Cost Reduction Strategies

Sustainable Cost Reductions

Increasing competition forces companies to control their expenses at all times. Continuous cost-reduction throughout the entire economic cycle becomes a necessity to remain in business. Cost-cutting is typically used to reduce expenses in difficult times in an attempt to compensate for sliding profits, a failed product launch or loss of a major customer-account. Attacking the symptoms without addressing the causes (example: lacking competitiveness) leads just to short-term gains, costs will bounce-back eventually. In the seminar “Cost Reduction Strategies”, participants learn how to lower the cost base in an effective and sustainable way.

Seminar Brief

• Seminar: Cost Reduction Strategies (CRS)
• Application: when traditional cost cutting measures are exhaused
• Process: reducing cost across all categories: material, labor, overhead, non-quality
• Duration: 2 day seminar (theory and application)
• Outcome: certificate of participation and completion

Cost Inflators

If not controlled, costs naturally rise, driven by lack of knowledge and human behavior:

1. PEOPLE
   Preference – managers prefer to grow/expand, rather than to cut/reduce
   Mindset – shift of thinking and behavior is not encouraged and supported
   Inflation – people naturally fill the available time with additional tasks
   Avoidance – managers avoid difficult decisions to cut according demand
   Priority – cost is out of focus during “good times” and naturally increase
   Morale – reduction-programs are often avoided as they dampen morale
2. PROCESS
   Quality – additional inspection and sorting in an attempt to control quality
   Waste – lack of customer-knowledge, adding unnecessary items/features
3. SYSTEM
   Maintenance – inflated, fear of breakdown, lack of cost/risk-knowledge
   Support – permanent/fixed support rather than variable/when needed

Cost of Support Activities

Three drivers determine the cost structure of an organization’s support system – to achieve sustainable cost-reductions, those factors must be considered in sequence:

• Capability – define what a department/function can really do
• Demand – define to what extend/how often those capabilities are used
• Efficiency – define how well they are delivered (timing, quality, cost)

Considerations – think before you cut

• How to match capability to strategic needs and market demands
• How to apply “Collaborative Budgeting” – shared budget to drive savings
• How to apply “Bottom Zero” – financing programs through savings

Cost Reduction Approaches

• Cost Structure Improvement
  Kaizen approach to remove non-value adding activities, components and features while maintaining existing structure and systems – typical gains are 5-20%.
• Cost Structure Redesign
  Kaikaku approach to achieve step-improvement by redesigning the entire structure, using only what is absolutely required to meet market requirements – typical gains are 20-50%.

Cost Reduction Strategies

1. MATERIAL COST
   Lean Product Development (LPD), reduction to essentials
   Design for Six Sigma (DFSS), maximizing yields
   Standardization and BOM-reduction
   Shared parts and platform-concepts
2. LABOR COST
   Reducing non-essential activities
   Connecting processes to flow
   Synchronizing activities to actual demand
   Leveling the schedule to avoid peaks and idle times
   Introducing adaptive manning systems
   Grouping, consolidating and simplifying complex tasks
   Automating, outsourcing, centralizing repetitive work
   Flexibilizing systems to adapt to changing demand
3. OVERHEAD COST
   ALARM when overhead grows faster than sales
   Largest spending category for US/EU companies – major focus
   Reducing management-layers
   Shortening planning and approval cycles
   Elimination administrative waste
   Standardization and automating reporting
   Revamping the IT infrastructure
   Eliminating or outsourcing non-strategic activities

Pitfalls and Conclusion

‘Quick Fix’ approaches generally do not work. When fewer people do more of the same work will deteriorate productivity, quality and morale with serious consequences. Costly errors quickly offset savings in the short-term and lack of innovation erodes competitiveness in the long-term. Successful cost-reductions require deep-rooted change, a redesiged cost structure, efficient processes and systems, and skilled people to develop, implement, and sustain them.

Contact for details on upcoming events.