Cost reduction

Cost reduction is the process used by organisations aiming to reduce their costs and increase their profits, or to accommodate reduced income. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project^[1] or the construction of a building.^[2] In the public sector, cost reduction programs can be used where income is reduced or to reduce debt levels.^[3]

Importance

Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market. The importance of cost reduction in relation to other strategic business goals is often debated.^[4]

Examples of cost reduction strategies and programmes

Commercial businesses

Supplier consolidation: see examples in the aerospace manufacturing industry
Component consolidation
Low-cost country sourcing
Request for quotations (RFQ)
Supplier cost breakdown analysis
Function cost analysis / Value analysis / Value engineering
Design for manufacture / Design for assembly
Reverse costing
Cost driver analysis
Activity-based costing (ABC), which assigns a cost of each activity undertaken in the production and delivery of each product and service according to the actual consumption by each activity including a share of overheads. Peter Turney in a 1989 article examines the role of ABC in the achievement of manufacturing excellence and the product cost information needed by managers working towards this goal.^[5]
Product benchmarking
Competitor benchmarking
Design to cost
Design workshops with suppliers
Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes or value adding stages to 1/N of the previous cost.^[6]

Public sector

In a public sector spending review, an overall target for reduction in expenditure may be identified: for example, in the United Kingdom, the 2010 spending review anticipated a reduction of £81bn in public expenditure over the four year budget planning period.^[7] In order to meet the challenges of a significant reduction in expenditure, government departments are expected to look at how they can "take cost out of the business" rather than simply cut services.^[8] One of the main principles expected of government departments in order to reduce costs is a "data-driven approach", i.e. ensuring that staff within the department have "a good understanding of the distribution and profile of costs in their business".^[8]

Centralisation of procurement activity has been hightlighted as a beneficial public sector strategy.^[8]^: 6

References

^ Barton, J. A. et al., Design determines 70% of cost? A review of implications for design evaluation, Journal of Engineering Design, Volume 12, published 1 March 2001
^ Designing Buildings Wiki, Cost control in building design and construction, last updated 15 August 2021, accessed 11 September 2021
^ McKinsey & Company, A smarter approach to cost reduction in the public sector, published 8 June 2018, accessed 19 April 2024
^ Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021
^ Turney, P., Activity-Based Costing: A Tool for Manufacturing Excellence, Association for Manufacturing Excellence, published summer 1989, accessed 13 September 2021
^ High, P., AstraZeneca CIO Makes IT Twice As Good At Half The Cost - Here Is How, Forbes.com, published 3 January 2017, accessed 10 January 2021
^ BBC News, Spending Review 2010: George Osborne wields the axe, published 20 October 2010, accessed 13 February 2024
^ a b c National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024