For supply chain, procurement, logistics and operations professionals one of the top goal is to reduce cost, while keeping other metrics such as on-time delivery, quality, productivity and safety at the highest possible level. Whilst the focus is there, it’s hard to find many cost reduction strategies.
So, what should you do?
While most business concentrate on increasing sales, reducing outlays, it is equally important to focus on cost reduction strategies when trying to attain profitability.
As one of my colleagues put it
“Volume is Vanity, Profit is Sanity and Cash is King”
That is partially because profit margins come in several flavors and are often accessible in exceedingly multifaceted ways. While you cannot force your clients to spend more or pay more, you can control cost in most circumstances. The trick is knowing which cost reduction strategies to apply, and by how much. Here is a look at some easy cost reduction strategies to expand your brand’s net profit margin by reducing common expenditures, without obstructing your activities, goals, or even slowing down your business’s ability to grow. Some are applicable to manufacturing business, but most of them could apply to any business.
1. Always Remember Everything Is Negotiable
Except for when it is plainly spelled out in a contract, every fee is negotiable. Entrepreneurs have a habit of to look out for each other, and merely saying that you own a business is often enough to get discount. In some situations, there is a lively quid pro quo at work.
Most importantly this applies to Direct and Indirect Buyers who are trained to negotiate and expected to drive cost reduction pipeline 3-7% year in year out in their respective commodities & categories.
2. Deploy Lean & Six Sigma Tools & Philosophies
Over decades both Lean and Six Sigma has created savings in millions when deployed in a structured fashion with right leadership and support structure. Whilst I agree Lean can produce product savings in both material and labor cost, this should not be the prime aim. The main target should be to improve flow.
Similarly, there is clear expectation from Six Sigma projects to deliver big savings by reduction variation, they could be hard saving (can be measured on bottom line) or soft saving. There are huge amounts of material available on sources like isixsigma which you can refer for more details.
3. Buying (Gently) Used Products
There is no place in your business bylaws where it is stated that you must purchase only glittery new equipment. So why not purchase gently used Products, when it makes sense? Depending on what your business does, you can find gently used Products on Assembly equipment, Glassware and cutlery, Furniture, Office technology, Personal technology, Vehicles, and Storage equipment.
4. Transportation & Logistics Savings
This includes the saving like freight, productivity improvement in warehouse, changes in warehouse structure, consolidation of warehouse or outsourcing the non-core activities to 3PL or 4PL who are better equipped to manage your warehouse or road transportation.
Whilst there’s strong temptation to have your own warehouse and fleet, it is very expensive to run them and most business use these assets inefficiently. This is massive topic to cover, therefore, I will probably write a separate blog on possible strategies to drive transportation and logistics savings.
5. Evaluating Worker Perks and Fringe Welfares on Merits
In several industries, talent struggle is aggressive. On top of juicy packages and substantial time-off allowances, many businesses offer marvelous perks and fringe assistances in a constant arms race to entice ultra-qualified staffs. However, with time, they can disturb productivity. To enhance self-esteem and shape amity, substitute luxurious perks for cheaper, social ones like team building events, employee recognition program or Amazon vouchers!
6. Freelancers and Contract Labor for Minor Works
Freelancers and autonomous contractors are easier to hire and economical to keep than traditional staffs. You are not expected to offer health insurance welfares, pre-tax retirement accounts, or other pricey assistances. You just need to pay them for completed work. These cost reduction strategies serve better during one-off projects and non-core activities.
7. Inspire Telecommuting
For thousands of business owners, telecommuting has marvelous cost-cutting potential. Regrettably, that potential is still mostly untapped. With this cost reduction strategies, business owners can be directly impacted by reduced utility costs through lesser electricity/water usage, reduced travel costs for employees, and reduced time lost to commuting.
8. Trade Management Saving
For most manufacturing business the importing and exporting of goods is very common, and for companies who are either importing and exporting out of EU, the trade management bill is heavy.
Ask around and you will be surprised to know very few people know the benefits and details of GSP, i.e. Generalised System of Preferences (GSP) system under which the EU – and other developed countries – offer developing countries lower tariffs on their exports into the EU. In other words, you can save import duty if your goods qualify?
