What is a cost reduction strategy?
Cost reduction is a process usually used by many companies to cut down their costs and increase their bottom line. The strategies can vary depending on a company’s products or services. Every decision made in the development process of a product will impact cost.
Companies often launch a new product without considering the cost. Cost becomes more important when competition increases and price becomes a differentiator in the market.
Cost reduction strategies are effective methods or principles for improving operations efficiency. Cost reduction strategies will lower operations costs while improving productivity, which allows for strategic resource reallocation. The cost reduction strategies afford additional benefits that will be felt throughout the business by accelerating processes, eliminating waste, and utilizing resources effectively.
While both small and large organizations struggle with a high operating cost, the issue is more significant for new businesses as they do not bring yet enough revenue to balance their cost of operations. Employing cost reductions strategies will help them increase their profits dramatically.
Managing to reduce the costs is easier said than done. There are plenty of expenses that simply cannot be avoided. The situation is similar to getting a paycheck at the end of the month. There is the plan to save at least a small portion of the earning but some unprecedented expenses later and you notice that you are back to square one.
Managing the operating costs of a business is a difficult balancing act. With the right cost reduction strategies in place, a business can bring operating costs down and still run a profitable business.
Cost Reduction Strategies that Work
There are several easy actions you can take to reduce business expenses. Some are obvious, but others are not. Following the 4 suggestions can get you started.
1. Encourage remote working
Many businesses hire remote employees because this step can help in reducing the cost of additional office space, utilities, and new office equipment. You can cost-effectively expand your team when you consider hiring employees to work from remote stations.
Remote working will create challenges in employee onboarding, discipline, and communication. They are, however, temporary hiccups because once the system for remote employees is established, you can help reduce a significant amount of costs in the lung run.
2. Improve your negotiation skill
Small businesses often have high operating costs because their suppliers charge higher for their raw material requirements. This is often an offshoot of a lack of trust between the small company and its supplier. The company must first establish better payment terms with the supplier and negotiate the cost of raw materials provided.
Negotiations should not compromise on the quality of the raw materials. By developing a mutually beneficial relationship with your suppliers, you can avoid paying extra. Gaining the trust of the suppliers is important in this regard. The suppliers are likely to bring their costs down if they see that your business is a profitable venture.
You need to convince your suppliers that building a long-term relationship with your company to get improved payments terms that will help you improve your cash flow and increase the overall profitability of your business.
3. Manage fuel and traveling costs
Business travel eats up quite but of your operating costs. They are unavoidable but can you can cut down the unnecessary expenses associated with business travels.
One way to save costs is to consider booking flights that will take you to a small, regional airport instead of a major airport hub. They cost less and can help you save money on your business trips. By developing a travel itinerary ahead of time, you can book in advance and avail of cheaper tickets.
Booking at the last minute will cost you more. You have to consider also if traveling is really necessary. If not that necessary, you may consider a virtual meeting through the various digital resources. This will help you cave both time and money and is an effective way to reduce costs.
4. Invest in technology solutions
While most people will consider investing as an additional expense, investing in technology is quite different. You incur a high cost at the beginning, but the use of modern technology solutions will increase the efficiency of your operations. This will bring your operating costs down in the long run and help you improve your output.
Cloud computing is a very promising technological investment right now. It helps reduce your capital costs and brings down your day-to-day expenses. With cloud computing, there is no need anymore to purchase expensive servers while accessing more bandwidth and storage.
There are many strategies you can use to reduce costs. Top management must establish cost-cutting as an organization objective and must provide for a plan for cost reduction.
How do you implement a cost reduction strategy?
Businesses are lucky if they manufacture an in-demand and highly popular, but they are also facing a bumpy road ahead if their production process is not cost-effective.
There are ways that a business can cut down costs and better achieve its corporate objectives in ways that nicely reflect on the bottom line. The following are tips on how to plan cost reduction strategies in business:
Cut employee costs
The most significant cost in a business process is associated with workers, which means that your profit margin can be enhanced by finding ways to reduce labor costs. There are various leeway to accomplish this such as finding ways to make employees more efficient or reduce their salaries. A business must critically analyze the production process to find steps that may be eliminated. However, it is important that cost-cutting will not adversely impact corporate goals in the long run.
