Cost Reduction Techniques and methods

Cost Reduction,

Is one of the major factors of a succesful buisness.

With Retailers wanting to increase their profits year on year but still give their customers cheaper products compared to the competition. There is only one place the savings can come from.

In relatively saturated markets, sales increase doesn’t always come the required saving. Hence the need for cost reduction projects.

This is one of my favorite areas in Food Processing industry, as such I will be doing a few posts on techniques and Ideas in the future.

Definition

The dictionary has the definition as “Decision or action that will result in fulfillment of the objectives of a purchase, at a cost lower than the historical cost or the projected cost.”

My definition, is “an action that improves final profitability”

Cost Reduction Techniques.

This falls into the following process

• Identify the Saving
• Make your prediction on saving
• Measure the process prior to adjustment
• Make the cost saving change
• Measure the process after
• Confirm saving has been made and it hasn’t impacted other areas to make a loss.
• If YES move onto next project.
• If NO go back to the beginning and start again.

Break Down of the above process.

Identify the saving.

Go through the financial sheets to identify which products, ingredients, packaging or areas, that you need to target. This is different for each buisness. I will review this in a later article.

Write down your prediction of saving

This is critical document at the very beginning how much reduction you think there will be. I would also put into this the success factor and the time frame. I often use a document like this as the sites cost saving template. It allows you to review previous success’s and prioritise the next work load.

Measure the process prior to adjustment

To really understand if you have made a saving you have to measure the process beforehand to set the baseline. This then allows you to measure your improvements. I also find this stage critical as it allows you to confirm stage one before spending time or money

Make the cost saving change

Simple make the change. Ok so its not that easy but you implement the change that will save you money. You also need to decide how long to keep the change in place. You may test it for 15 mins or 15 months before making a final decision. Length of time of trial is often determined by Risk factor, or size of reward. Yup trade off between risk and reward. There may also be a training or settling in time for the new process.

Measure the process after

Now you make the exact same measure as before and see if there is an improvement. With luck your initial numbers were on the conservative side.

Confirm saving has been made and it hasn’t impacted other areas to make a loss.

Talk to people and review other process’s impacted by your change. This is crucial as your change may have started a chain reaction further down the process. I have seen cost reductions of cents result in dollar losses.  Please take the bigger picture into consideration at this point. Validate you have achieved your cost saving.

If YES move onto next project

Well done, you have made your saving, before moving onto the next stage, write down your saving in your original document. Ensure the saving will continue to be measured, then review the process you took to achieve the cost reduction before moving to the next project.

If NO go back to the beginning and start again.

Ok it didn’t work, unfortunately you will come across this step more than all the others combined. At this point i quote Micheal Jordan “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life and that is why I succeed.”

Review your numbers, review your initial idea and see what went wrong, it might need a minor tweak, it might need adjustment of risk factor. At this point you have hindsight on the cost reduction project, this means your more likely to succeed next time.

Basic Principles of Cost savings

Produce it faster, with less labour, for less weight and with lower costs and you have saved money.

I will post later on how this is achieved.

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