Cost Management Strategies for Modern Manufacturing Companies

Critical Review Letter 1
Critical review letter
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Critical Review Letter 2
Govin Naidu identified and described five cost reduction or management strategies for
manufacturers n the article, entitled “Essentials of modern manufacturing part 1: Cost
management”. According to the article, a company has to analyze its costs and for instance,
conducting a detailed review to determine the optional expenditures (Naidu, 2019). The article
identified price shopping as another way of managing cost. In this case, a company can use
request for quotation mode. Furthermore, a company can ascertain its vital business operations
and after that outsource the supplemental options. Additionally, the article argued that a business
can vertically integrate its customers, and service providers to remove the costs emanating in
between. Lastly, a company can reduce product catalogs in a bid to reduce its operational costs.
The five strategies suggested forms key element of reducing costs in supply chain.
Most of the points identified by Govin Naidu are indeed essential in cost management in
supply chain. First, it is true that vertical integration is one of the ways of cost management.
Vertical integration is one of the key elements applied in supply chain management. This form of
integration can be useful for the company in that it makes it possible to reduce production and
marketing costs by connecting sequential production stages; in addition, it can be vital for a firm
to provide reliable sources of supply of inputs or distribution channels in order to maintain its
competitiveness. The benefits of vertical integration are achieved through various effects.
Vertically integrated firms can avoid some trading costs when making transactions with external
resource providers and with advertising and trading agencies by conducting intra-company
transactions. It is also true that outsourcing is one way of reducing cost (Buzzell, 2019).
However, a solution is effective if it brings the company additional profit or does not allow profit
to decline. This is true, among other things, for switching to outsourcing: it is economically
justified if the changes in the income and expenses of the enterprise associated with it provide

Critical Review Letter 3
profit growth (Jurevicius, 2019). Nevertheless, it is important to note that it is not technically
difficult to evaluate the effectiveness of outsourcing based on changes in profit. The main
problem is to correctly determine the list and the absolute value of income and expenses
(including taxes) of the enterprise, which will change due to the transfer of the execution of some
functions or processes to other organizations. To do this, you need to find out how the function
or process in question is “embedded” in the production and organizational structure of the
company. Outsourcing a particular stage of the production process, for example, abandoning the
in-house production of semi-finished products for the assembly of finished products and
switching to external orders for these semi-finished products, in most cases leads to an increase
in variable costs. This is understandable: the purchase price of the finished semi-finished
product, as a rule, is higher than the variable costs of its manufacture (the cost of materials,
technological energy, piecework of wages) (Bragg and Bragg, 2019). The main economic effect
of the transfer of some functions to external organizations is to reduce the company's fixed
(conditionally fixed) costs. Moreover, for production processes, the transition to outsourcing will
be largely determined by the volume of output and, as a result, by a combination of the growth of
variables and the reduction of fixed costs (Marco et al.,2009). It is also true that request for
quotations from suppliers help the manufacturer choose the lowest bidder and hence save the
cost.
Nevertheless, it is important to note that cost management is very broad topic and that the
five essentials identified are just part of the many essentials of cost management. The costs that
form the cost of production (work, services) are not the same both in composition and in value in
the manufacture of the product, the performance of work and services. Some costs are directly
related to the manufacture and production of products (costs of raw materials, materials, wages

Critical Review Letter 4
of workers, etc.). Others - with the management and maintenance of production (expenses for the
maintenance of the management apparatus, for providing the production process with the
necessary resources, for maintaining fixed assets in working condition, etc.). And the third ones,
not directly related to production, nevertheless, according to the current legislation, are included
in production costs (deductions for the reproduction of the mineral resource base, social needs of
the population, etc.). In addition, part of the costs is included directly in the cost of specific types
of finished products (goods, works, services), and the other part, in connection with the
production of the assortment, is indirectly. Therefore, for the efficient organization of
accounting, it is necessary to apply economically sound classification of costs according to
certain criteria (Barbole & Tuvraj 2013). This will help in the planning and accounting of costs,
will allow more accurate analysis, as well as identify certain relationships between certain types
of costs and calculate the degree of their influence on the level of cost and profitability of
production (Zhiran, Xu & Mengxiao, 2012). Keeping in mind that HP offers the content for
business, I think the author is somewhat biased with his examples as he allows for ones that
'promote' HP. I believe that cost management for a modern manufacturing business is more
based on balancing and control rather than the reduction of costs as depicted by the author.
However, this article has its strengths too. The author is keen to mention the negative impacts of
the ways he is suggesting. This implies that he not only notes the positive implications of his
methods but also the adverse effects it can cause. For instance, he mentions how catalog
reduction requires careful customer engagement which if not would have problems (Xinyu and
Jackson, 2014). In management accounting, the classification of costs is of great importance
depending on their relationship to the norms, standards, limits and standards in force at the
enterprise. On this basis, all costs included in the cost of production are grouped relative to