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The endless pursuit of the lowest cost curve

Sunday 3rd April 2011 - By Leo Alarcon    Share    

In most manufacturing businesses the cost of manufacture or input costs into operations is the biggest factor that determines the profitability and competitiveness of a business in its industry and market place. The cost curve is the curve which depicts the relationship between level of output and unit costs. In many industrial processes the greater the output the lower the unit cost of manufacture. This relationship is not always linear due to resource constraints such as machine capacity and labour. Although the quantity of output has a big impact on costs to the business so do the quantity and cost of input resources and other peripheral costs to the business and its operations.

Operations and business managers will usually pursue the lowest cost of manufacture by sourcing lower input costs and cheaper raw materials at the detriment of quality and customer service at times. When customer service/satisfaction and product quality is at stake or compromised the management team has failed to truly achieve the lowest cost curve of production for the business. In pursuing the lowest cost curve they have introduced intangible costs and compromised future business. Then we ask is the pursuit of the lowest cost curve really to the benefit of shareholders and customers? Or are there other peripheral business costs and inefficient use of resources such as inventory, human resources and capital that are generating waste that managers could focus on?

The operations of a business is the area which holds the most opportunities to save costs. This statement should be very carefully understood as many managers will not understand that cost cutting and efficiencies do not always relate to cost savings through head count and searching for the cheapest inputs to the business. The cheapest raw materials and labour rarely deliver true cost savings and value to the customer. The goal should be to deliver on customer expectations and satisfy their needs by making the most efficient use of inputs and resources available to the firm. This can be achieved through the implementation and application of the many lean manufacturing concepts and techniques with sound operations management. Being able to achieve this can in itself differentiate a business brand and the operational practices achieved through a more efficient use of resources and minimisation of waste, place the business on the lowest cost curve among competitors giving it a true competitive advantage.

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