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Cost reduction
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<h2 id="importance">Importance</h2> <p>Companies typically launch a new product without focusing too much on cost. Cost becomes more important when <a href="/facts/Competition_(economics)/zscsQx5l">competition</a> increases and <a href="/facts/Price/yWQ8edfN">PRICE</a> becomes a differentiator in the market. The importance of cost reduction in relation to other strategic <a href="/facts/Business_goal/PmJfIjr3">business goals</a> is often debated.<a class="footnote-ref" id="fnref:4" href="#fn:4"><sup>4</sup></a> </p> <h2 id="examples-of-cost-reduction-strategies-and-programmes">Examples of cost reduction strategies and programmes</h2> <h3>Commercial businesses</h3> <p>Consultants <a href="/facts/Deloitte/PrG29xtM">Deloitte</a> reported in 2006 that over three-quarters of the <a href="/facts/FTSE_100_Index/spHl9KWk">FTSE 100</a> listed companies had commenced a cost reduction programme during the preceding 12 months. Cost reduction is most frequently stimulated by recognition that profits and <a href="/facts/Profitability/kfPA9rfB">profitability</a> are below expected levels.<a class="footnote-ref" id="fnref:5" href="#fn:5"><sup>5</sup></a>: 1 Some examples of programmes include: </p> <ul><li>Reductions in <a href="/facts/Employee/pqEUAhNv">staff</a> numbers (head count). Doherty refers to staff reduction exercises as "a quick and easy method" whose use often means that companies lack the resources they need when business activities recover.<a class="footnote-ref" id="fnref:6" href="#fn:6"><sup>6</sup></a>: 1 </li> <li>Component consolidation</li> <li><a href="/facts/Function_cost_analysis/xPBF2xcw">Function cost analysis</a> / <a href="/facts/Value_analysis/sd7jPdCt">Value analysis</a> / <a href="/facts/Value_engineering/sd7jPdCt">Value engineering</a></li> <li><a href="/facts/Design_for_manufacture/mujLQqYz">Design for manufacture</a> / <a href="/facts/Design_for_assembly/RkbonJJ8">Design for assembly</a></li> <li><a href="/facts/Reverse_costing/dRk4CVwx">Reverse costing</a></li> <li><a href="/facts/Cost_driver/SLQgJMWk">Cost driver</a> analysis</li> <li><a href="/facts/Activity-based_costing/jVh1wQIa">Activity-based costing</a> (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 <a href="/facts/Overheads/KodqdRBp">overheads</a>. Peter Turney, in a 1989 article, examines the role of ABC in the achievement of <a href="/facts/Manufacturing/3qW7bcdy">manufacturing</a> excellence and the product cost information needed by managers working towards this goal.<a class="footnote-ref" id="fnref:7" href="#fn:7"><sup>7</sup></a></li> <li>Product <a href="/facts/Benchmarking/7HKqj6aL">benchmarking</a></li> <li>Competitor benchmarking</li> <li><a href="/facts/Design_to_cost/rVvxt4pF">Design to cost</a></li> <li>Property portfolio reviews addressing whether the <a href="/facts/Real_estate/fngFAqrR">estate</a> occupied by a business continues to meet its needs, and also reviewing the <a href="/facts/Land_tenure/zf9fEcFx">tenure</a> which it holds on the estate: Deloitte's survey of British companies noted that "smaller firms in particular" rarely take advantage of the cost reductions they can secure through <a href="/facts/Sale-and-leaseback/14cU9zR2">sale-and-leaseback</a> and similar deals.<a class="footnote-ref" id="fnref:8" href="#fn:8"><sup>8</sup></a>: 3 </li> <li>Incorporation of "low-cost thinking" into an organisation's <a href="/facts/Organizational_culture/FdAzHDyV">culture</a><a class="footnote-ref" id="fnref:9" href="#fn:9"><sup>9</sup></a>: 8 </li> <li>Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes or <a href="/facts/Value_added/TCDUk1bH">value adding</a> stages to 1/N of the previous cost.