8 Ways To Reduce Costs In Your Business
If your business is looking to increase profitability for survival, to free-up resources to invest in new products, or to pay bigger bonuses, cost reduction is a powerful way of doing this.
But how do you go about reducing your costs in the first place and getting those savings to stick?
Businesses can spend up to 70% of their revenue on goods and services bought from 3rd party suppliers, so-called “bought-in” goods and services.
For some businesses though, effective purchasing or procurement is an afterthought, meaning that costs are not controlled and managed properly. This can expose the business to profitability risk, among other things.
Think about that. If your business is spending up to 70% of its revenue without having any effective management or control of that spend in place, it could be haemorrhaging money…and profit!
Cost management, cost control and cost reduction are an essential part of running a successful business and ideally should be handled by a dedicated team of procurement professionals.
But if your business doesn’t have such a team, all is not lost.
I’m going to give you the 8 x cost reduction levers in this blog that work on the demand-side of your bought-in purchases.
Demand-side in this context means what you buy, how you buy and when you buy. The great news is that YOU have complete control over this.
For a detailed explanation, including how to ensure your business is ready for cost reduction and pitfalls to avoid, please see my “Ultimate guide to practical cost reduction”.
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his is about challenging all areas of spend and asking yourself: do I really need to buy that product or service or could I achieve the same output with a lower input cost?
For example, could you reduce wastage in your processes, reduce the number of software licences, or move some meetings online instead incurring travel costs by meeting of face-to-face?Description text goes here
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This lever seeks to optimize your product or service from a cost perspective BEFORE the product or service is launched; designing-out more costly elements, while retaining the product or service functionality.
Carrying this out at the design-stage is advantageous, as at this point your business will not have committed any costs such as for production lines or tooling.
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Similar to Value Engineering, but this activity takes place AFTER product or service launch. Therefore, changing design at this stage will be more costly, as production machinery will have already been bought.
But this is still worth evaluating as in some cases the savings will outweigh the additional costs of making a design change.
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How much should the product that you’re buying cost? This tool seeks to build a cost model, from the bottom-up, based on your knowledge of the cost components of the product, such as raw materials, processing and transport for example.
This can provide you with the basis for having a discussion with your supplier on whether the price that you’re paying is reasonable, based on your “should-cost” model.
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IIt’s at the specification stage where cost-creep can occur. If specifications aren’t closely managed, more and more exceptions to your standard spec and one-off’s including “exotic” materials or features tend to be added in, with little regard to the cost impact.
There are 2 stages to this lever.
1. Put a management process in place to standardize and control specs
2. Take a look at your full range of specifications and rationalize those that don’t make financial sense.
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If your company has several sites, perhaps with the sites buying from the same supplier(s) independently, in the absence of a central overview of supplier pricing, there could be instances of different sites paying different prices for exactly the same goods or services.
Having visibility of your demand in an aggregate way and having a single oversight of supplier pricing across all your sites can often yield cost reduction opportunities through price harmonization.
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Increased order volumes can result in your supplier incurring lower costs such as discounts on buying raw materials and production run-time efficiencies.
If you place fewer orders with your supplier, such as monthly instead of weekly, the supplier could share these cost benefits with you. There are some pitfalls with this approach, so please read my “Ultimate guide to Practical Cost Reduction ”.
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Providing visibility of your future demand to your supplier could also result in them also incurring lower costs.
With some certainty over your requirements, your supplier can not only secure discount on their raw material purchases but can schedule and execute production in the most efficient way, passing-on those savings to you.
There are some pitfalls to avoid on this lever, too, so please read the “Ultimate guide to Practical Cost Reduction” in the resources area of my website.
To summarise, all these cost reduction levers are totally within your control.
Deploying some or all of these 8 levers will secure meaningful and sustainable cost reduction, increasing the profitability of your business, and elevating your profile in the process.
If you’d like to benefit from your team understanding the levers and how to apply them in practice, see my cost reduction course for what you’ll learn.
