cost. Related terms include Statistical Process Control, Regression Analysis, and Hypothesis Testing. For example, a company that produces electronic components can use Design of Experiments to evaluate the effect of different variables on its manufacturing process and to identify ways to improve its quality and reduce its cost.
Efficiency Improvement #
This is the process of improving an organization's efficiency by reducing waste and improving its processes. Efficiency Improvement is often used to improve an organization's productivity and to reduce its costs. Related terms include Cost Reduction, Value Engineering, and Process Improvement. For example, a company that wants to improve its efficiency can implement lean manufacturing techniques to reduce waste and improve its processes.
Fast Tracking #
This is a project management technique used to speed up a project's completion by overlapping or eliminating certain tasks. Fast Tracking is often used to reduce a project's duration and to improve its productivity. Related terms include Crashing, Project Scheduling, and Resource Allocation. For example, a company that is working on a construction project can use Fast Tracking to overlap certain tasks and to speed up the project's completion.
Functional Analysis #
This is a technique used to evaluate the functionality of a product or process. Functional Analysis is often used to identify areas for improvement and to evaluate the cost and benefits of different design options. Related terms include Value Analysis, Cost-Benefit Analysis, and Decision Tree. For example, a company that produces electronic components can use Functional Analysis to evaluate the functionality of its products and to identify areas for improvement.
Gap Analysis #
This is a technique used to identify the gap between an organization's current performance and its desired performance. Gap Analysis is often used to identify areas for improvement and to develop a plan to bridge the gap. Related terms include SWOT Analysis, Benchmarking, and Performance Metrics. For example, a company that wants to improve its customer service can use Gap Analysis to identify the gap between its current performance and its desired performance and to develop a plan to bridge the gap.
Gross Margin #
This is the difference between a company's revenue and its Cost of Goods Sold. Gross Margin is often used to evaluate a company's pricing strategy and to calculate its profit. Related terms include Gross Profit, Operating Expenses, and Net Income. For example, a company that produces and sells widgets can calculate its Gross Margin by subtracting its Cost of Goods Sold from its revenue.
Internal Rate of Return #
This is a financial metric used to evaluate the return on investment of a project or initiative. Internal Rate of Return is often used to prioritize projects based on their expected return on investment. Related terms include Net Present Value, Payback Period, and Cost-Benefit Analysis. For example, a company that is considering investing in a new manufacturing facility can use Internal Rate of Return to evaluate the expected return on investment of the project and to prioritize it based on its expected return.
Just #
In-Time: This is a manufacturing approach that aims to produce and deliver products just-in-time to meet customer demand. Just-In-Time is often used to reduce inventory and to improve a company's efficiency. Related terms include Lean Manufacturing, Total Quality Management, and Supply Chain Management. For example, a company that produces electronic components can use Just-In-Time to produce and deliver its products just-in-time to meet customer demand and to reduce its inventory.
Kaizen #
This is a Japanese term that refers to the continuous improvement of a process or product. Kaizen is often used to improve a company's quality and to reduce its costs. Related terms include Lean Manufacturing, Total Quality Management, and Six Sigma. For example, a company that produces electronic components can use Kaizen to continuously improve its manufacturing process and to reduce its costs.
Lean Manufacturing #
This is a manufacturing approach that aims to minimize waste and to maximize value. Lean Manufacturing is often used to improve a company's efficiency and to reduce its costs. Related terms include Just-In-Time, Total Quality Management, and Six Sigma. For example, a company that produces electronic components can use Lean Manufacturing to minimize waste and to maximize value in its manufacturing process.
Life Cycle Costing #
This is a technique used to evaluate the cost of a product or process over its entire life cycle. Life Cycle Costing is often used to identify areas for improvement and to evaluate the cost and benefits of different design options. For example, a company that produces electronic components can use Life Cycle Costing to evaluate the cost of its products over their entire life cycle and to identify areas for improvement.