<a class="footnote-ref" id="fnref:10" href="#fn:10"><sup>10</sup></a></li></ul> <p>Examples specifically focussed on the use of suppliers and the costs of goods and services supplied include: </p> <ul><li>Supplier <a href="/facts/Consolidation_(business)/neJVyvfq">consolidation</a>: see examples in the <a href="/facts/Aerospace_manufacturer/fdGwdY85">aerospace manufacturing industry</a></li> <li><a href="/facts/Low-cost_country_sourcing/NrgKa2Dc">Low-cost country sourcing</a></li> <li><a href="/facts/Outsourcing/qa3WgJ7u">Outsourcing</a>: experience in the United States suggests that businesses primarily outsource to reduce peripheral and "non-core" business expenses.<a class="footnote-ref" id="fnref:11" href="#fn:11"><sup>11</sup></a></li> <li><a href="/facts/Request_for_quotation/k5w1tUmH">Request for quotations</a> (RFQ)</li> <li>Supplier <a href="/facts/Cost_breakdown_analysis/Uwmr00k6">cost breakdown analysis</a></li> <li>Design workshops with suppliers</li></ul> <h3>Public sector</h3> <p>In a public sector <a href="/facts/Spending_Review/3U6UjYxm">spending review</a>, 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 <a href="/facts/Public_expenditure/3x42TKTD">public expenditure</a> over the four year budget planning period.<a class="footnote-ref" id="fnref:12" href="#fn:12"><sup>12</sup></a> 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.<a class="footnote-ref" id="fnref:13" href="#fn:13"><sup>13</sup></a> 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".<a class="footnote-ref" id="fnref:14" href="#fn:14"><sup>14</sup></a> </p><p>Centralisation of <a href="/facts/Procurement/y35C00fn">procurement</a> activity has been highlighted as a beneficial public sector cost reduction strategy.<a class="footnote-ref" id="fnref:15" href="#fn:15"><sup>15</sup></a>: 6 </p><p>Scott Brown <i>et al</i>, of "Excellence in Business", note that in most cases, a successful approach to cost reduction which aims to maintain service quality "has at its heart an approach based on the principles of <a href="/facts/Systems_thinking/C56Ck7DQ">Systems Thinking</a>": a fundamental review of the whole service, its purpose and objectives.<a class="footnote-ref" id="fnref:16" href="#fn:16"><sup>16</sup></a> The "Route Map for Change" which they advocate has been used effectively by <a href="/facts/Kent_County_Council/B6tDNzKh">Kent County Council</a> for their <a href="/facts/Highway_maintenance/3aadH4s3">highway maintenance</a> contract, while the decommissioning of various warships and aircraft squadrons following the UK's <a href="/facts/Strategic_Defence_and_Security_Review_2010/twuXBcK3">Strategic Defence Review</a> in 2010 is seen as a good example of a strategic option appraisal.<a class="footnote-ref" id="fnref:17" href="#fn:17"><sup>17</sup></a> </p> <h2 id="further-reading">Further reading</h2> <ul><li>Barrett R. Crane. "Cycle time & cost reduction in a low volume manufacturing environment". <i>MIT DSpace</i>. <a href="/facts/Hdl_(identifier)/rdebSxmC">hdl</a>:<a href="https://hdl.handle.net/1721.1%2F11020">1721.1/11020</a>.</li> <li>Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry". <i>MIT DSpace</i>. <a href="/facts/Hdl_(identifier)/rdebSxmC">hdl</a>:<a href="https://hdl.handle.net/1721.1%2F60836">1721.1/60836</a>.</li> <li>Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools". <i>MIT DSpace</i>. <a href="/facts/Hdl_(identifier)/rdebSxmC">hdl</a>:<a href="https://hdl.handle.net/1721.1%2F12092">1721.1/12092</a>.</li></ul> <h2 id="see-also">See also</h2> <ul><li><a href="/facts/Potential_analysis/lQ12tEvC">Potential analysis</a></li> <li><a href="/facts/Productivity/yXlzAjC2">Productivity</a></li> <li><a href="/facts/Efficiency/azCNkIzY">Efficiency</a></li></ul> <h2 id="references">References</h2> <ol> <li id="fn:1"><p>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 <a href="https://research.aston.ac.uk/en/publications/design-determines-70-of-cost-a-review-of-implications-for-design-" target="_blank">https://research.aston.ac.uk/en/publications/design-determines-70-of-cost-a-review-of-implications-for-design-</a> <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li> <li id="fn:2"><p>Designing Buildings Wiki, Cost control in building design and construction, last updated 15 August 2021, accessed 11 September 2021 <a