Similarly defining the country of origin correctly is very important in trade management. Inadequate processes can cost you lot of money!
9. Avoid Procrastination and Inspire Effective Time Management
Time is money, and this simply implies wasted time is wasted money. Every minute spent procrastinating is a minute that is not being spent on productive work. If chronic procrastination is becoming an issue, figure out why and take suitable steps to address it. Procrastination is not a catch-all offender for office efficiency woes. Some are better at time than others. The use of Project management apps and inter-organizational messaging tools are part of this cost reduction strategies which can go a long way toward streamlining functions necessary to your brand’s goals.
10. Lessen Paper Use
Like reducing energy and water usage, reducing paper use is good for your business’s bottom line and the environment at large. And there are countless ways of applying this cost reduction strategies, for example paperless pilling, cloud storage etc.
11. Limiting Travel Expenditures
Permitting staffs to telecommute reduces travel costs, keeping more money in your pockets. Reducing company-paid travel is an even better deal for you. Sure, there is no alternative for team-building at business conventions, or expert meetups. But that does not mean you need to travel for every client meeting. For large summits, virtual meeting systems with telepresence abilities can easily be used.
12. Make even Plan Costs with Usage
Your business undoubtedly pays for a lot of indispensable services – telecoms, cloud storage, possibly even legal support. At least, these plans should be reviewed once every year to determine whether they meet your requirements. If your business is paying for capacity not needed or used often, you can likely trim to an inexpensive plan without harming your brand. Equally, if you are regularly above the limits of a lower plan, you could be charge a lot more.
13. Minimize inventory – Reduce
As I have mentioned before Inventory is the cash sitting in your warehouse in the form of product! Apply these 18 inventory reduction strategies to reduce gross inventory, in turn inventory carrying cost.
The question is can you claim reduction in inventory carrying cost as real hard saving?
In my experience there are two school of thoughts in finance community:
- Unless I see more cash in my bank account it is not a saving
- By reducing gross inventory, we are increasing turns hence, improving cash flow.
I am always friends with 2nd group of controllers for obvious reasons!
14. Only Purchase in Bulk When Its Profitable
It seems counter-intuitive to recommend against purchasing in bulk. However, before pledging to bulk buying, make a simple enquiry: is it profitable to buy bulk of one thing? On the other hand, if you have vividly cut such usage in recent times, it may not make sense buying in bulk to get a slightly better per-unit rate. This cost reduction strategies requires moderation.
15. Paying Invoices Earlier
Numerous sellers offer small but expressive discounts to clients that pay invoices ahead of time. As long as disbursing early does not harmfully influence your cash flow, it usually makes monetary sense to do so. This is particularly true in a low-interest environment, where cost of short-term lending bridging any deficit is not likely to surpass the value of the reduction.
16. Pool Funds with Other Side Businesses
When it comes to buying supplies, and equipment, you should be able to recognize the strength in numbers. Several businesses lessen recurring costs by pooling resources with other small businesses, and this cost reduction strategies cut across broader layouts.
17. Put Off Extra Appliances, and Machinery After Hours
This is an agonizingly forthright cost reduction strategy to reducing electricity or gas bill without upsetting operations. And once your employees get in the habit, it is painfully easy too. In a normal office setting, PC workstations encompass the sole major additional energy suck, so ensure every PC is put off before heading out. Or if you are intro heavy manufacturing where boilers, CMM machines or any other heavy equipment which is not required overnight, turn it off. Shut off overhead and desk lights too or use the sensor lighting which turns off when no movement!
18. Use Practical Healthcare Changes
Most staff benefits packages comprise some form of healthcare treatment. Salaried staffs expect companies to make available healthcare services, and it is undoubtedly the right thing to do. Regrettably, it is also becoming more expensive. Tax-advantaged health savings accounts are particularly beneficial as a cost reduction strategy as they allow staffs to take possession of their healthcare selections while shifting risk away from the business owner. When combined with other health insurance campaigns, they may serve as appropriate substitutes for old health insurance plans.
19. Using Office Space More Resourcefully
Office spaces have become more resourceful for years now. With this cost reduction strategies, you can redesign your space around these and other space-efficient ideologies. This allows you to do more, even if you are growing, anticipate a move into a larger, pricier space.
