The prerequisites and essentials for making cost reduction effective are as follows:
1. Obtaining a larger quantity of production from the same facilities, i.e., without increasing investment in fixed assets this can generally be obtained by proper production planning and control.
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Even installation of some extra equipment may help in reducing idleness. For example, if taxis have wireless equipments, they can be directed to proceed to a fare without their coming to the stand first.
2. Breaking up and simplifying the process of manufacture so as to be able to use labour of lower skill without, again, sacrificing the quality of the finished product.
3. Making a judicious choice between parts to be made and those to be bought from the market.
4. Using materials of lower or different quality and price, without, however, sacrificing the quality of the finished products. This is known as the process of substitution. Building construction offers many examples steel door or window frames instead of those made of timber, stone dust being used to economise in the use of cement etc.
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5. Changing the method of distribution of the goods, say from retailers directly to wholesalers.
6. Changing features of the product suitably, so as to reduce costs without affecting the volume of sales.
7. Determining the points at which finished goods godowns will be located and the quantities that will be stored there at different points of time. This will mean transport in bulk leading to transport economies, as also prompt dispatch of goods to the places where they are being demanded.