Make #
or-Buy Decision: This is a decision that a company must make when it is considering whether to make a product or component in-house or to buy it from a supplier. Make-or-Buy Decision is often used to evaluate the cost and benefits of different options and to prioritize them based on their expected return on investment. Related terms include Outsourcing, Insourcing, and Vertical Integration. For example, a company that produces electronic components can use Make-or-Buy Decision to evaluate the cost and benefits of making a component in-house versus buying it from a supplier.
Material Requirements Planning #
This is a technique used to manage a company's inventory and to ensure that it has the necessary materials to meet customer demand. Material Requirements Planning is often used to reduce inventory and to improve a company's efficiency. Related terms include Just-In-Time, Lean Manufacturing, and Supply Chain Management. For example, a company that produces electronic components can use Material Requirements Planning to manage its inventory and to ensure that it has the necessary materials to meet customer demand.
Net Present Value #
This is a financial metric used to evaluate the value of a project or initiative. Net Present Value is often used to prioritize projects based on their expected return on investment. Related terms include Internal Rate of Return, Payback Period, and Cost-Benefit Analysis. For example, a company that is considering investing in a new manufacturing facility can use Net Present Value to evaluate the expected value of the project and to prioritize it based on its expected return.
Operating Expenses #
This is the cost of operating a business, including expenses such as salaries, rent, and utilities. Operating Expenses is often used to evaluate a company's profitability and to calculate its net income. Related terms include Gross Profit, Gross Margin, and Net Income. For example, a company that produces and sells widgets can calculate its Operating Expenses by adding up its salaries, rent, and utilities.
Outsourcing #
This is the practice of contracting with a third-party supplier to provide a service or product. Outsourcing is often used to reduce costs and to improve a company's efficiency. Related terms include Insourcing, Vertical Integration, and Make-or-Buy Decision. For example, a company that produces electronic components can outsource its manufacturing process to a third-party supplier to reduce its costs and to improve its efficiency.
Payback Period #
This is the amount of time it takes for a project or initiative to generate enough cash flow to pay back its initial investment. Payback Period is often used to evaluate the feasibility of a project and to prioritize it based on its expected return on investment. Related terms include Net Present Value, Internal Rate of Return, and Cost-Benefit Analysis. For example, a company that is considering investing in a new manufacturing facility can use Payback Period to evaluate the expected feasibility of the project and to prioritize it based on its expected return.
Process Improvement #
This is the practice of identifying and implementing changes to a process to improve its efficiency and effectiveness. Process Improvement is often used to improve a company's quality and to reduce its costs. For example, a company that produces electronic components can use Process Improvement to identify and implement changes to its manufacturing process to improve its efficiency and effectiveness.
Product Life Cycle #
This is the series of stages that a product goes through from its introduction to its withdrawal from the market. Product Life Cycle is often used to evaluate the feasibility of a product and to prioritize it based on its expected return on investment. Related terms include Life Cycle Costing, Value Analysis, and Cost-Benefit Analysis. For example, a company that produces electronic components can use Product Life Cycle to evaluate the feasibility of a new product and to prioritize it based on its expected return.
Quality Function Deployment #
This is a technique used to deploy quality requirements throughout a product's design and development process. Quality Function Deployment is often used to improve a product's quality and to reduce its cost. Related terms include Design for Six Sigma, Total Quality Management, and Lean Manufacturing. For example, a company that produces electronic components can use Quality Function Deployment to deploy quality requirements throughout its design and development process and to improve its quality and reduce its cost.
Regression Analysis #
This is a statistical technique used to evaluate the relationship between two or more variables. Regression Analysis is often used to identify areas for improvement and to evaluate the effect of different variables on a process or product. Related terms include Design of Experiments, Statistical Process Control, and Hypothesis Testing. For example, a company that produces electronic components can use Regression Analysis to evaluate the relationship between different variables and to identify areas for improvement.
Return on Investment #
This is a financial metric used to evaluate the return on investment of a project or initiative. Return on Investment is often used to prioritize projects based on their expected return on investment. For example, a company that is considering investing in a new manufacturing facility can use Return on Investment to evaluate the expected return on investment of the project and to prioritize it based on its expected return.
