Eight Key Strategies to Reduce Cost in the Construction Sector

Written by Michelle Wan, MSIPMM

by Michelle Wan, MSIPMM

Eight Key Strategies to Reduce Cost in the Construction Sector

Written by Michelle Wan, MSIPMM

by Michelle Wan, MSIPMM

by Michelle Wan, MSIPMM

The Construction sector

The Construction sector is considered to be a basic industry on which the development of the country depends to a great extent, the growth of the construction companies is determined by the quality of the companies and their capability. Therefore, purchasing is the act of buying the goods and services that a company need to operate. Purchasing is now seen as more of strategic function that can be used to control and reduce bottom line costs. Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered.

Below are the eight strategies can be use in purchasing departments wherein companies have achieved stunning bottom-line gains through revamped purchasing process.

Strategy 1: Value Analysis for Cost Reduction

Value analysis as a powerful cost reduction strategies which is systematically identifies the hidden, unnecessary costs in a materials or services or a process and eliminates them to provide the necessary function at a minimum cost.

Analysis for Cost Reduction

Value analysis is a function-cost approach which defines the function. Then generates value alternatives in a creative manner to provide the same function at a lower cost and results in cheaper, faster, better accomplishments of the needed function. Some tools of value analysis include: value tests, checklist, function-cost matrix, comparison and evaluation of value alternatives.

Value analysis can lead to cost avoidance if it is used right at the product/project design stage because cost reduction potential exists at that stage. It leads to rational choice of materials, specifications, tolerances, manufacturing processes, and packaging.

Strategy 2: Purchase products in bulk and with less packaging

The companies which have greater geographical presence or are multi locational can achieve better price by buying bigger volumes instead of buying for individual units. Buy concentrates or reduce the type or quantity of packaging. Eliminates use of small containers, reduces packaging waste and saves worker time opening and disposing of containers. Reduces labour, procurement and disposal costs.

Purchase products in bulk and with less packaging

Purchasing department have to discuss with end users to make sure that ordering catalogue identify container size and price differences. Seek information from vendors and work directly with them and end users to identify ways to reduce packaging.

Strategy 3: Quality Control

Standards give you the knowledge you need to tune to your organization so that can performs the best at every level. The results are growth and increased profits especially for the construction industry needs to decrease its costs due to non-conformance by implementing an objective model for analysing the excessive cost of poor quality and the overall savings realized from good quality.

The term quality can be applied in many different ways to various aspects of the construction process. This paper proposes a model which helps illustrate how the various elements of the cost of quality might be employed by the general contractor within the construction project itself.

The kinds of areas where you can improve performance include Quality Management; Product Certification; Customer Satisfaction; IT Service Management; and Project Management.

Strategy 4: Local Vendors

Vendors should be located in close vicinity of the manufacturing area that can helps your company lower costs such as shipping fees, low freight charges, materials handling cost and minimize the organization inventory to prevent dead cost.

If you can find ways to expedite shipments from suppliers, you can order closer to the time you need the supplies. Ordering far in advance can incur warehouse costs, because you have to store them so that they’ll be available, and products are more likely to get lost or damaged. In addition, examine whether you can shorten the time it takes you to transport supplies from where you receive them to where you need them. Transportation from the supplier and within your company can add days or weeks to increase costs.

Strategy 5: Partnership with Major Vendors

It is highly recommended to your organization to have partnership with potential vendors in either having equity or strong technical collaboration which can result in cost reduction in manufacturing cost. Vendors are need to assured of business and has this kind of arrangement with their vendors. Partnership with potential vendors also can help the organization reduce the outsource cost to invite talent members to complete the technical tasks from our customers.

Strategy 6: E-Procurement

Putting up construction project tenders and requirement on Internet and setting up auction for requirement (example: quantity, products specification, delivery schedule) on web which can helps organization reach out more numbers of vendor base.

Numbers of vendor base

This also can help in reducing costs when we request for tender and/or quotation from the vendors. Most popular way of procurement strategy is reverse auction, where the lowest price bidder can make the vendors takes away the order or project.

Strategy 7: Use better Technology

Cost often emerges as a point of contention when it comes to technological investments, no business can afford or even benefit from every IT innovation that comes to the market. However, businesses are increasingly looking toward technology to push greater efficiency and ultimately do more with the same number of or fewer resources.

Use better Technology

There are several principles that can guide companies toward cost savings. Below are four such principles and how to incorporate them within your business.

1) Eliminate manual processes doing with their time serves as a good starting point for identifying potential improvements.

2) Focus on integration best option for many organizations is some combination of offerings from different vendors.

3) Improve IT purchasing processes organizations without a large IT team can do jobs effectively.

4) Train end users implementation is done once a new piece of software is installed.

Strategy 8: Economic Order Quantity

Quantity fixed at a point where total cost of ordering and the cost of carrying the inventory will be minimum. Corporate goals and strategies may sometimes conflict with EOQ. Measuring performance solely by inventory turns is one of the most prolific mistakes made in the name of inventory management. Many companies have achieved aggressive goals in increasing inventory turns only to find their bottom line has shrunk due to increased operational costs.

EOQ is essentially an accounting formula

EOQ is essentially an accounting formula that determines the point at which the combination of order costs and inventory carrying costs are the least. The result is the most cost effective quantity to order.

Conclusion

Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered. Cost reduction can be effected either by reducing unit cost of production, or by increasing productivity.

There have been two drivers behind this emergence of cost consciousness in the corporate sector. First is the compulsion to stay profitable, which is the basic instinct of any company. However, second reason that is in highly competitive market place increasingly populated by multinationals, the best way for companies to survive and grow is by offering better quality products at cheaper price.


References:

Daniel, F. (2016). “5 Inventory Reduction Strategies for a More Profitable 2016”. Retrieved from https://www.eazystock.com/blog/2015/11/06/5-inventory-reduction-strategies-for-a-more-profitable-2016/, accessed 19/12/2017.

Isha, V. (2011). “Purchase cost reduction’. Retrieved from https://www.slideshare.net/varmaisha8/purchase-cost-reduction, accessed 15/12/2017.

Kevin, J. (2017). “Cost Reduction Strategies in Supply Chain Management”. Retrieved from http://smallbusiness.chron.com/cost-reduction-strategies-supply-chain-management-69509.html, accessed 15/12/2017.

About the Author: Michelle Wan has substantive years of experience in purchase planning, specifically in the construction sector. She is a qualified member of the Singapore Institute of Purchasing and Materials Management (MSIPMM). She completed the Professional Diploma in Purchasing Management (PDPM) at SIPMM Academy in December 2017.

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