Cost-Reducing Strategies

Cost Reduction

It is simply the art of cutting out the unnecessary financial expenses that make your bottom line appear bloated and excessive. There are six fundamental cost-saving approaches that you need to keep in mind if this exercise is to yield any worthwhile fruit for you.

1. The Combination Approach: you need to deal with the management and execution of goods and services collectively instead of independently to save costs.
2. The Adaptation Approach: it involves using leaner & stricter solutions to structure your business operations to the demands of the consumer and market.
3. The Elimination Approach: you’re expected to first identify and then eliminate benefits, products, services, workflows, and processes that have proven unproductive or redundant.
4. The Substitution Approach: involves opting for cheaper services and products without compromising the quality of the goods and services that you offer.
5. The Repurposing Approach: it refers to finding new & creative ways of applying existing processes, tools, and technology to more efficiently address your current pain points.
6. The Optimization Approach: you implement cost-reduction techniques by restructuring and streamlining your workflows and processes in a manner that eliminates/reduces existing redundancies and bottlenecks.

Cost Reduction Strategy

From encouraging proper resource allocation to encouraging better utilization of raw materials and digital resources as well as supply chain optimization, cost reduction eliminates unexpected and unwarranted expenses efficiently.

Every strategy rests on the foundation of enhancing and streamlining operational efficiency, the business becomes perfectly positioned to make the best of resources like its investment and employees.

Tools, Techniques, and Strategies

25 Cost Reduction Techniques

Establish realistic goals, Evaluate business expenses, Get staff buy-in, Ask employees, Hire remote workers and freelancers, Outsource, Reduce wages, Combine/Bundle purchases, Go green, Reassess your services/products, Lower products/services costs, Combine staff events, Replace unproductive staff, Reduces maverick spend, Integrate systems, Review previous cost-cutting strategies, Reduce meeting, Evaluate potential process improvements, Transform business process, Ditch the legacy systems, Leverage low code platforms, Deploy robotic process automation, Invest in better system, Work with business.

Low-Cost Country Outsourcing (LCCS)

Supplier Consolidation – Low-Cost Country Sourcing – Cost Breakdown Analysis – Design for Manufacturability – Design To Cost

Request for Quotation (RFQ)

RFQ can also be referred to as an Invitation For Bid (IFB), this is a process that companies can adopt to better engage specific contractors and suppliers. You will get a clearer and more detailed picture of what each team will be bringing to the table for you.

Cost Breakdown Analysis (Price = Cost + Profit)

Cost = Direct Cost [Direct Labor (Engineering/Manufacturing Labor) + ODC + Direct Material (Subcontracting + Raw Material + Purchased Parts + Inter-Divisional Transfers)] + Indirect Cost [Overhead (Engineering Support + Manufacturing Support + Material Handling) + G&A]

Function Cost Analysis (FCA)

FCA is also known as Function Value Analysis (FVA), a cost reduction technique that hinges on conducting extensive research into the operations & economics of an organization with the sole objective of optimizing expenses, consumer functions, and values. When you apply the principles of FCA to the Direct/Indirect/Intangible/Competitive costs that your business incurs, you become able to get a competitive edge as a result of the positive outcome of the decisions you’ll be making. It will contribute to increased production and higher generation of sales revenue.

Design for Manufacturability (DFM)

It is used to describe the process through which the components/parts of a product are designed with the express intention of manufacturing better merchandise at a lower cost. Five specific principles must never be compromised if the excellent design for the manufacturer is to be achieved.

1. Process: for DFM to work for you to the fullest effect, you must use the appropriate manufacturing process for your product/service.
2. Design: conformity is of critical importance when it comes to streamlining the cost of production efforts. You have to be sure that the design of the product/part you’re working on has the right level of thickness/undercuts/drafts.
3. Material: choosing the right material is also vital, something you need to look at but not limited to variables like the materials’ properties, color, flammability, mechanical features, etc.
4. Environment: is the product you’re manufacturing designed and well-optimized to function in the environment it’ll be operating?
5. Testing & Compliance: does your product meet all existing quality and safety requirements? DFM helps you address those critical questions to find lasting & readily adaptable answers to them.

Design for Assembly (DFA)

FDA involves taking a strongly minimalist approach toward the design facets of a product. It focuses on using as many new parts as possible to build a product without sacrificing quality and functionality in any capacity. When properly applied, DFA not only saves you from the costs typically incurred from purchasing unnecessary parts, but also ensures that it takes far less time to couple or assemble product.

Reverse Costing

It is also called Reverse Engineering, which involves breaking down a finished product into its component parts to establish its manufacturing technology. It is arguably one of the best and most efficient ways of analyzing and evaluating an existing product to build an even better and more sophisticated version.

