Cost reductionis the process used by organisations aiming to reduce theircostsandincreasetheirprofits,or to accommodate reduced income. Depending on a company’sservicesorproducts,the strategies can vary. Every decision in theproduct developmentprocess affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project[1]or theconstructionof a building.[2]In thepublic sector,cost reduction programs can be used where income is reduced or to reducedebtlevels.[3]
Importance
editCompanies typically launch a new product without focusing too much on cost. Cost becomes more important whencompetitionincreases andpricebecomes a differentiator in the market. The importance of cost reduction in relation to other strategicbusiness goalsis often debated.[4]
Examples of cost reduction strategies and programmes
editCommercial businesses
editConsultantsDeloittereported in 2006 that over three-quarters of theFTSE 100listed companies had commenced a cost reduction programme during the preceding 12 months. Cost reduction is most frequently stimulated by recognition that profits andprofitabilityare below expected levels.[5]: 1 Some examples of programmes include:
- Reductions instaffnumbers (head count). Doherty refers to staff reduction exercises as "a quick and easy method" whose use often means that companies lack the resources they need when business activities recover.[5]: 1
- Component consolidation
- Function cost analysis/Value analysis/Value engineering
- Design for manufacture/Design for assembly
- Reverse costing
- Cost driveranalysis
- Activity-based costing(ABC), which assigns a cost of each activity undertaken in the production and delivery of each product and service according to the actual consumption by each activity including a share ofoverheads.Peter Turney, in a 1989 article, examines the role of ABC in the achievement ofmanufacturingexcellence and the product cost information needed by managers working towards this goal.[6]
- Productbenchmarking
- Competitor benchmarking
- Design to cost
- Property portfolio reviews addressing whether theestateoccupied by a business continues to meet its needs, and also reviewing thetenurewhich it holds on the estate: Deloitte's survey of British companies noted that "smaller firms in particular" rarely take advantage of the cost reductions they can secure throughsale-and-leasebackand similar deals.[5]: 3
- Incorporation of "low-cost thinking" into an organisation'sculture[5]: 8
- Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes orvalue addingstages to 1/N of the previous cost.[7]
Examples specifically focussed on the use of suppliers and the costs of goods and services supplied include:
- Supplierconsolidation:see examples in theaerospace manufacturing industry
- Low-cost country sourcing
- Outsourcing:experience in the United States suggests that businesses primarily outsource to reduce peripheral and "non-core" business expenses.[8]
- Request for quotations(RFQ)
- Suppliercost breakdown analysis
- Design workshops with suppliers
Public sector
editIn a public sectorspending review,an overall target for reduction in expenditure may be identified: for example, in the United Kingdom, the 2010 spending review anticipated a reduction of £81bn inpublic expenditureover the four year budget planning period.[9]In order to meet the challenges of a significant reduction in expenditure, government departments are expected to look at how they can "take cost out of the business" rather than simply cut services.[10]One of the main principles expected of government departments in order to reduce costs is a "data-driven approach", i.e. ensuring that staff within the department have "a good understanding of the distribution and profile of costs in their business".[10]
Centralisation ofprocurementactivity has been hightlighted as a beneficial public sector cost reduction strategy.[10]: 6
Scott Brownet al,of "Excellence in Business", note that in most cases, a successful approach to cost reduction which aims to maintain service quality "has at its heart an approach based on the principles ofSystems Thinking":a fundamental review of the whole service, its purpose and objectives.[11]The "Route Map for Change" which they advocate has been used effectively byKent County Councilfor theirhighway maintenancecontract, while the decommissioning of various warships and aircraft squadrons following the UK'sStrategic Defence Reviewin 2010 is seen as a good example of a strategic option appraisal.[11]
References
edit- ^Barton, J. A.et al.,Design determines 70% of cost? A review of implications for design evaluation,Journal of Engineering Design, Volume 12, published 1 March 2001
- ^Designing Buildings Wiki,Cost control in building design and construction,last updated 15 August 2021, accessed 11 September 2021
- ^McKinsey & Company,A smarter approach to cost reduction in the public sector,published 8 June 2018, accessed 19 April 2024
- ^Green, W.,Growth trumps cost cutting, says survey,Supply Management,published 31 January 2018, accessed 12 September 2021
- ^abcdDoherty, P.et al.(2006),The cutting edge: Sound advice for a sustainable approach to reducing costs,Deloitte
- ^Turney, P.,Activity-Based Costing: A Tool for Manufacturing Excellence,Association for Manufacturing Excellence,published summer 1989, accessed 13 September 2021
- ^High, P.,AstraZeneca CIO Makes IT Twice As Good At Half The Cost - Here Is How,Forbes, published 3 January 2017, accessed 10 January 2021
- ^Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26.
- ^BBC News,Spending Review 2010: George Osborne wields the axe,published 20 October 2010, accessed 13 February 2024
- ^abcNational Audit Office,A Short Guide to Structured Cost Reduction,reference 009328-001, published June 2010, accessed 13 February 2024
- ^abBrown, S., Hadden, C., Jones, K. and Roddie, R. (2010),Radical Cost Reduction in Public Services,published by Excellence in Business, p. 5
Further reading
edit- Barrett R. Crane. "Cycle time & cost reduction in a low volume manufacturing environment".MIT DSpace.hdl:1721.1/11020.
- Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry".MIT DSpace.hdl:1721.1/60836.
- Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools".MIT DSpace.hdl:1721.1/12092.