Risk Analysis #
This is a technique used to evaluate the risk associated with a project or initiative. Risk Analysis is often used to identify areas for improvement and to develop a plan to mitigate risks. Related terms include Decision Tree, SWOT Analysis, and Sensitivity Analysis. For example, a company that is considering investing in a new manufacturing facility can use Risk Analysis to evaluate the risk associated with the project and to develop a plan to mitigate risks.
Sensitivity Analysis #
This is a technique used to evaluate the sensitivity of a project or initiative to different variables. Sensitivity Analysis is often used to identify areas for improvement and to develop a plan to mitigate risks. Related terms include Decision Tree, Risk Analysis, and SWOT Analysis. For example, a company that is considering investing in a new manufacturing facility can use Sensitivity Analysis to evaluate the sensitivity of the project to different variables and to develop a plan to mitigate risks.
Six Sigma #
This is a quality management approach that aims to produce products that are defect-free and meet customer requirements. Six Sigma is often used to improve a product's quality and to reduce its cost. Related terms include Lean Manufacturing, Total Quality Management, and Design for Six Sigma. For example, a company that produces electronic components can use Six Sigma to produce products that are defect-free and meet customer requirements.
Statistical Process Control #
This is a technique used to monitor and control a process to ensure that it is operating within specifications. Statistical Process Control is often used to improve a product's quality and to reduce its cost. Related terms include Design of Experiments, Regression Analysis, and Hypothesis Testing. For example, a company that produces electronic components can use Statistical Process Control to monitor and control its manufacturing process to ensure that it is operating within specifications.
Supply Chain Management #
This is the practice of managing a company's supply chain to ensure that it is operating efficiently and effectively. Supply Chain Management is often used to reduce costs and to improve a company's efficiency. Related terms include Just-In-Time, Lean Manufacturing, and Material Requirements Planning. For example, a company that produces electronic components can use Supply Chain Management to manage its supply chain and to ensure that it is operating efficiently and effectively.
SWOT Analysis #
This is a technique used to evaluate the strengths, weaknesses, opportunities, and threats associated with a project or initiative. SWOT Analysis is often used to identify areas for improvement and to develop a plan to mitigate risks. Related terms include Decision Tree, Risk Analysis, and Sensitivity Analysis. For example, a company that is considering investing in a new manufacturing facility can use SWOT Analysis to evaluate the strengths, weaknesses, opportunities, and threats associated with the project and to develop a plan to mitigate risks.
Total Quality Management #
This is a quality management approach that aims to produce products that meet customer requirements. Total Quality Management is often used to improve a! Product's quality and to reduce its cost. Related terms include Lean Manufacturing, Six Sigma, and Quality Function Deployment. For example, a company that produces electronic components can use Total Quality Management to produce products that meet customer requirements and to improve its quality and reduce its cost.
Value Analysis #
This is a technique used to evaluate the value of a product or process. Value Analysis is often used to identify areas for improvement and to evaluate the cost and benefits of different design options. Related terms include Functional Analysis, Cost-Benefit Analysis, and Decision Tree. For example, a company that produces electronic components can use Value Analysis to evaluate the value of its products and to identify areas for improvement.
Value Engineering #
This is a technique used to evaluate the value of a product or process and to identify ways to improve its value. Value Engineering is often used to improve a product's quality and to reduce its cost. For example, a company that produces electronic components can use Value Engineering to evaluate the value of its products and to identify ways to improve its value and reduce its cost.
Variable Costs #
This is a cost that varies with the level of production or sales. Variable Costs is often used to evaluate a company's cost structure and to calculate its profit. Related terms include Fixed Costs, Contribution Margin, and Break-Even Analysis. For example, a company that produces and sells widgets can calculate its Variable Costs by adding up its direct costs of production, such as materials and labor.
Vertical Integration #
This is the practice of controlling all stages of a product's production and distribution. Vertical Integration is often used to reduce costs and to improve a company's efficiency. Related terms include Outsourcing, Insourcing, and Make-or-Buy Decision. For example, a company that produces electronic components can use Vertical Integration to control all stages of its production and distribution and to reduce its costs and improve its efficiency.