What is a Cost Reduction Program?
A cost reduction program is a strategy to reduce expenses in order to increase profits or cash flows. Cost reduction program is intended to counteract both the short-term and long-term impacts of costs that decline its operating results. When a cost reduction program is intended to counteract a short-term effect on company operating results, it will likely target discretionary costs, which do not affect the company performance, like maintenance and employee training. While when cost reduction is designed to counteract a longer-term decline in business operation results, it is likely to focus on paring away products and programs that tend to create profits or cash flows over the long period. A cost reduction program and a strategic shift are pared back to provide funds for the business’s new path.
Cost Reduction Strategies
Cost reduction strategies are effective measures to increase the efficiency of business operations. Cost reductions can increase productivity while reducing operations costs allow strategic reallocation of resources. These cost reduction programs offer additional benefits that affect the organization by eliminating waste, speeding up processes, and utilizing resources effectively.
Business Process Improvement
Business process improvement includes the company practice of determining, analyzing, and increasing current business processes’ effectiveness to optimize performance, attain best practice standards, and improve quality and user experience for customers and clients.
Shutdowns, Turnarounds, and Outages (STO)
These events of shutdowns, turnarounds, and outages (STOs) require exceptional planning and execution, no matter how small or large an organization. Optimization of shutdown performance demands a rigorous method. With a comprehensive technique and hands-on application, Shutdowns, Turnarounds, and Outages workshop will ensure an advantage at all degrees of team expertise. Considering all potential effects, well-executed STOs can offer a competitive advantage for a business. They can propel commercial performance, improve morale, drive recognition to high-performing teams, and increase individual careers.
Supply Chain Management
Checking on client demand patterns can help an organization reduce supply chain costs so that they will have an idea if something needs to be changed. Customer demand patterns may change from month to month or in seasons, so you may use this information to work on a more accurate ordering decision.
Employees do not have control over their workplace safety because a safe working environment does not only consist of employee involvement. It also involves investing in better and efficient safety pre-planning without incurring higher costs. Some factors you may consider altering are the use of funds to ensure physical conditions safer and, at the same time, to improve coordination of work activities. While organizations should plan to have no or lower injuries, they need a well-thought-out safety plan in case of a work-related injury.
Corrective & Preventive Action Management (CAPA)
A corrective action plan is a method of correcting or eliminating problems that have occurred or have already been identified. A preventive action plan is defined as steps to eliminate the root cause of the problem to prevent it from recurring. Establishing a corrective and preventive action plan in your company is vital to correct and to avoid SOP problems early as it will cost less than fixing the problems later.
Make it an aim to improve quality and process, eliminate waste, reduce lead time, and minimize the manufacturing system’s total process cost.
Tough times in business happen and mostly result in implementing cost-cutting activities. But profitable businesses also benefit from cost reductions that would create a higher profit margin on their products or services. Companies have several options to reduce their costs without sacrificing the quality of their product or service.
Focus on Profitable Products
The first place to start cost reduction program is by analyzing the profit boundary on the products or services you provide. Determine and direct your efforts on profitable products or services, and cut out those with a low profit or no yield.
If you know where your business’s money is going, you should know the operations to cut back or stop spending on a particular cost. Remember to keep track of all your company expenses. If you are writing down all of your outgoing money, be it in a notebook or a spreadsheet, use a more sophisticated process, such as accounting software, make sure to review each of your spending to see where you can implement cost cutting.
One way to cut back business cost is by allowing your employees to telecommute instead of working in the office or on-premises. Telecommuting allows you to cut the lease or rent payment you pay each month because you require a smaller space to run your firm if some or most of your employees work from home. With fewer employees coming to the office, you can also cut back cost on utilities, such as water and electricity.
Switching full-time workers to part-time is one way to reduce costs, but cost cutting on payroll expenses. By doing this, you can close the office one or two additional days every week, which can cut costs not only on the employees’ wages but also in operational costs or utilities like electric and water. In 2007, after the downturn in the economy, many U.S companies settled to a four-day workweek as their cost reduction program without having to lay off their employees or close the company for good.
