Archive for January 2011

Fixed cost and variable cost

According to Nikkei on January 8th, Mr. Kanagawa, a chairman of Shin-Etsu Chemical Co., Ltd. told about their semiconductor silicon wafer business that fixed costs become close to zero and the further challenge would be in variable costs.

If fixed cost weight is high, the fluctuation of the company’s performance becomes high when its sales fluctuate. If the sales are going well, nothing is to be worried about. If the sales drop down, the profit may easily turn into the loss. The reason semiconductor business fluctuates to the market is that the semiconductor industry is a process industry with high fixed costs.

Therefore it is important to reduce fixed costs in order to minimize the performance fluctuation.

Generally, a variable cost is defined a cost in/decreases as sales in/decrease, whereas a fixed cost is not. According to the article Shin-Etsu Chemical shortened the life of deprecation. It probably means that depreciation is finished earlier and no cost incurs after it (and then they succeeded to reduce fixed cost).

However depreciation is not the only sample of fixed costs. Payroll is a fixed cost unless the labor cost is fully based on work-hour-based salary. Property taxes and minimum charge of utilities are also fixed costs. Therefore it is very interesting how they dealt with such fixed costs when the “fixed costs become close to zero.”

It should be considered more whether variable costs are really variable, if “the further challenge would be in variable costs.”

Although a cost paid to a supplier is a variable cost, it may be split into fixed and variable in the cost structure of the supplier. Therefore, in order to reduce the variable cost, it also should be considered how to reduce the fixed costs and the variable costs in the supplier’s cost structure.

Then the next supplier’s cost structure is probably to be analyzed after a supplier’s cost structure analysis.

Cost reduction may simply be imaged to merely give a supplier pressure to cut cost, but the total cost reduction is more efficient as a whole if the entire cost structure is defined in the entire supply chain.