What is Cost Reduction Anyways?

As a Cost Reduction Advisor, I get asked this question a lot.  Most fear that cost reduction is about making drastic cuts, kind of like getting on an extreme diet to lose weight. Who loves that? Personally, I do not. Anything extreme always ends in failure.

Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on the company’s products or services, their strategies can vary.

Why cost reduction strategies fail

The majority of cost reduction strategies are not implemented to their fullest extent and are not enforced companywide. This means the end user is not being informed and educated on the ways the new strategy to reduce costs is benefiting them. Therefore, the process becomes especially difficult when internal departments and stakeholders fight the change and do not cooperate with the newly implemented process.

For example: A business negotiated a deal for their business travels that would save them on hotel and rental car bookings with additional services included for free. But if these procedures are not being utilized by every employee, every time, then these negotiated programs will fail. Because of this, end-user education is a very important component in successfully implementing new cost reduction strategies.

Big vs. Small Organization

Big businesses handle cost reduction through their Supply Chain Management department. These larger companies can often afford to hire the most experienced professionals and consultants to help them implement and control major cost reduction projects. But the downside of a large organization is that they can overlook some of the money leakage because their procurement team only stays on top of identified, key products and services.

Small businesses, on the other hand, are often unable to afford this luxury. A small businesses’ challenge is usually hiring a candidate that is capable of covering many business responsibilities, i.e. Office Manager functions as Admin, Marketing, Procurement, etc. Not only is it difficult to find qualified candidates that can cover many positions, but once in the role these types of candidates are often spread too thin. They are often not experts in all of the areas needed to bring immediate improvements to the bottom line.

Common cost reduction strategies

In general, almost every other business applies common strategies to improve the bottom line by reducing business expenses such as:

  • Cutting travel expenses
  • Laying off employees
  • Hiring Freeze
  • Canceling holiday parties and events
  • Reducing employee hours
  • Reducing and/or eliminating year-end bonuses

It comes down to doing more with less or taking something away from someone. Either way, a great deal of pain is involved.

Unfortunately, most often areas that can bring savings without extreme and painful strategies are overlooked.  I often hear business owners or executives say: “We are laying off people to reduce our costs”.  I personally had experienced this stressful, lay-off process in the past and I can tell you first hand, it is not a fun experience and often not even a productive one, long term.

Layoffs are not viable cost reduction strategies

Laying off or reducing employee’s hours might seem like the easiest thing to do because it is a common cost reduction strategy. But this only benefits businesses in the short term.

In the long run, layoffs are not good for employee morale or the company’s future growth. Turnover dollar cost is high, and is often not analyzed or reported as a bottom line hit in most organizations.

Businesses have to consider the cost factors of:

  • Not only recruiting and hiring someone new, but also training them for the position.
  • Temporarily filling the now-vacant position until a new, official employee is hired.
  • Any severance pay for the laid-off employee.
  • Processing termination paperwork.

And these also do not account for the cost incurred by the employer where an employee takes their valuable, hard-earned knowledge with them to a competitor.

Factor these elements in, and the cost of that layoff will be significantly higher.

The true cost of turnover varies and must be tracked within the organization to see the actual dollar value and the effect on your company’s bottom line.  Keeping employees happy and engaged is often a much easier and beneficial solution in the long term, as happy employees help businesses grow and thrive.

In addition to some of the above-mentioned strategies, a vast majority of organizations are not taking advantage of Specialized Tax Savings such as Hiring Tax Incentives, which can optimize the hiring process and add to the bottom line while growing the business.  Such hidden costs are due to ignorance and lack of expertise and are often a death sentence to a business in our highly competitive economy.

Successful Approach to Cost Reduction Strategies

Cost Reduction Strategies implemented from the top down are the best, as executive support drives the implementation down through the ranks to ensure compliance, which we already know is vital for long term success.  Owners and Executives must empower their employees by providing some level of decision making power, even simple guided choices designed to allow the sense of ownership and loyalty that many do not have.

This is especially vital if savings dollar values are not enough at vast levels but are “penny in the bucket” savings that, added over time, can cover that employees’ salary and provide soft savings and even job security for those employees. What better reason for them to comply with saving for the bottom line. It is all too common for stakeholders to avoid cooperation with procurement departments who are working to reduce costs, because they see them as threats rather than the solution to their problems.

I am not a business owner nor executive

From the individual employee standpoint, cost reduction strategies are often nonexistent.  We commonly lack financial literacy, with money management not taught in schools and most people living paycheck to paycheck.  It is not about how much we earn, it is how we spend.  We all must be in control of our financial situation as living in chronic financial stress is not fun to say the least.  Many continue to seek high paying jobs and carrying their financial stress from one position to another, rather than learning to use Cost Reduction Strategies to attain financial freedom in their own lives.

Conclusion

When it comes to Cost Reduction Strategies “think outside the box.” Rather than sticking to the same old avenues which have not worked before, be innovative.  Keep in mind what works for one company may not work for another, goals and spending habits vary from person to person, business to business, and from industry to industry.

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