12 critical factors influencing cost reduction

Companies had thought about and implemented cost reduction steps during recession. Very soon those cost reduction actions were out of place and dragged companies behind by hampering the growth severely.

Growth oriented companies review, modify, and implement cost reduction strategies regularly, say twice in a year.

12 critical factors influencing cost reductionThe age-old adage “A rupee saved is a rupee earned” is so true till date. Here are the 12 highly critical factors influencing the cost reduction process.

  1. Management Information System (MIS): Track all financial transactions. Generate reports from different viewpoints in order to understand the costs better. This helps making the right decisions for corrective actions on time.
  2. Production and Inventory: Produce right quantities at right time keeping the optimal inventory of raw materials and finished products. Cost cutting is possible in processes processing raw materials to finished products.
  3. Purchase: Purchase decisions should be based on the consumption of finished products. Regularly ask for better prices from the current vendors. Also keep looking for new vendors with better prices without compromising on the required quality.
  4. Productivity: It’s a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs. Train the manpower regularly with the latest technologies and processes in order to maintain the required productivity levels.
  5. Redundancy: Offer products and services as per the needs of the customers. Regularly review the production processes, identify redundant processes and eliminate those processes. Rework is another form of wastage which needs to be eradicated completely.
  6. Outsourcing: Outsourcing non-core business activities often saves costs. Take decision if any of the activities such as payroll, accounting, training have to be outsourced.
  7. Hiring: Make clear hiring guidelines. Hire people with the required skill-set though it may take some time in finding suitable candidates. Attrition results in increased costs and reduced profit margin.
  8. Employee and Client Feedback: Employees and clients feedback gives great insight into the processes in place. Offering a small incentive to get those feedbacks is not a bad idea.
  9. Product Re-engineering: Analyze if profits increase substantially by making small changes to the current products and services.
  10. Payments: Make payments on time such as loan payments, statutory fees, or any other charges that attract penalty. Setting alerts on mobile phones or computers for making such payments is a good idea.
  11. Miscellaneous Costs: Keep a watch on miscellaneous costs such as printing, stationary, renovation, etc. For example, it is observed that most of the printed papers are shred within 24 hours.
  12. Customer Retention: Many times gaining new customers is more costlier than retaining the existing customers. Take concrete measures to retain customers.

I came up with the above list based on my knowledge and experience. Share the article with your friends and contacts. Good day!

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