Cost Reduction

Do you consider all options to lower costs?
A. No, our costs are what they are.
B. We sometimes try to lower costs, but really only with ‘hit and miss’ success.
C. We frequently examine options to lower costs, but follow-through is poor.
D. We regularly evaluate cost reduction and productivity improvements options to lower costs, with moderate success.
E. We continuously and systematically evaluate and implement cost reduction and productivity improvement options to lower costs.
[Score:  A=0, B=1, C=2, D=3 and E=4]

 

Why is this question important?

If you find it difficult to increase prices because of competition or customer resistance – this effectively eliminates one of your methods for increasing profits.

You may have little opportunity and considerable difficulty and expense in introducing a new product or service.

Therefore cost reduction may remain your only real short-term effective method of increasing profitability.

How do you reduce a cost, any cost?  Simple – you “use less” or you “pay less”.

A simple cost reduction action plan for your business might be as follows:

  • Make a thorough analysis and identify all your costs
  • Classify your costs under: materials / purchases, payroll costs and overheads
  • Rank costs within each classification according to magnitude
  • Initially select the major costs from each classification
  • Prepare outline plans to achieve cost savings
  • Discuss with all employees all methods by which reductions can be achieved
  • Put together an agreed action plan and put it to work immediately

However a word of warning – your cost reduction programme is precisely that – a programme – it should be very detailed, requiring thoroughness and commitment on your part, a process which takes months.  It is certainly not a quick-fix solution!

Most small and medium-sized businesses are by and large ‘cost lean’ anyway, and therefore cost reduction scope is limited and difficult to achieve.   Notwithstanding that costs should always be scrutinized.

Key Questions

  •  Do you have a cost-reduction plan in place?
  • Have you set cost-reduction targets?
  • How do you analyse and cut unnecessary costs?
  • What barriers will you encounter, and how will you get around them?

Teamwork

It’s impossible to reduce costs by yourself. There are prospects to reduce costs in all areas. Identifying and putting these cost reductions into practice requires the cooperation of everyone.

Resistance to Change

Generally people are slow to embrace change and are often quite resistant at first. Cost reduction will most definitely involve change. Leadership and support from  senior management is a must to get people behind the project.

Everyone Working Together

It’s important that all the team are committed, motivated and want to make things happen and meet their scheduled commitments.

Cost Analysis

It is best to identify and rank all of your current costs. Larger costs probably have greater cost-reduction opportunities. Smaller costs will also provide opportunities to reduce costs, but usually not on the same scale as the larger costs.

Assess Necessity

A suggestion here is to break down each cost into one of three categories such as

  • necessary
  • unnecessary, or
  • nice-to-have

where the items where opportunities to cut losses typically lie in the unnecessary and nice-to-have categories. Although necessary items cannot be eliminated, there may be scope for reductions.