Cost reduction is the process used by organisations aiming to reduce theircosts andincrease theirprofits, or to accommodate reduced income. Depending on a company’sservices orproducts, the strategies can vary. Every decision in theproduct development process 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 theconstruction of a building.[2] In thepublic sector, cost reduction programs can be used where income is reduced or to reducedebt levels.[3]
Companies typically launch a new product without focusing too much on cost. Cost becomes more important whencompetition increases andprice becomes a differentiator in the market. The importance of cost reduction in relation to other strategicbusiness goals is often debated.[4]
Examples of cost reduction strategies and programmes
ConsultantsDeloitte reported in 2006 that over three-quarters of theFTSE 100 listed companies had commenced a cost reduction programme during the preceding 12 months. Cost reduction is most frequently stimulated by recognition that profits andprofitability are below expected levels.[5]: 1 Some examples of programmes include:
Reductions instaff numbers (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
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 ofmanufacturing excellence and the product cost information needed by managers working towards this goal.[6]
Property portfolio reviews addressing whether theestate occupied by a business continues to meet its needs, and also reviewing thetenure which 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-leaseback and 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 adding stages 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:
In 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 expenditure over 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 ofprocurement activity has been highlighted 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 Council for theirhighway maintenance contract, while the decommissioning of various warships and aircraft squadrons following the UK'sStrategic Defence Review in 2010 is seen as a good example of a strategic option appraisal.[11]
^Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26.
Barrett R. Crane (1996).Cycle time & cost reduction in a low volume manufacturing environment.MIT DSpace (Thesis).hdl:1721.1/11020.
Apichart Jearasatit (2010).Using a total landed cost model to foster global logistics strategy in the electronics industry.MIT DSpace (Thesis).hdl:1721.1/60836.
Bryan K. Parks (1994).Cost and lead time reduction in the manufacture of injection molding tools.MIT DSpace (Thesis).hdl:1721.1/12092.