20. Using High-Tech Replacements to Legacy Systems
How many legacy machineries do you have around your workplace? That is highly dependent on what your brand offers. Reputable manufacturing and light industrial firms are often burdened with lots of old machines and systems that they wish to replace, even if doing so would decrease costs and increase output in the long run. In such industry, the struggle from legacy systems is not always as clear-cut, but that does not mean it is not real. Using High-Tech Replacements to Legacy Systems should also be seen as a part of cost reduction strategies.
21. Using a Programmable/Smart Thermostat
Heating and air conditioning are not negotiable outlays. Small variations in your facility’s ambient temperature can unfavorably influence your clients’ comfort and staffs’ output, intimidating your top and bottom lines. But that does not imply you cannot apply some cost reduction strategies. With programmable/smart thermostats, you can cut your climate control prices without reducing comfort.
22. Using Passive Energy-Saving Measures
Balance the cost reduction strategies above with passive energy-saving measures. This lessen your climate control, lighting systems’ capabilities, and carbon footprints. Before starting an energy-saving project, determine whether it meet the requirements for local, state, or federal energy-efficiency tax credits. Most energy-supping appliances, and moderate renewable energy project often do.
23. Recognize and Control Your Location Costs
Not all economies are equal. Some locations are perfect to start growing a business while others are not. Collectively, your business location plays a key role in arranging the former from the latter. When you able to Recognize and Control Your Location Costs, this Cost Reduction Strategies would aid you relocate to a lower-cost region. If moving is not a choice, you need to understand your location costs, identify tolerable ranges, and learn how to tweak the numbers in your favor.
24. Reward Responsible Spending
As the old saying goes, you spend money to make more. Every money you invest has a rate of return and can take longer to materialize. If your credit is good, you can use a small business credit card to cover for answerable spending on inventory you would procure anyway. Keep in mind that some cards carry annual fees, but you can counterbalance those with modest use.
25. Shop Round for Vital Services
Most business operates in competitive sectors. Use this to your benefit by going around for vital services – or simply threatening to shop around at the right time. With this cost reduction strategies, you can find insurance firms offering hefty discounts or bonuses to clients who make the leap from rivals.
26. Social Media Advertising Influence
Traditional advertising is expensive compared to paid social media advertising. Social media ads are also inexpensive to make. Though it is increasingly common to see slick video spots on social medias, the most profitable social ads remain simple, inexpensive memes. If you devote time and personnel to winning your brand’s fans and building your social media followers organically, this cost reduction strategies can reach millions of current or prospective clients while spending less.
27. Barter Exchanges
Today, most dealings use exchange backed by central banks, but that does not imply non-monetary exchange is totally outdated. As part of cost reduction strategies, the digital revolution has given rise to dedicated cottage industry of barter enablers. There are limits to what you can exchange, but it is worth observing if you believe your products or services make respected trades.
Every business is different. Still, it is almost certain that your business records comprise of at least some fiscal fat to cut off. Even if you believe you have taken all the non-essential spending, it may be worth it to still apply some cost reduction strategies listed above. It would not cost any additional fee, and might even produce a noteworthy payoff within the shortest period. What are you doing to reduce your business’s expenses as you keep growing? Learn and apply this cost reduction strategies to improve your finances and business profit today.
If you have more ideas and suggestion on how to save cost, please do share in comments below.
Hello Dr. Muddassir Ahmed,
I always have enjoyed your very insightful articles and share them with our team.
In my experience, a tool that has helped is the management of no-moving (obsolete) and slow-moving inventory. There are several approaches that can be taken to manage these two types of inventory that end up benefiting the company. One way is that if you are able to return it to the suppliers or to sell it off, you can reduce the write-off amount.
But the biggest benefit is in reducing the actual administration of this inventory and also by making the space available for “good” inventory, especially when you are considering the cost of carrying inventory.
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good morning Dr. saab.
the 27 cost reduction strategies give a fine knock at the doors every SCM manager, to fall in line with required needs. At the end it should be every body endeavor to convert your 27 strategies in to actions to win over the management expectations. Assessment of correct need and getting the same to user to control inventory carrying cost play an important role
Thanks Ziauddin for your comments.
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