Cost Driver

Cost drivers are another way of efficiently mitigating your business’s expenses during various operations. A cost driver is the accounting term given to the cost incurred from each given financial activity in an organization. It can be used to streamline variable costs such as maintenance and labor expenses. As there are different costs associated with any given activity in a business, there are also different types of cost drivers as well.

Activity-Based Costing (ABC)

ABC can be defined as the process of computing production costs. It’s an invaluable tool for cost reduction because it assists you with the efficient distribution of overhead costs according to the production-related activity. You can better tell what funds are going towards your business.

Design-To-Cost (DTG)

It is the popular opposite of Design to Value and is one variable that must never be overlooked or underestimated in the production process. It refers to the process by which you analyze and reduce the design phase and requirements of any project that you plan to embark on.

Establish Realistic Goals

Before settling on any cost reduction strategy, take time out with your team to give your goals definite shape and form. Set specific and detailed milestones, and then use your preferred cost management tactics to further fine-tune that.

Evaluate Business Expenses

Analyze each expense your business incurs line by line: do not clump or lump any aspect of your financials together. It helps you to see the areas in which you’re being wasteful. This is impossible to do if you don’t maintain an objective front and view the facts individually and critically.

Get Staff Buy-In

Let your staff know the vital role that they can play in ensuring the efficient use of resources in your business. Doing this properly can have staggering positive effects on your organization, not least of which is eliminating absenteeism, reducing shrinkage, and eliminating various safety issues.

Ask Employees

Ask employees to point out areas where there might be waste in the department might reveal many things that you may missed. Following their recommendations, you’ll have a more comprehensive overview of what’s happening in each department. This in turn will let you identify the most effective cost-reduction strategy to adopt and implement in each sector.

Hire Remote Workers and Freelancers

This is a great advantage with cost reduction.

Outsource

You simply need to do your research and identify contractors that work out of cities with a lower cost of living. These individuals will typically offer you more budget-friendly rates for their services, and you can just work with that.

Cut Employee Costs

Cutting employee costs will bring down what you’re spending significantly. In the same stroke, you could also be damaging the morale of your employees, which is why you simply have to tread carefully here. Most employees would rather take a pay cut than outright dismissal.

Combine/Bundle Purchases

Bundling or combining your purchases means organizing the expenditures of all the departments in your business to streamline costs. It also increases your average transaction size, enhances sales, and ensures that you always secure the most competitive prices in the market.

GO GREEN

Embracing green policies in your operation can be a great marketing aid as more people are drawn towards brands that do their part in protecting the environment. It means you can easily generate more sales with minimal effort as well.

Reassess Services & Products

Review how well your products and services meet customer’s needs. Explore more affordable means of producing the same elements you do now. Take a close look at your competitors to see things they’re doing that work for them that you can adopt too.

Evaluate New Products/Services Costs

Before introducing any new features or functionality to an existing product, or building a completely new product, carefully contemplate the cost implications of such actions.

Combine Staff Events

Proper HR management can also play a pivotal role in helping you bring down costs. You can get the same results and save a considerable amount of funds when you schedule both events to run at the same time.

Replace Unproductive Staff

If someone you’re paying good money for isn’t doing what they should, it’s almost always more cost-effective to replace such personnel with an individual who’ll give you better value for your money.

Reduce Maverick Spending

Maverick spending refers to all purchases and expenditures that don’t follow existing, laid-out purchasing policies. To avoid this, you need to do things like take decisive steps to clearly define your procurement policy, automate purchase approvals, increase your spending analysis as well as build a more refined strategic sourcing program.

Integrate System

Moving to integrate all the applications and systems that comprise your business efficiently eliminates redundancies and improves cost and storage savings exponentially. It’s also worth mentioning that the benefits of integrating systems also stretch to enhancing your business’s security, making actionable real-time data more readily available, and helping to optimize the growth and expansion of your brand.

Review Previous Cost-Cutting Strategies

As more unexpected events transpire, it can be all too easy to forget the pended tasks and focus exclusively on high-priority objectives. Reinventing new solutions to old problems can be a time and resource-consuming affair, so it might be best to explore an alternative approach first. Going over previous cost reduction strategies and checking whether they might still be viable and applicable in the current situation or not offers a more than decent way out.

Evaluate Potential Process Improvements

Implementing continuous process improvement can help you effectively tweak your workflows in a way that ensures you reduce costs without breaking stride. It also hep you scale faster as you become able to identify hidden bottlenecks that much more accurately.

