Cost reduction does not means Laying off employees, cutting cost through less power consumption etc. It is completely different aspect which the organization or the management needs to understand and focus on. 1 out of 10 organizations does this and enables its processes to cut down the cost, it is not easy as it is looking it needs complete professional assistance and time to streamline the things in a proper way. The best way to get the same done is through making SOP and Cost Audits from the Professionals.
It is complete methodology of Cost reduction, which is required to be implemented by the company in long term to achieve this, while there are short term cost reduction methods which only last for very short period and is very difficult to implement it successfully. A permanent solution to cost reduction is the process streamline, Standard Operating Procedure and these are different to each organization depending on their structure and working environment.
Following is the methodology which is given by the Deloite Analysis team:-
Step No. 1:- Assessment of Cost Reduction potential
In this Preliminery step the organization is required to Assess the current cost of the organization and required to bifurcate these cost into different categories and then need to assess whether these could be reduced through process improvement, outsource or by any other thing. It gives the initial idea that how much potential organization have to reduce its cost, under this the manpower required to do task of the company is also assessed but this is not only thing which could reduce the cost of the organization.
This step contains 3 sub points which includes:-
- Analysis of Cost structure
- Benchmarking and Analysis of best practices
- Assessment of Cost reduction opportunities.
Step No. 2:- Development of Cost reduction Plan
While developing the cost reduction plan it is required to analyze the problem area, comparing the things with best practices in the market and Benchmark processes, detailed area analysis through questionnaire and survey is required to be done afterwards detailed calculation of the implementation is required to be made and assessment of required investment is required to be assessed, so with prioritization of the areas the organization needs to Test the pilot projects and coordinate with various departments to run this for small period of 1 month only, so this process results into 4 sub points:-
- Development of Initiatives
- Calculation of Business cases and estimation of effects.
- Testing and Coordination
- Prioritization
Step No. 3:- Preparation for implementation of Cost Reduction program
Now the company needs to develop detail plan of events which are identified in the previous step, for this the organization needs to identify the person who will be responsible for this and to whom this process is required to give, also key risk are needs to be identified then each event is required to be scheduled and activity pertaining to each event is required to be monitored on frequent basis so under this step there are two points which are as under:-
- Development of an implementation plan for each initiative.
- Development of an integral plan for implementing the cost reduction program.
Step No. 4:- Program Implementation
This is final and utmost important step under which the organization is required to develop and implement the plan which includes office structure and approach to the implementation of the program along with this a communication plan needs to be developed to control the deadlines and launching the program implementation. Further for each activity a control objective is required to be set and are required to be review on timely basis. Finally the organization needs to assess the efficiency of the plans that are implemented and evaluate the economic impact from cost reduction point of view afterwards transit to the system of continuous improvement. Under this step subpoints are as under:-
- Organisation of program management project office.
- Implementation of the cost reduction program.
- Assessment of efficiency
- Transition to the system of continuous improvements.
Cost Drivers for Cost Reduction Process
There are various fields and cost drivers through which the organization can reduce cost by improving or streamline of these areas some of the general areas are as under:-
| Product and Service Innovation |
| Retain and Grow current customers |
| Cash/Asset Management |
| Price Optimization |
| Improve customer interaction efficiency |
| Order fulfillment & Billing |
| Improve corporate/shared service efficiency |
| Business Management |
| Financial Management |
| Improve Logistics & Service Provision Efficiency |
| Improve Income Tax Efficiency |
| Improve PPE Efficiency |
| Improve Inventory Efficiency |
| Receivable and Payable Managemen |
| Improve Managerial & Governance effectiveness |
| Improve execution capabilities. |
Purpose of Cost Reduction
- Improve financial results including cash flows and profits.
- Respond to negative macro-economic and market changes, reduce business marginality.
- Implement cost leadership strategy.
- Prepare the company for significant changes.
- Prepare and launch a system for continuous improvement.
Approaches to Cost Reduction
- Quick Wins
- Short Tem Initiatives, quick results
- Imcrease in working capital is the main objective
- Difficult and completed within 90 Days.
- Balanced Approach
- Balance of Short Term and long term initiative improvement programs for basic.
- Stable and completed within 6-12 Months.
- Transformation Approach
- Long Term initiatives, absence of quick results
- Necessity of considered investments.
- Healthy and completion process takes more than 12 Months.
Linkedin Link:-
Stay Safe Stay Healthy!!
Disclaimer: – The information compiled are my personal observation and Experience. The Author and publisher disclaim any liability in connection with use of this information.Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided. Neither Author nor Yes GST (collectively referred as we) assume no responsibility thereof. The user of the information agrees that the information is not a professional advice and is subject to change without notice. We shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information in any circumstances.
