Cost Reduction Analysis – Techniques to Drive Savings

The fog has nearly lifted on the recession, but many companies have yet to see revenue growth rates that are substantial enough to drive meaningful increases in profitability. With continuing questions about long-term growth rates, companies are often left with only one option to improve profitability: cost reductions.

The low-hanging fruit, which tends to involve workforce reduction and increased productivity from existing employees, has been largely exhausted. However, if companies look beyond labor, they can often find additional ways to drive meaningful long- term cost reductions.

Here are a few areas to consider:

1. Product lines and customer segments

Many companies have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.

2. Inventory

Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows.

The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of stock-outs.

3. Purchasing process

Companies can often decrease unnecessary costs by implementing additional controls over the purchasing process. Many businesses grant selected employees the authority to initiate and/or approve purchases using company- sponsored credit card programs. Because tracking card spending can be onerous, these types of privileges often result in unnecessary, or worse, improper charges. By implementing procurement card programs with specific vendor, transaction value or aggregate charge limits, companies can reign in spending, as well as reduce paperwork in the procurement process.

4. Vendors

Companies can often reduce general and administrative costs through techniques such as vendor consolidation and/or the implementation of formal RFP processes. Think about the number of departments or locations using different vendors for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected vendors, companies can leverage purchasing power to reduce general and administrative costs.

5. Employees

Whether your company has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives.

Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, companies often decrease costs and increase employee retention.

While there is no single solution for cost reductions that applies to all businesses, learning more about what other companies have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near- term increases in profitability and ensure you are prepared for any future economic downturns.

Contact us at 215-441-4600 if you would like to discuss how this topic impacts your business.

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