What is Cost Reduction?

What is Cost Reduction?

Much has been researched and written about the cost advantages of overseas ventures. Medical tourism has become a new market, with people traveling internationally to undergo less costly health-care procedures, such as plastic surgery in Brazil or eye surgery in India. Foundries and factories have been moving offshore for many years to attain cost savings. Businesses have become international in order to reduce costs in such categories as raw materials, labor, and production overhead. They may also achieve cost reductions through market expansion, as they reach economies of scale and efficiencies through experience.

For many firms, these cost reductions have been attained by locating a facility abroad or by securing raw material or manufacturing suppliers in foreign markets. In the 1980s, Speakman Company, a well-established manufacturer of faucets and shower heads, found that the costs of domestic production were becoming prohibitive, so it located foundries in Asia and developed a new technology in South America, to reduce costs.

The company continued to assemble the final products in the United States, while realizing substantial savings in materials and labor. However, such material savings do not always translate into overall cost savings, if the cost or difficulties of transporting the goods is too great. For example, a U.S. mattress manufacturing firm realized that it could acquire springs at a lower price in the international marketplace, but the cost of transportation would offset the gains.

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