Cost reduction methods that achieve results.
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Saving costs rarely goes out of fashion. Wasteful and bureaucratic processes which lack appropriate compliancy and controls result in higher cost which in turn results in reduced profit. For many organizations this is sufficient rationale to develop cost reduction strategies. Higher cost is also inextricably linked with agility and efficiency. Inefficient processes more often than not affect competitiveness and as such provide even greater rationale to develop appropriate steps to reduce cost.
Appropriate thought and strategic focus needs to go into developing cost reduction strategies. Cutting cost for the sake of it can be detrimental – unknowingly reducing aspects of the business that actually add value. Savings should be linked to improving. The business still needs to remain agile with sufficient resources to react to customer requirement.
But if your embarking on cost reduction initiatives where should you start? Firstly of key importance is – know your numbers – knowledge about your product – its key cost drivers is vital if your are to focus on areas that will bring about change. Secondly develop the knowledge about the processes that support your production – whether that’s design, manufacture or the processes relating to material flow such as procurement and logistics.
Many businesses when faced with a cost reduction drive carry out a slash and burn technique, reducing staff numbers and pushing suppliers for significant discount (whilst often maintaining existing contractual terms). Far better is to a considered and thought through strategy that focus’s on key cost drivers (and value add to the business) and sets out a scheduled for change. For many organizations this will include the following
Process Optimization
Process optimization is the activity where processes are reconfigured in order to improve a parameter (cost or performance) whilst not enhancing or realizing risk. Optimization can often be facilitated through re-engineered processes, kaizen/six sigma events or in many cases through introducing new tools or software (P2P for example). Cost reduction is a common goal for process optimization and there are dedicated off the shelf tools and methods that can be used to help realize benefits.
Outsourcing
Outsourcing refers to the process of utilizing a third party organization to undertake a service that is currently provided in house usually for either enhanced levels of service or for reduced cost. There are a variety of processes that can be outsourced from procurement, logistics to financial services. Outsourcing has become commonplace but there are still pitfalls. Businesses must be sure of service levels, capabilities and cost when passing work to a third party. Consideration should also be given to the strategic importance of the process being outsourced – outsourcing core capabilities can often dilute the end product or in worst case reduce the competitiveness of the business. However implemented correctly outsourcing offers a simple and effective method of reducing cost.
Improved Sourcing
One of the key opportunities for cost reduction is strategic sourcing. Optimizing the demand signal, the supplier base and your strategic relationships can reap significant reward. For many businesses savings can be realized through tendering processes for key commodities or establishing formal contracts or long term agreements for materials. Many organizations will benefit from simple but effective techniques such as consolidating spend into fewer suppliers or from reviewing the geographical spread of suppliers and incorporating more suppliers in emerging economies.
Design to cost/manufacture
It should not be forgotten that one the principle cost driver within a business is the product. Design to cost or design to manufacture workshops can produce a variety of initiatives – from improving assembly times, through to swapping out components for cheaper alternatives. The success of design to cost depends upon where the product is in its lifecycle, impacts to serviceability and principally whether changes are cost effective to deploy.
Summary
Cost saving initiatives are here to stay – businesses need to develop a strategic approach– slash and burn cost saving techniques rarely work in the long term. A considered approach that reviews key cost drivers and established plans to target these is much more likely to deliver benefits without placing the business at greater levels of risk.