Tuesday, January 5, 2016

Cost Savings & Cost Avoidance

I hope to eventually talk about things that the average Joe can do to save money. I hope to come up with some unique ideas, other than just "Make coffee at home and don't buy Starbucks every day, LOL".

My previous work as an industrial engineer was heavily focused on cost savings. I was in charge of tracking all of the cost savings ideas for the plant I worked at. Finding savings at a manufacturing plant is different than finding savings at home, but some themes can be carried over.

One of the items where we looked to save money was high volume items. Even if you could save $1.00 on one item/unit, then you multiply that by 1,000,000 units a year, and suddenly you have some real savings. Obviously, there isn't anything the average joe is buying in that high of volume, but it's something to think about. If you have a house like the one I grew up in, light bulbs were always burning out. This would probably be considered a high volume item for us. If we normally bought a 60W light bulb that would last for 5,000 hours for $2.00/bulb, and find another with the exact same specs, but cost $1.90/bulb, that would be considered a cost savings.

We also did cost savings projects at the plant that probably more aligned with cost avoidance. As I'm writing this, my example isn't as clear cut, because it probably still overlaps with cost savings. If I found a 60W light bulb that lasts for 10,000 hours, and cost $3.00/bulb, buying this bulb wouldn't be a "cost savings", right? I'm paying $3.00/bulb instead of $2.00/bulb. The cost savings will come down the road, when you can go twice as long without getting a new light bulb. I've now spent $3.00 for 10,000 hours of light vs. $4.00 for 10,000 hours of light.

With the previous example, it was a cost savings, but also a cost avoidance. We avoided another trip to the store. We avoided waiting in line. We avoided getting a ladder out and setting it up to change a lightbulb in the ceiling. These aren't as easy of things to quantify for savings, but additional cost/opportunity costs were avoided.

So for my first suggestion for cost savings - Don't buy Powerball tickets. At the time of writing this, the Powerball jackpot is at $450,000,000 (a lot less after taxes, but probably still enough to retire on). I've occasionally bought Powerball tickets when the amount gets insanely high. I'm going to put an end to this practice. It's just not worth the money to me. Again, this is just a suggestion, it is your right if you are 21 or older to buy a Powerball Ticket. I'm just not going to anymore.

Signed,

Mitch

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Thanks for your thoughts!