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Ten Cost Reduction Techniques

Updated on August 9, 2010

Ten Cost Reduction Techniques That Increase Productivity by Lowering Supply Costs

Reducing operating expenses and supply costs are essential elements of successful cost reduction plans. The amount of money the business spends on raw production materials directly affects their profit margin. It is cost efficient to develop a competitive cost reduction strategy rather than increase profits through front-end sales. Reducing supply costs requires common sense and a bargain hunter's ambition, and the process is relatively straightforward.

Click Here for Free Cost Reduction Report
Click Here for Free Cost Reduction Report

What is Cost Reduction?

Cost reduction strategies are geared towards generating substantial revenue from preexisting elements without making additional sales. The process identifies profitable procedures already in place and optimizes procedures to maximize profitability. Cost reduction enables businesses to identify their current needs, forecast future sales, and understand the factors that help or prevent their products from selling. A successful cost reduction strategy includes the entire organization and all levels of management.

#10 Cost Reduction Technique

Analyze Supply and Demand

You need to analyze supply and demand in order to effectively lower supply costs and increase productivity in your organization. Work with the sales team reviewing sales figures from the past several years, forecasting sales for the next three months based on consumer confidence, past sales, acquisitions, and merges. Keep in mind external variables such as weather, the economy, holidays, and national events. Repeat the process each quarter, refining forecasts as necessary. A good cost reduction strategy requires businesses to stay one step ahead of the consumer.

#9 Cost Reduction Technique

Learn and Shop Smart

Supply costs vary depending on the time of year, market demand, manufacturer supply, and industry variables. Reduce supply costs by shopping around to find the best deal on office supplies, production equipment, and raw materials. Utilize bargain hunter services to find the best prices on electronics and every day equipment. Consider hiring a procurement officer to monitor and maintain supply levels, as their training and knowledge are invaluable assets to your organization. Ensure that the decision makers within the company know how to find the best prices by using a variety of tools and resources. Monitor changes in pricing, purchasing the products when the price is historically low.

#8 Cost Reduction Technique

Minimize Transactional Costs

A great deal of business revenue is depleted by payment processing companies, such as PayPal and credit card companies. Encourage cash-based transactions such as check, money order, and cash. Form partnerships with processing authorities and choose a plan that is cost effective for your organization. Streamline the purchasing process by using auto-generated purchase orders and advanced notification systems. Additionally, you can automate the shipping and receiving procedure by using electronic metered postage and bulk discounts when applicable. Review your PO history as part of your cost reduction strategy at the end of the year, creating notifications for the New Year regarding commonly ordered products. An example would be the acquisition of raw materials for a seasonal product.

Effectively Managing Inventory is a Great Way to Reduce Costs
Effectively Managing Inventory is a Great Way to Reduce Costs

#7 Cost Reduction Technique

Manage and Optimize Your Inventory

Enhance your cost reduction efforts by monitoring your inventory on a weekly basis, noting the exact supply levels of each item in the warehouse. Internal inventory management is cost efficient, however; larger companies may find external inventory management a viable option. Create an automated system to automatically order new supplies, which reduces back office labor expenses. Improve efficiency and maximize space by organizing inventory supplies and modifying the layout of the room or warehouse. Keep the aisles free of debris and narrow, with enough room for handcarts, forklifts, or other equipment. Consider liquidating products that are expiring soon or have a history of poor sales.

#6 Cost Reduction Technique

Reduce Lead Times

When a product arrives at the warehouse it inevitably takes several days for it to reach the customer. Review and refine your receiving protocols to ensure products hit the shelves with minimal delay by maintaining adequate order supply rates and throughput levels. Consider rationalizing SKUs by removing inappropriate products from the shelves. Maintain optimal levels by reducing safety stock inventory and increasing order fill rates.

#5 Cost Reduction Technique

Utilize Bulk Discounts

Contrary to some business sustainability policies, buying select materials in bulk reduces supply costs and increases productivity by lowering human interaction. Every company orders certain supplies more than other products. Consider purchasing non-perishable items with long shelf lives in bulk to reduce supply and labor costs. Ordering items less frequently reduces the costs associated with placing orders and saves money by lowering the cost per unit. Before placing the order, ensure the savings per unit are worth the risk, given current market demands. Never purchase more than one year's worth of inventory at one time, ensuring the warehouse has the ability to hold the products without finesse.

#4 Cost Reduction Technique

Reduce Shipping Charges

Cost reduction strategies require advanced planning and efficient spending; thus it is essential to order supplies well in advance to reduce shipping costs. Attempt to purchase items in large groups based on the manufacturer or vendor to save on freight charges, utilizing merge-in-transit techniques to reduce transit times. When shipping to consumers, utilize bulk discounts by shipping multiple quantities of the same item. Choose carriers and form partnerships with them to reduce shipping charges. Order inventory early to avoid rush-processing charges and expedited delivery fees, which add up quickly for bulk orders.

#3 Cost Reduction Technique

Collaborate with Suppliers

Your vendors are your best allies when implementing cost reduction strategies within your organization. Consider a variety of programs, such as vendor managed inventory systems (VIM), vendor stocking programs (VSP), and common supplier joint procurement policies. Choosing a VSP reduces inventory costs for less popular items and increases supplier reliability and dependency. Alleviate the nightmare of managing inventory by giving the responsibility to the vendor, which reduces your inventory and related expenses.

#2 Cost Reduction Technique

Ask for Employee Suggestions

Employee suggestions play a vital role in cost reduction and increasing productivity because employees have more experience regarding daily operations in a business. Every suggestion that your business implements improves your business in some way. Performance may be improved, customer satisfaction may increase, costs reduce, or some other positive impact improves your business in some way. The average employee suggestion saves the company $6,224 in operational expenses. The more ideas you implement the more your business will improve. These suggestions will add up over time and can be used as a competitive advantage.

Cut Paper Flow Boost Profits
Cut Paper Flow Boost Profits

#1 Cost Reduction Technique

Eliminate Paper Flow

Another great way to improve productivity while lowering costs is to eliminate paper flow. The average office worker prints 10,000 sheets of paper a year. The best approach is to place all documents online for employees to download, read, and make changes to. Also, instruct all employees not to print e-mails and other unnecessary documents that will usually end up in the trash upon a few quick glances. Have IT set all printers to print doubled sided.

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    • profile image

      anonymous 6 years ago

      ITS REALLY VERY HELPFUL FOR ME.....

      AND IT WORKS

    • profile image

      anonymous 5 years ago

      OK..need to further eloborate..

    • profile image

      anonymous 4 years ago

      wonderful indeed

    • profile image

      anonymous 4 years ago

      This really very usefulll,,,,,

    • profile image

      anonymous 4 years ago

      This really very usefulll,,,,,

    • profile image

      anonymous 4 years ago

      that all are used in just in time system in japan to reuce all costs

    • profile image

      anonymous 4 years ago

      @anonymous: you are right.....

    • profile image

      WONG YEE FOONG 2 years ago

      CARRY ON....... GOOD..... THANKS.......

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