If you are a business owner or one of the owners, you and your partner may consider getting a reduced pay as a cost cutting strategy. Reducing your salary will allow you to cut back on your company expenses. This way, the money that went to paying your wage can cover other costs or go into a savings account to cover future costs.
How Do You Create a Cost Reduction Plan?
Today, every industry faces a perfect storm of soft rates, low investment opportunities, and new regulations. This has impacted and shifted the customer expectations, prevailing business models, and market competition will be very different. Due to this, companies have to make up with a survey plan to implement a cost reduction program initiative over the coming year.
Squeezing a little percentage point savings from slow, stretched, unfocused operations will not be enough to sustain a competitive approach in this disrupted marketplace. The crucial priority is not focused on cutting costs. Instead, focusing on your resources to improve growth and differentiation, in short, a strategic cost reduction program. This involves digital transformation, which can sharpen the precision frisk selection and pricing, at the same time, to deliver more tailored and targeted customer solutions at a particular cost. An organization can refocus its resources away from low business returns into higher value and return opportunities in a fast-growing geographical market and underinsured risk such as cyber and environmental exposures. Hence, the key differentiator within an effective cost reduction program is not technology; instead, the strategic ambition and innovation culture allow the customer to focus within the organization.
However, a lot of cost optimization programs fail to succeed. As much as you cut costs, some product returns won’t be viable because either customers don’t value them or there is another cheaper option. The main focus is the potential value instead of volume or cost. When a company is at the point where quick cost wins have been accomplished, it is left with more rigid and more strategic far-reaching choices ahead. Such victories are likely to involve withdrawal from unviable businesses, important shifts in the business model, and comprehensive industrialization or elimination of particular methods. Making the right choices and bringing the organization forward demands thorough thinking of strategy, costs, and above all, how to align them. Here are five steps that focus on optimizing rather than just slashing costs to guarantee your company could support competitive significance and maximize its potential.
1. Start with strategy. Have a clear view of it and make sure it is consistently comprehended across the whole organization.
2. Align costs to strategy. Examine your firm operations and try to see the difference between strategically-critical “good costs” and the non-essential “bad costs.”
3. Aim high. Be brave, bold, and creative. Use technology innovation and new processes of working to improve and optimize the cost base.
4. Set direction and show leadership. Build cost optimization as a strategic business transformation program.
5. Build a culture of cost optimization. Make sure you embed a culture of ownership and offer incentives for continuous improvement. Getting this right could provide top and bottom-line rewards, and your company will be more differentiated and equipped to deliver its goals. It will be less reliant on pricing and will be able to compete in the market while targeting high earning growth.
What are the 6 Types of Cost Savings?
Cost-saving is typically the money saved from shifting plans or policies that minimize the cost of the preparation. It is the changes in the business process that produce profits. As cost-saving is concerned, both the employer and employees play an essential role. It is the employer’s responsibility to make sure that the policies are in place to ensure the implementation of the cost reduction program measures. At the same time, the employees are responsible for ensuring that they adhere to the stipulated measures. The following are six types of cost savings.
1. Historic saving. These are the changes in unit prices as compared to the previous time. It is computed based on a baseline of the prior year.
2. Budget savings. They are based on the difference between the real price and the planned budget.
3. Technical savings. These are derived from the result of changes in the technical specification of a product.
4. RFP savings. RFP means Request for Proposal, and it is a kind of avoidance saving, wherein an organization may request proposals from several suppliers. The party that requests a proposal has the liberty to choose a supplier, and often the one that bids lowest is chosen.
Index savings – are saving derived from the external market developments that have affected raw materials and services’ prices.
Ratio savings – are a combination of savings, such as technical and budget.
The Bottom Line
With cost reduction program, a company will be able to focus on the proper allocation of resources through expanding operations or new market expansion. It also supports the strategic alignment of goals, innovation, and increases market share.
Business success depends on operational success and how an organization takes into action or plans the best strategic approach on cost reductions.