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Cost Reduction Strategies

Lowering the Cost Base

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 over time, driven by lack of information and human behavior.

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

PROCESS

  • Quality – additional inspection and sorting in an attempt to control quality
  • Waste – lack of customer-knowledge, adding unnecessary items/features

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 before Cutting

  • 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): removing non-value adding activities, components and features, while maintaining existing structure and systems; expected gains 5-20%.
  • Cost Structure Redesign (Kaikaku): step-change from redesigning the entire structure, using only what is absolutely required to meet market requirements; expected gains 20-50%.

Cost Reduction Strategies

MATERIAL COST

  • Quality Function Deployment (QFD), customer-driven
  • Value Engineering (VE) to minimize steps, waste
  • Design for Six Sigma (DFSS) to reduce variability
  • Standardization and BOM-reduction
  • Shared parts and platform-concepts

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

OVERHEAD COST

  • Alert when overhead grows faster than sales
  • Largest spending category for US/EU companies, must be in 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 us to develop sustainable cost reductions – ‘Navigating to Results’.