Approaches towards Cost Reduction:
it's important to take a balanced approach that does not just push for immediate cost cuts rather it ensures implementation of measures that bring sustained benefit to the organisation without compromising on the quality of output.
- Cost breakdown:
- Identify and analyse drivers:
- Compare with industry standards:
- Process improvement:
- Inventory management:
- Warehouse management:
- Technology Assessment:
- Review current supply chain process :
- Automise or contract out:
- Focus on Energy-efficiency:
- Validation of proposals:
- Select proposal:
- Alignment with Corporate goals:
- Handle challenges in implementation:
- Keep on Monitoring:
- Bring Cost-conscious attitude as work culture:
Conduct a thorough review of all expenses, breaking down the cost into categories like variable and fixed expense, direct and indirect, one time and recurring — for better visibility and control. This analysis helps understand expenditure proportions, identify high value expenditure item and avoidable expense.
In case of variable expenses, study each of the cost drivers that influence the costs incurred on major expense items. By analysing this, the company could figure out ways for smarter resource use, tighter operations, and eliminating waste and thereby transforming these insights into cost reduction efforts.
Compare the organisation's costs against industry average to identify areas where the organisation might be overspending or underperforming resulting in a cost overrun.
In line with the driver analysis made in the Step 2, scrutinise the operational processes to identify: process inefficiencies resulting in resource wastage, bottlenecks, or even redundant steps which can be eliminated.
To reduce cost associated with over stocking, implement improved demand forecasting methods, validate and optimize the present order quantities, consider implementing just-in-time (JIT) system bearing in mind the demand structure and supplier relationship.
If the business is such that, the maintenance of large quantity of stock and consequent availing of warehouse facility is the norm, then another relevant area for cost reduction is Warehouse management. Efficient warehouse management can aid cost reduction by
(a) Implementing technology like conveyor belts, robotics, and automated storage and retrieval systems (AS/RS) thereby improve accuracy as well as reduce labour cost.
(b) Implementing WMT like Cross-docking that minimizes the storage time in warehouse.
(c) Implementing like movement based motion sensors, LED lighting, and optimized temperature regulation for temperature sensitive goods, significantly reducing utility costs.
While process optimisation is about reforming current workflows, technology assessment is about evaluating current technology infrastructure and identify opportunities for upgradation of outdated systems to target the cost associated with of frequent breakdowns.
Review the existing supply chain process - to identify process inefficiencies, to re-negotiate and secure further more cost effective contracts with suppliers or to explore alternative sourcing options.
Evaluate possibility of outsourcing of non-core activities to specialized subcontractors. If there are repetitive tasks capable of being automized, explore options for the same to reduce labour costs and improve efficiency.
Upgrade to energy-saving / energy efficient equipment and insist employees to adopt energy-saving practices as a routine, to lower utility costs.
Implementation of cost reduction:
Conduct a thorough analysis of cost reduction proposals at hand to compare their each reduction measure against their benefits/Profit Potential
Give priority to initiatives with the highest scope for cost savings and the highest positive impact on profitability and efficiency.
Ensure that selected cost reduction proposal does not in way contradict with organization's long-term goals to avoid subsequent issues.
Get prepared to address the challenges such as resistance to change from employees, maintaining quality and sustainability.
Develop trackers like Key performance indicator tracker (KPI dashboard) to periodically track the progress of cost reduction initiatives after their implementation.
Encourage employees to identify cost-saving ideas, reward them suitably and promote responsible spending habits across all departments.