Cost Reduction Tectic for Engineering Cos

Dear Friends,

EPC companies begging business from Govt. sector have to face major challenges while acquiring large orders as the same has (as usual) following three elements that adjudicate their eligibility criteria for wining the orders as follows:

1. Price
2. Quality
3. Readily Availability

Companies majorly forgo the first element in terms of profitability for the sake of winning the orders against anticipated loyalty of their customers towards the rest two. This, however, is done with a hope to regain the subsequent orders and to recoup the loss so incurred at later stage. But since the clients are smart enough to sense this and enjoy the competitive environment, they go through the same set of procedural aspects again when they wish to release the new orders w.r.t. their new requirements. Consequently the companies lose the control over the price they quote and tend to become lose making.

What to do to overcome this dilemma??

This can be dealt with by achieving control over the cost rather than looking for opportunity to increase the price. Friends, Major portion of cost of their products is the material cost, wherein, again required quantum of material cannot be curtailed unless a totally substitute item is introduced as an option. Nevertheless, the price paid for material used can be controlled by some traditional ways viz. Negotiations, Finding alternative vendors base, Bulk Buying and so on. However, these all have become age old tecticts to control cost.

Nonetheless, This requires an out of box treatment for controlling the material cost.

Prior to proceeding further, i like to take you through an ad film:

http://www.youtube.com/watch?v=sPRH0cMPidE

Hope it took your brain through something relevant to the matter that I'm about to discuss.

Just imagine what a Film Director in order to encourage an amateur actor says when he expects him/her to act as. Yes........."Put yourself into the shoes of the character and then act". Likewise my todays post puts the requirement and manufactures' parts to think from the angle of a vendor. Just Imagine what a vendor wants. For sure you would endup with concluding three things.

1. Large Business Volume
2. Consistency
3. Timely receipts of their dues for the materials they provide. (Favourable liquidity).

Lets Discuss, each of them individually:

1. Large Business Volume:
Offer of large business volume to vendors may not be possible considering own scale of economies and Opeartions as no miracle can be brought in the requirements w.r.t. the same in terms of cost improvement. Also EPC Cos have constraints of tendering pattern of order winning thus business is not an assured piece of cake.

2. Consistency:
Due to it's inherent nature the business model is not sure to retain it's market share on consistent basis.

3. Quick Liquidity:
Since the business model requires the own dues from the clients to be cleared on successive basis viz. Supply of goods, Installation, Commissioning etc., it's unable to clear the outstandings towards the material so bought from vendors.

To encounter the above three vices, the EPC business model needs to be re-structured as follows:

1. To see who all are the other business houses who dont fall in our competition but again have the same set of requirements as far as principal inputs are concerned.
2. To form a shared service group that accumulates the requirement of inputs for self as well as for such non-competitior group.
3. To place the order for clubbed common requirements and get them processed on time.
4. To retain the maximum profit by the concept initiator and to share the rest amongst the remaining stakeholders.
5. Vendors can be controlled by meeting their requirements w.r.t. all three needs they ever dreamed of.

To Cross-check this model of business following differents can be infurred:

• Own requirements are limited on individual basis but can generate large requirement of inputs when clubbed togather. this will give rise to bulk requirement which is not totally dependent on single business and would redult into bulk business for vendores who are nominated.
• There subsists increased probability of  consistent requirement due to variety of business models.
• Since not all stakeholdhers have same kind of business, the cash richness will also vary in other business models forming part of such non-competitor group. This will enhance the liquidity of group as a whole and will facilitate quick clearance of dues for materials so sought.

When all above three requirements of a vendor are fulfilled, they would tend to become the business parterns rather than being just a vendor and would pass on the benefits of scale of economies achieved from such orderings.

Once benefits are passed on by the vendors to the customers, these will be retained by shared service, and will be shared amongst the stake holders by way of retaining major savings for own and minor share of non-competitors group.


This will result into massive reduction in material cost and thus will improve the cost structure of a products in market. This will give rise to chances of obtaining business at a rapid rate.