In a time of slow growth, improving profitability often requires a focus on cost reductions. Whether a cost reduction initiative is driven by “top down” mandate, or the management team recognizes the need for downsizing, these four proven techniques can yield savings in a systematic way.
1. Examine spend analysis by vendor.
This often presents insightful findings at the macro level that may otherwise be concealed in inventory or expense accounts. Determine whether any spending can be consolidated to achieve more competitive prices, or whether a service can be eliminated when it doesn't add much value. Also evaluate whether certain services or products can be put out to bid. But don't only look at price; it's imperative to look at total cost, including payment terms and volume or quick-pay discounts. Also investigate whether suppliers will consider consignment to improve working capital management.
2. Review symbolic expenditures.
Look at items that may not be significant from a dollar perspective but that employees notice, such as company-owned luxury cars, first class travel, and other executive perks. Eliminating or curtailing such expenditures will help gain buy-in from other parts of the organization. Also, don’t forget to review company-paid credit cards and other payments or reimbursements that have no approval process. But, caution: Be mindful of curtailing certain low-cost expenses that employee’s value. For example, charging employees for coffee might save you money but adversely impact morale. That newfound coffee surplus isn’t going to save your business.
But, caution: Be mindful of curtailing certain low-cost expenses that employees value.
3. Evaluate return on investment analysis.
Get in the mindset of asking, “If this were my money, would I spend it on this investment?” While many investments will generate some return, what are the best returns among all choices? Analyzing preventive maintenance for long-term cost efficiency often falls into this category of analysis, for example, maintaining a database of machinery and equipment preventive maintenance measures and reviewing historical data for major repairs and how they can be prevented.
Decision-makers may be confronted with the “we can’t afford not to” argument by entrenched defendants of any given historic investment, so leadership must balance the long-term investment horizon with the short-term liquidity window to meet both objectives.
4. Conduct a benchmarking analysis.
In situations with strong resistance to cost cutting, data from a benchmarking analysis can show, starkly, how an organization compares to peers. Reducing employee benefit spending is a common example, and a benchmarking analysis can help you determine whether your overall costs are high, i.e. in the top quartile, or indeed close to average.
Whatever your company's objectives for cost reductions, using these techniques helps you make hard decisions in an objective, thoughtful, methodical way.