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WK #3 (Cost): Cost Structure Analysis PDF Print E-mail

Understand the Cost Structure before making Supply Chain decisions


The following table shows a comparison between  a  "Low Labor" Cost Structure and a "High Labor" Cost Structure". 

Table 1 - Cost Structure Comparison
 Cost Component                                  
      Low Labor      High Labor
 Material            70%            15%
 Labor            03%
           50%
 Overhead            27%
           35%
 Total          100%
         100%



When making decisions it is important to note where effort will result in the most results:

  • Low Labor Cost: Attacking the Labor cost for a "Low Labor" cost structure will not have much effect.  A 50% reduction in the Labor Cost will result in only a 1.5% savings.  For this example the effort should go into attacking Material Cost which is 70% of the cost.

  • High Labor Cost: In this case attacking the Labor cost can have a large effect.  A 50% reduction in the Labor Cost will result in a 25% overall savings.  For this example the effort should go into attaching Labor Cost which is 50% of the cost.

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