As a business owner, one thing is for certain: costs will reliably rise. And if you're not careful, those costs could overwhelm your profit. Cost reduction strategies aim to reallocate resources in order to decrease operational burden and improve business productivity.
Common cost reduction strategies include investing in profitable areas and tracking spending, optimizing labor and refining processes. Let's dive into these strategies a little bit more, shall we?
Understand Your Business's Winners and Losers
If you haven't yet determined the products and/or services that are offering the highest return and largest profits as well as the greatest value to customers, this can be a good place to start. You may want to invest in these areas while cutting back in those that are not essential to your organization's future.
Sometimes, this may mean retiring a product or service that isn't performing to expectations. This can be a hard call, but putting aside your sentimentality can help you realize if you're spending far more on development, production and marketing than you are receiving in revenue. Taking action on this knowledge can make product or service retirement one of the more effective cost reduction strategies.
Similarly, business owners could employ accounting software to accurately assess where outgoing funds are going. Consider taking a hard look at expenses that could be reduced with a different approach, and then you can adjust your operations accordingly. In particular, businesses with physical locations may find that overhead and paper-based processes are keeping costs unnecessarily high.
Optimize Labor and Reconfigure Processes
Rusty Koss, CEO of shirt manufacturer Koss Creative Brands, has made cost reduction strategies a priority this year. Specifically, his team is mapping value streams to become more efficient.
“Our manufacturing team spent a few weeks timing the changeover and cycles of our work cells," Koss explains. "Incomplete schedules were a sign that we were not working efficiently, and the actual cycle timing showed some deficiencies.
“This led to a setup reduction event and a new standard changeover time of 20 minutes or less," he continues. "We can now also be specific about how many people we need per work cell during normal operations."
As a result of this cost reduction strategy, Koss Creative Brands spent 15-20 percent less to produce a finished shirt. Koss says the company also benefited from a decrease in finished goods inventory of over 10 percent, resulting in a stronger monthly cash flow and profitability.
Refining processes is also another example of effective cost reduction strategies. W. Michael Hsu, CEO of accounting firm DeepSky, has eliminated unnecessary meetings by establishing a solid set of expectations, process and check-in rhythms.
“In order to decrease chaos and prevent the distractions that cost money and keep actual work from getting done, we set everyone up with a clear goal followed by cascading priorities and metrics to avoid confusion," he says.
“This cost reduction strategy decreased meeting time by 80 percent and freed up team member capacity drastically," Hsu continues. "Since personnel expenses make up 50 percent of our revenue, it is impacting our bottom line in a big way."
Automatic Cost Reduction Strategies
In many businesses, automation plays a role too—allowing for greater economies of scale and the ability to produce the same products and services at a lower cost.
Nikhil Choudhary, CEO of Zenith Engineers, has implemented a customer relationship management (CRM) system that tracks everything from lead generation to the complete lifecycle of each project.
“The software significantly reduces our manual coordination, which brings costs down," he says.
Automation can also reduce costs by eliminating human scheduling contingencies, decreasing production errors, and increasing overall efficiency.
The key to effective cost reduction is a solid understanding of what adds value to your business—and what doesn't. Once you have that, executing in the form of process management and automation strategies can be easier.
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