Reduce material expenses
If the costs of materials make up a large percentage of product expenses, a business should look for ways to obtain materials at lower costs or consider how to manufacture their products using a smaller quantity of materials. Buying materials in large quantities is one way of driving down material costs.
Cut overhead fees
A business must keep track of operating expenses. Management should know the ins and out of things such as property, supply, storage, utility, and administrative and supervisory expenses typically cost. After finding out, the next step is putting in place budgets. They should weigh whether to buy or to rent to substantially cut down on costs.
Spend to save
There are times when a business has to spend to save. A business might reduce production costs if they will spend for equipment and hasten the manufacturing process. Purchasing equipment that will require less material to produce could result in savings over time.
By turning to robot-based operations, a business can cut down costs as these robots can used for a wide range of functions that are normally performed by highly paid workers.
What are the 6 types of cost savings?
the following productivity tools may give you fresh insights into the different types of cost savings.
You should ask: What can you do, or use, instead? When exploring different types of cost savings, you should think about what you have that can be put to other use.
One area of cost savings is the office software that your employees use. The costs of software and licensing fees can add up. Instead of buying or paying for license fees, why not switch to one of the various free software options available. Before making your choice, you have to evaluate the free option of the software to find out if it is the right choice for the needs of the company.
Combining processes, people or product components could lead to cost savings.
A good example is insurance. Some companies have different insurance companies for their business and home insurance. Combining the two insurances could save you a lot of money.
Another area to consider is electricity for cost savings. Installing ceiling fans while at the same time using your air conditioning system can result in cost savings. A ceiling fan used in conjunction with air conditioning can raise the thermostat setting by about 4°F. over time, this will result in significant cost savings.
There so many ideas from other businesses that you can emulate. Cost savings can be realized simply by looking at what other companies or industries are doing.
If one bakery has cut down on the size of its bread or muffins, why can’t you? As long as you maintain the high quality of your products, your consumers will continue to buy your products.
You can realize cost savings by modifying your employees’ vacation policy. You can offer your employees a mixture of paid and unpaid leave, which they will appreciate as they may be looking for an opportunity to have some personal time off without having to resign their jobs.
There are many things that you can put to other use to save money or generate some income. If you have a store or office, you can rearrange it to free up some space that you can sublet, saving you money on your space rental costs.
Elimination or Reversal
There are many things in your business that you dispose of, streamline, or eliminate. If you have several part-time employees in your office, you can do away with the need for a dedicated desk for each person. You can offer telecommuting to some employees to save on office space and furniture and equipment.
You might still be keeping obsolete items in storage. They can be eliminated as they only take precious real estate in the storage room.
You can also cut on costs by rearranging, revising, or reversing the way you do things in your business.
How can employee costs be reduced?
Some companies cut employee costs through downsizing, retrenchments, or cutting employee headcount. Letting go of a long-term employee will save you a lot of money as his salary must have gone up through his years of service. However, doing so is counterproductive because you lose also the priceless experience and knowledge that such an employee has accumulated. The employee you just let go must have vast knowledge about your business and industry. Should he be hired by your competitor, your business will be in big trouble.
It is very obvious that companies looking to cut down on employee costs should not consider the option of cutting down headcount. There are many ways of reducing employee costs without having to let go of valuable employees.
Instead of laying off employees to cut down employee costs, you can simply reduce the working hours of some employees temporarily. They can be reinstated to their original working hours once business picks up again.
Some businesses have busy and quiet times. There are days in the week when business is very slow but picks up during the latter part of the week, particularly during weekends. If this is the case with your business, you can maintain a skeleton staff only during the quiet days and have all your employees work during the busy part of the week.
This is a painful way of cutting down on employee costs but a lot better than letting them go. If a business is very slow, your employees will understand if you temporarily cut down their wages with the commitment that the same will be restored when the business starts to pick up. Your employees will appreciate having reduced wages than losing their jobs.
Enforce annual leave
By encouraging your employees to take their annual leave instead of accumulating it, you can cut down on employee costs. You can even introduce unpaid leave to encourage your employees to take longer annual leave.
Ask for ideas
The employees who know where the waste is are those employees that do the job. If you will give your employees incentives to pinpoint areas where savings could be realized, you are tapping into a new source of employee savings.