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Cost reduction is the process used by companies to reduce their costs and increase their profits. 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]
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.[3]
Cost reduction strategies
- Supplier consolidation: see examples in the aerospace manufacturing industry
- Component consolidation
- Centralisation of procurement activity [4]: 6
- 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]
- 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.[4] 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".[4]
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
- ^ Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021
- ^ a b c National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024
- ^ 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
Further reading
- Barrett R. Crane. "Cycle time & cost reduction in a low volume manufacturing environment". MIT DSpace. hdl:1721.1/11020.
- Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry". MIT DSpace. hdl:1721.1/60836.
- Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools". MIT DSpace. hdl:1721.1/12092.
