Cost-saving is essentially the money saved as a result of a shift in plan or policy that minimizes the cost of operation. Simply put, it is the changes that produce profits.
Both the employees and the employer have a role to play as far as cost-saving is concerned. For the employer, it is his responsibility to ensure that policies are in place to ensure cost-saving measures are implemented. The employee, on the other hand, has the sole responsibility of ensuring he/she adheres to the stipulated measures.
What are the 6 types of cost savings?
The 6 types of cost savings are; historic saving, budget-saving, technical saving, RFB savings, index saving, and ratio saving.
1. Historic saving: are the changes in unit prices as compared to the previous period. It is calculated based on a baseline from the previous year. For example, it could be from an indicator like the price average from the year before. It is such indicators that are then compared with the current price and the difference is then calculated.
2. Budget savings are saving that is derived based on the difference between the real price, (price on the invoice) and the planned budget.
3. Technical savings: These are savings that are made as a result of changes in the technical specification of a product. For example, when the requirement for an expensive titanium metal is replaced by the fairly priced steel metal – the difference in prices, as a result of this change is what is known as a technical saving.
4. RFP savings: RFP is an acronym for Request for Proposal and it is an ‘avoidance’ kind of saving in that; through the request for proposal from various suppliers, the entity requesting for proposal has the liberty to choose a supplier from the proposal received. And in most cases, the lowest bidder is the one who is selected.
5. Index savings: is a saving that is acquired as a result of external market developments which usually affects the prices for material and services
6. Ratio Savings are a combination of savings. For instance, it could be a combination of technical and budget savings.
How to save on cost in your workplace
Most people usually think that cost saving is not that necessary – at least not on an individual level since it is taken care of on the business end of things. The truth is that there’s so much you can do as an individual in your workplace to cut costs and save money for your company or business. So, how do we save costs in the office?
1. Minimize waste
Most organizations lose a lot of money on wasted resources without realizing it. So, where possible, make sure that you recycle, repurpose, and reuse. Going green is another effective way you can adopt to help save costs in your workplace. For a start, you can choose to go paperless by using soft copies and sending memos, reports, invoices, and other forms of communication via email. In instances where you can use the digital or electronic documents, don’t print hard copies, however, if it is completely unavoidable, then print on both sides of the paper. By doing so, you will be helping the company cut the cost of purchasing paper, toners, and ink. It will also help in saving storage space and money that would have been used for repairs and maintenance of printers.
2. Sharing of office resources
Apart from going paperless, another way of saving cost is by sharing office resources especially equipment such as printers, fax, and photocopy machines. These are equipment that is essential in any office, and instead of everybody having their machine, a few machines can be placed in a central place where it can be accessed by everyone.
3. Reduce expenditure
One of the best ways of cutting cost in any work environment, business place, or even at home, is by reducing expenditure. To successfully achieve this, you will have to look out for opportunities to save. For example, when there is a new technology or software update that requires a lot of money to purchase, yet the old versions are still working fine, you can choose not to request for these new versions. Also, if there is a new tool, device, or equipment that is needed in your workplace but you have a similar one at home, you can opt to use that one instead of requesting a new one. By doing all these simple yet practical things, we can help the company save money that would have been used to purchase these types of equipment.
Work travel and seminars are among the areas where a lot of money is spent. There are options that you can adopt to save money from these expenditures such as conducting online seminars and meetings. In a case where you absolutely have to travel, you can choose to stay in a less expensive hotel or with friends and family so that you don’t spend so much on the trip.
4. Cut costs related to your workspace
Within your work environment, there are simple things that you can do to reduce costs in your organization. Things like switching off unnecessary lights, making all your work documentation fully digitized, and switching off electronic devices when not in use. Additionally, to reduce cost on telephone expenses, you can avoid using the company’s phone by using other cheaper options like making calls over the internet. You can use apps such as SKYPE and ZOOM for video calls.
5. How do companies implement cost savings?
The issue of cost savings has been a topic of discussion among business owners since the industrial revolution as they tried to find ways through which they can minimize spending and maximize profit. The primary goal of any business-oriented organization or company is to generate as much money as they can while reducing and saving as much as possible on operation costs.
So, how can companies reduce costs and optimize profit without compromising their service delivery?
6. Online advertisements
Marketing and promotion are central to any business success, and this is evidenced by the amount of money companies allocate for marketing. This, therefore, makes it one of the key areas where cost-saving should be implemented. And one way to achieve this is switching from traditional marketing to online or digital marketing. The digital space is growing, and with it comes various options through which companies can leverage on.
When it comes to digital marketing, the first thing that companies should think about is their target audience and how best to meet their needs. In regards to price, online marketing is ways cheaper as compared to the traditional way of marketing, where you had to print posters and pay newspapers and other print media to carry your advertisements. The best part about online marketing is that you can track and analyze your performance to determine whether you are getting a good return on your investment.
Additionally, online marketing gives you control over your audience and offers targeted marketing. It is truly one of the best ways to reduce costs, in addition to having other benefits.
