Cost Reduction & Value Analysis Strategies Flashcards

A purchasing team discovers that two departments are purchasing identical raw materials under different part numbers at different prices. The BEST corrective action is:

Answer: Standardize the part number and consolidate purchasing to leverage volume

Standardizing the specification and combining purchases eliminates duplicate effort, reduces unit cost, and simplifies inventory management.

In cost analysis, 'learning curve' theory predicts that as cumulative production doubles, unit labor cost decreases by:

Answer: A fixed percentage of the prior unit cost

Learning curve theory holds that each time cumulative output doubles, the direct labor hours per unit fall by a constant percentage (e.g., 80% curve means a 20% reduction).

Which of the following is an example of a 'cost avoidance' rather than a 'cost reduction'?

Answer: Negotiating to hold the supplier's proposed 8% price increase to 3%

Cost avoidance prevents a cost from increasing to its full proposed level, whereas cost reduction lowers costs below the current baseline.

A purchased component fails quality inspection at a rate causing significant rework costs. From a TCO perspective, the buyer should:

Answer: Include quality-related failure costs in the supplier evaluation and TCO model

TCO requires incorporating all quality-related costs—rework, scrap, warranty—into the supplier comparison so true total cost is visible.

Spend analysis software helps purchasing departments reduce costs primarily by:

Answer: Providing visibility into all purchasing transactions to identify consolidation and savings opportunities

Spend analysis aggregates and classifies all purchasing data, revealing maverick spend, duplicate suppliers, and consolidation opportunities.

The primary purpose of conducting a 'value analysis' on an existing product versus 'value engineering' on a new product is that value analysis:

Answer: Reviews cost reduction opportunities for items already in production

Value analysis is applied to existing products already in production to find cost reduction opportunities, while value engineering occurs during the design phase.

A buyer negotiates with a supplier to shift from monthly invoicing to consignment inventory. The primary cost benefit to the buyer is:

Answer: Reduced inventory carrying costs since payment is made only when items are consumed

Consignment inventory means the buyer holds the supplier's stock but pays only upon consumption, reducing working capital tied up in inventory.