Transform Business Processes

The integrations connect the disparate arms of your system, it becomes possible and easy for you to access and interpret the data you need to run your business correctly. Automating the various processes in your business system can help you fluidly move data between systems with minimal effort.

Ditch the Legacy Systems

The legacy systems are outdated and archaic, they are capable of stalling the operations and progress of your enterprise extensively. It also makes the flow of data slow, creates exploitable loopholes in your business, and can lead to the isolation of your teams.

Leverage Low-Code Platforms

Those platforms can best be described as visual software development environments that developers can leverage to connect and create everything from web apps to mobile apps. Those resources shine as a cost reduction measure because they give you the ability to get the software up and running with just a few lines of code.

Deploy Robotic Process Automation (RPA)

RPA is a means through which your business can automate technologies that can efficiently mimic the back-office mechanics of human workers. It can assist you with various activities that include but aren’t limited to filling i forms, extracting data bytes, and creating backups for your crucial business documents.

Invest In Tech Solutions

Using tech solutions to implement cost reduction, you’ll also be giving your business a competitive edge over your counterparts and imbuing your organization with the agility it needs to thrive in your industry. Using it to manage costs can be pivotal for helping you drive operational productivity at your pace.

Work With Business Transformation Specialists

It is a professional that helps you analyze the design and implementation process of your business to see how you can come up with better strategies. It is also responsible for evaluating consumer & competitor trends to identify areas you should be improving, as well as what things you need to drop.

Improve Your Negotiation Skills

Keep in mind that negotiation must never at any point require that you compromise on the quality of the raw materials you’re securing, as this can have far-reaching negative effects. You need to build your negotiating skills such that you can foster a more profitable and mutually beneficial relationship with your supplier.

Manage Fuel and Traveling Costs

You should endeavor never to travel without an itinerary, it allows you to wield greater influence over what you want to spend, when, and how. Avoid booking last-minute flights, as those can get very costly. Explore the possibility of having a virtual meeting instead, as those can save you considerable time and money.

Cut Overhead Fees

Not all businesses end up successful, the most common culprit is overhead costs. You have to track your operating expenses closely and methodically. Doing something as simple as choosing to buy rather than rent, can profoundly affect your bottom line.

Spend To Save

Highly hailed as one of the most convenient solutions to the paradox of thrift, spending to save is a must-follow principle for businesses who want to operate lean and efficiently financially. Spending to save relies on the principle that, for you to put anything away in the bank, you need to first have enough to spend.

Substitution

In the process of exploring the various types of cost savings out there, you should always know the things you have that can be readily put to other forms of use as well.

Adaptation

Be ready to tap ideas/innovations from other companies, niches, and industries as well. You may be surprised at the sheer number of practical cost-saving ideas that you can get from simply watching the activities of other industries and companies. The most important thing is that the quality of the goods or services that you deliver doesn’t drop or suffer.

Modification

Adaptation is more focused on reorganizing how you offer your product/services, and modification is more about the method of approach that you take with your employees. A great cost-saving strategy that you can employ in this area is to revise the vacation policy that you offer to staff. Something you can do here is to offer them a mixture of paid and unpaid leave.

Elimination or Reversal

You’re keeping items that you’re not likely to ever use in storage. Removing those from the mix can free room for more relevant items in storage space, thus helping you do more with what you already have. You can also look into reducing operating expenses by revising/rearranging how your business is currently set up to function.

Change Rosters

Consider adjusting your employee/staff presence to your business activities. Subtle moves like this will give you an edge over how much operating costs you have to sustain, especially when your business is generating light revenue.

Cut Costs on Financial Accounts

Some steps you can implement here include comparison shopping between insurance providers to identify the cheapest rate and, where possible, consolidating your bank accounts and insurance packages. Be sure NOT to take on unnecessary debt.

Modernize Your Marketing Efforts

If you want to maximize what you spend getting your target audience to notice your brand, you need to adopt modern elements into your marketing strategy. For example, building a customer email list and implementing a referral program. Increasing your network more while simultaneously downplaying your blatant advertising efforts, because customers are more likely to buy the products of a brand they know.

Use Efficient Time Strategies

Time is money. Deploying time management tools like Rescue Time/Focus Booster, helps you to enhance concentration and stay on track in the workplace. Looking into establishing a predetermined time frame for meetings and encouraging practices like timely attendance and sticking closely to the program.

Narrow Your Focus

It means limiting the number of products/services you offer, so you can almost always effectively guarantee that your company will be more productive and that you’ll be able to deliver high-quality work with a greater degree of consistency.