href="https://www.designingbuildings.co.uk/wiki/Cost_control_in_building_design_and_construction" target="_blank">https://www.designingbuildings.co.uk/wiki/Cost_control_in_building_design_and_construction</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li> <li id="fn:3"><p>McKinsey & Company, A smarter approach to cost reduction in the public sector, published 8 June 2018, accessed 19 April 2024 <a href="/wiki/McKinsey_%26_Company" target="_blank">/wiki/McKinsey_%26_Company</a> <a href="#fnref:3" class="footnote-back-ref">↩</a></p></li> <li id="fn:4"><p>Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021 <a href="https://www.cips.org/supply-management/news/2018/january/growth-trumps-cost-cutting-says-survey/" target="_blank">https://www.cips.org/supply-management/news/2018/january/growth-trumps-cost-cutting-says-survey/</a> <a href="#fnref:4" class="footnote-back-ref">↩</a></p></li> <li id="fn:5"><p>Doherty, P. et al. (2006), The cutting edge: Sound advice for a sustainable approach to reducing costs, Deloitte <a href="#fnref:5" class="footnote-back-ref">↩</a></p></li> <li id="fn:6"><p>Doherty, P. et al. (2006), The cutting edge: Sound advice for a sustainable approach to reducing costs, Deloitte <a href="#fnref:6" class="footnote-back-ref">↩</a></p></li> <li id="fn:7"><p>Turney, P., Activity-Based Costing: A Tool for Manufacturing Excellence, Association for Manufacturing Excellence, published summer 1989, accessed 13 September 2021 <a href="https://www.ame.org/sites/default/files/target_articles/89Q2A4.pdf" target="_blank">https://www.ame.org/sites/default/files/target_articles/89Q2A4.pdf</a> <a href="#fnref:7" class="footnote-back-ref">↩</a></p></li> <li id="fn:8"><p>Doherty, P. et al. (2006), The cutting edge: Sound advice for a sustainable approach to reducing costs, Deloitte <a href="#fnref:8" class="footnote-back-ref">↩</a></p></li> <li id="fn:9"><p>Doherty, P. et al. (2006), The cutting edge: Sound advice for a sustainable approach to reducing costs, Deloitte <a href="#fnref:9" class="footnote-back-ref">↩</a></p></li> <li id="fn:10"><p>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 <a href="https://www.forbes.com/sites/peterhigh/2017/01/03/astrazeneca-cio-makes-it-twice-as-good-at-half-the-cost-here-is-how/" target="_blank">https://www.forbes.com/sites/peterhigh/2017/01/03/astrazeneca-cio-makes-it-twice-as-good-at-half-the-cost-here-is-how/</a> <a href="#fnref:10" class="footnote-back-ref">↩</a></p></li> <li id="fn:11"><p>Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26. <a href="#fnref:11" class="footnote-back-ref">↩</a></p></li> <li id="fn:12"><p>BBC News, Spending Review 2010: George Osborne wields the axe, published 20 October 2010, accessed 13 February 2024 <a href="https://www.bbc.co.uk/news/uk-politics-11579979" target="_blank">https://www.bbc.co.uk/news/uk-politics-11579979</a> <a href="#fnref:12" class="footnote-back-ref">↩</a></p></li> <li id="fn:13"><p>National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024 <a href="/wiki/National_Audit_Office_(United_Kingdom)" target="_blank">/wiki/National_Audit_Office_(United_Kingdom)</a> <a href="#fnref:13" class="footnote-back-ref">↩</a></p></li> <li id="fn:14"><p>National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024 <a href="/wiki/National_Audit_Office_(United_Kingdom)" target="_blank">/wiki/National_Audit_Office_(United_Kingdom)</a> <a href="#fnref:14" class="footnote-back-ref">↩</a></p></li> <li id="fn:15"><p>National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024 <a href="/wiki/National_Audit_Office_(United_Kingdom)" target="_blank">/wiki/National_Audit_Office_(United_Kingdom)</a> <a href="#fnref:15" class="footnote-back-ref">↩</a></p></li> <li id="fn:16"><p>Brown, S., Hadden, C., Jones, K. and Roddie, R. (2010), Radical Cost Reduction in Public Services, published by Excellence in Business, p. 5 <a href="#fnref:16" class="footnote-back-ref">↩</a></p></li> <li id="fn:17"><p>Brown, S., Hadden, C., Jones, K. and Roddie, R. (2010), Radical Cost Reduction in Public Services, published by Excellence in Business, p. 5 <a href="#fnref:17" class="footnote-back-ref">↩</a></p></li> </ol>