Another effective way that companies are using to cut costs is by outsourcing some of their activities to a third-party specialist. There are those functions within a company, that though they are important for a company to function properly, they don’t form part of the core mandate of the business. These are the functions that should be outsourced. For example, if your business deals more with issues to do with building and construction, HR activities such as; hiring of staff and payroll management, do not contribute directly to your bottom line. You can, therefore, outsource for an expert on these areas to deal with this kind of issue, while you and your team focus on the task at hand.
Another area that most companies find it a bit challenging to manage is marketing and advertising. This is because, while companies understand that putting time and resources on this activity yields a good return on investment, many can’t find time for advertisement, promotion, and marketing. So, in most companies, this activity is usually outsourced. While it might appear that hiring an outsider would be expensive, the truth is that it is way cheaper, as you don’t have to pay benefits, insurance, and bonuses that come with full-time employment
8. Savings on electricity bills
Electricity bills can be quite expensive especially in companies with high energy consumption rates. However, there are ways in which you can cut costs and save money on these expenses. One way is by replacing all the light bulbs with cost-effective and energy-efficient LED bulbs. Additionally, some companies have installed motion sensors that help to keep light on and off when need. This is usually the case in organizations with big offices and with high numbers of employees.
These motion sensors can also be extended to electronic devices such as printers, photocopiers, computers, fax machines, and the others so that, it automatically switches off when it’s not in use. All these measures contribute massive cost savings and that’s why big companies seem not to be bothered with electricity bills.
9. Improve vendor relationship
Successful companies owe part of their success to the good supplier or vendor relationships. Note that no company can function without supplies, which in turn means, that there is no company that can work without suppliers.
When it comes to budgeting, suppliers come first, as they take the largest percentage off the companies budget allocation. Cutting costs on supplies can have a significant impact on your profit. So if you want to make some noticeable changes in your company in terms of reduction of your overall operational expenditure, while optimizing on production, one way to do that is to renegotiate suppliers’ contracts. You can even opt to have a barter agreement as long as at the end of it all, you save some money.
Such reductions in prices can only be achieved if vendors are flexible and willing to offer the company, bulk, or loyalty discounts, or settle on a mutually beneficial agreement. So, before starting a negotiation with the vendor, first, get bids from other suppliers so that you can have a baseline that can inform your discussion. Plan to do this at least once per year, preferably at the beginning of the year. By doing this, you will be certain of getting value from your suppliers while at the same time creating a good relationship with suppliers.
10. Use of management software
Another effective and efficient way that companies are using for cost-saving, is by taking advantage of management software to run some critical functions of the company. A good example of management software that most companies use is; Enterprise Resource Planning also referred to as ERP.
The best thing about it is that you get all your information centralized. This makes it easy and simple to quickly get information on things like; product pricing and suppliers’ details. Note that, you cannot conduct cost savings without having concrete information regarding your previous engagements with suppliers particularly, in terms of pricing and the quantities of items supplied. Management software will help you do that without so much hustle.
What are the cost reduction techniques?
Cost reduction is defined as the real and permanent reduction of individual unit prices of services offered or goods manufactured without interfering with the suitability or quality of the product or service. For companies to optimize on profit, it has either to reduce the unit price of the product or service offered or increase sale price per unit. Below are some cost reduction techniques that any small business or company can adopt.
11. Target Costing
Target costing or product costing method is a cost reduction technique that entails setting prices of products as agreed by management at an early stage – usually planning and development stage. This approach is aimed at minimizing cost by creating high-quality products that lower costs right from the production stage. It is a structured process of controlling price and profit planning.
12. Activity-based costing
Activity-based costing (ABC), is a costing technique that involves assigning a cost to products or services based on activity centers or cost pools. The products are assigned to the activity centers or cost pools based on the number of transactions, or events involved in the process of offering the service or manufacturing the product. This method of cost reduction is a complicated method and was first initiated in the early 1980s. Additionally, ABC, unlike the traditional approach, that is used to assign prices to products based on machine hours, allocates production overhead costs to items in a rational way.
13. Just in time (JIT)
Just in time or lean production as is sometimes referred to, is an on-demand kind of production whereby products are manufactured based on the actual demands – it’s basically a ‘pull’ system of production. This method enables the company to minimize waste by producing only what is required i.e. right quantity at the right time. Its main objective is to produce items at the right time in the right place (just in time).
14. Enterprise Resource Planning
Enterprise Resource Planning (ERP) is another method of cost reduction that entails a digitized inventory control and production system that was derived from the Material Requirement Planning System (MRP). MRP is a system that arranges the activities and functions of an organization. It helps in accounts, finance, e-commerce, and human resource application by creating graphical user interfaces and databases. It brings together task from institutions like; government agencies, co-operations, powerful institutions, non-profit organizations, businesses, and industries establishments
15. Value engineering (VE)
Value engineering is an organized, step-by-step method that is meant to enhance the value of goods and services. The value here is described as the ratio of function on cost. This, therefore, means that value can be enhanced either by reducing cost or improving the function. The main principle of value engineering is that basic function has to be maintained and never reduced.
The Bottom Line
So, whether you are a junior member of the team or a manager, or even the owner of the company or business, cost-savings, should be one of your priority areas. Every coin that is badly spent will ultimately reflect not only in the company’s performance but also in your performance. Our cost reduction consultants can help you reduce costs today