Make the Most of Your Space

When you consider that physical space remains a precious commodity, you can cut what you spend if you put what little space you do have to the best use. Try to find dual purposes for your space and maximize every other opportunity that comes up for you to make the most of what little ground you have available.

Maximize Employees’ Skills

Getting the service of good employees is only one-half of your job as a small business owner. Another half is making sure that you put those personnel to the best possible use. It is the best way to ensure that you can sustainably cut the costs of managing your business. Thoroughly evaluate the skill level and experience as well as their aptitude levels. It helps you know whether you’ve been using the right people in the wrong place or not.

Exchange Services & Barter With Other Businesses

Identifying businesses that offer services that you can benefit from, then approach them to strike a bargain that essentially allows you to use each other’s services at little or no cost. Do not fail to emphasize the merits of generating value for both parties.

TIE Employee Incentives to Results

Not only will this encourage them to put in more effort, but it’ll also save you a lot of expenses in the periods when the business doesn’t go as smoothly.

Hire Quickly and Retain The Best

Hiring the right personnel can be critical to your cost-saving efforts, as it’s the personnel you hire in the early stages of your business that determine how perfectly positioned your company is to achieve growth and success. Everyone is ultimately replaceable, the tangible and intangible costs attached to replacing old, high-performing members of your team are usually much higher than you think. Make sure that retaining the talent you find is a priority.

Negotiate Discounts on Operating Expenses

The more you leverage the services of the vendors and businesses, the more valuable you become to them. It gives you a small negotiating advantage that you can capitalize on. Don’t hesitate to approach them and negotiate a discount or price cut on their service. The vendors will most likely go your way because many of them would rather give you a 5%-10% discount than lose you as a client.

Opt For Government Incentives and Tax Write-Offs

The losses you sustain from this year can be carried to reflect on the profits you make in the new year, make sure that you correctly record your losses and expenses. Many states also make special accommodations for startups and new businesses. It can range from lower taxes to interest-free loans and subsidized use of land. Find out the options and make the most use of them.

Cost-Reduction Mistakes To Avoid

1. Making blanket cuts with unrealistic targets: by choosing to make blanket cuts, they effectively inflict damage on the efficient parts of the business and run the risk of eroding sources of value. To avoid this, be careful when setting savings targets and avoid making blanket cuts.
2. Failing to sustain behavior change: for cost savings to be truly successful, it has to be considered a lifetime affair, not a short-term recourse. Failing to do this only delays, but doesn’t avert, the next financial crisis.
3. Slowing down the organization: in the pursuit of a bigger bottom line, many businesses tend to leave a blind spot through which overhead costs accumulate massively. The company sees a sharp rise in direct costs like excessive inventory holding due to the higher concentration of SKUs.
4. Choking off needed innovation: only 9% of businesses are capable of creating sufficient capacity to tackle the innovation and growth opportunities that they undertake. Overly aggressive cost-reduction strategies tend to drain much-needed funds from high-impact innovation projects, effectively stunting the growth of the establishment as a result.
5. Missing the boat on digital: by prioritizing the Digi approach, businesses can foster a superior customer and employee experience, and get the edge over competitors in the industry, most importantly, more efficiently combat rising inflation.
6. Rushing into unfair contracts with providers: what makes the loss incurred in this area run even higher is the fact that, in more than a few cases, the procured technologies only generate new inefficiencies, impose previously unplanned implementation costs, and fall short of expectations in a few areas. Endeavor to carefully negotiate not just the cost, but also the terms and conditions.
7. Introducing harmful risks: in the face of rising operating costs, the first resort of most owners is to identify areas in their direct purview where they can quickly limit expenses. One thing that must also be carefully considered is whether those cost-reduction tactics will compromise the value proposition of the brand or not.
8. Not registering operations: to avoid leaving a gaping hole in your accounts, it’s important to take the time to carefully register operations, even those small values that don’t seem like much at the start. Then you’ll have a more comprehensive view of the financial operation of your business.
9. NOT keep tracking cash flow: cash flow is the surest means by which you register all the capital transactions that take place in your business. By assessing this element, it becomes possible for you to make critical decisions relating to your balance between accounts, stocks, and amounts payable, among other things.
10. NOT knowing the cost: if you don’t know what variables like product cost, general expenses, stock cost, and labor expense are taking from your business, how can you control your operating costs? It is impossible to effect any cost-reduction measure, not to mention properly tracking its efficiency.
11. NOT pricing products properly: proper pricing is central to the growth and success of any company. To set the right price for your products, you need to not only know precisely what your expenses and costs for producing the item, but you must also be familiar with what consumers perceive as value as well. Then you’ll be able to establish a price that consumers find acceptable and earn your profit.