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Actions to Reduce Fixed Costs Essay

  •Increase volume such that the fixed costs become a smaller proportion of the cost base. •Derive value from sweating the assets by working them as much as is safely and practically possible. For example, airlines plan their schedules to maximize night-time flying between 11pm and 6am when there are often legal restrictions on landings and take-offs. •Outsource on a unit cost basis, thus making the cost variable rather than fixed. For example, buying in a component at a cost per unit rather than paying for a machine and staff to make them yourself.

•Use standard platforms (such as one type of asset), thus minimizing the amounts of spares that need to be held. For example, logistics companies generally have only one manufacturer of trucks, and airlines select either Boeing or Airbus. •Use temporary staff to manage peaks in demand and thus avoid carrying the cost of staff throughout the year when demand is lower. For example, hotels often call in temporary banqueting staff for large functions. •Use an element of profit-related pay rather than a fixed salary, thus aligning the employment cost to the performance of the business. Similarly, sales commission not only provides a sales incentive but also makes the cost variable.

•Assess the full life-cycle cost of an asset. A cheaper asset may over its useful life involve higher maintenance and ultimately faster replacement than a more expensive version. For example, a cheap printer may do the job, but soon its quality deteriorates and within a short while a new one is required. •Develop products that can use the waste from manufacturing the primary product. For example, Marmite, a yeast extract spread, is made from the residue from brewing beer, thus making the brewing waste a revenue earner rather than a disposal cost.

•Employ staff with accountable hour’s contracts rather than standard hours and overtime. The process is that the staff works the hours they are required, but only 1,600 hours in a year. Operationally, this requires one-twelfth of the staff to have their accountable hours year ending each month. This makes sure that all the staffs do not run out of hours at the same time. •Simplify the product or service. Cut out a stage in the process that reduces costs but does not result in customers perceiving any loss in quality. For example, Kit Kat, a chocolate bar, used to be wrapped in foil with a paper sleeve. The packaging now is just a single outer wrapper. Some organizations describe this action as “squeeze”, which is the process of reducing the unit cost of production with no discernible loss in quality.


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