How they control cost: 30-Apr-08
Sourav Mitra -
Wednesday, April 30, 2008 11:56 PM
Home Retail Group Plc, the owner of Argos and Homebase stores:
1. It buys about a third of its merchandise from Asia.
2. It has combined the sourcing practice for Homebase, the home- improvement chain and Argos, the catalog-based retailer.
[Click here for full story at Bloomberg.com]
Buying cheap = cost saving = no-brainer
Combining the sourcing practices of various arms of the business = efficiency + some volume discounts = cost saving
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Exxon, oil company:
1. It will not increase production indiscriminately because the cost of exploration and production is rising.
2. It has been accelerating the pace of share-buyback program ($28 billion last year from $5 billion five years earlier) to reduce the notional cost of less productive investments of the idle cash generated by the oil price rise.
[Click here for full story at Businessweek.com]
It is necessary to do the marginal costing math rigorously to determine what volume of output will justify the expenditure involved before deciding whether production is to be increased or decreased.
In a scenario of abundant cash inflows, idle cash that cannot used to expand the business in any way and is not generating a return equal to or greater than the return generated by the business itself should be returned to shareholders either as dividend or by share buyback. Dividend reduces reserves i.e. internal accruals. Share buyback reduces capital and subsequently creates the happy illusion . Both are owned by shareholders. Returning the money reduces the money owed to shareholders.