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What is integral cost reduction?
Strategic cost savings is a critical issue for any procurement organization. The goal is for the organization to get the maximum return from its assets. But what does cost reduction mean?
Integrated cost reduction looks at all facets of the business. It includes:
Dissecting and improving one's own (business) processes.
You seek and find methods to increase efficiency. Consider streamlining activities or automating tasks.
Reducing costs throughout the supply chain.
Simple examples are to receive goods directly in the right packaging or on the right pallets, eliminating the need for repackaging or re-palletizing.
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Cost avoidance.
E.g., in the form of preventing price increases by suppliers
Negotiating with (suppliers) to achieve the most favorable cost level (TCO).
TCO stands for Total Cost of Ownership: the total cost of the collaboration over its lifetime. At xentys, we are happy to help you achieve strategic cost reduction.
List the five success factors for strategic cost reduction:
1. First, do a thorough cost analysis.
Herein, different cost items are characterized, sorted by their presence, the sources of the costs identified, and tactics developed to (with the goal of) reducing the final cost. A cost analysis different levels are performed, such as at the departmental level, product level or company level. The purpose of a cost evaluation is to understand the cost structure of the company or organization and thus reduce costs and increase organizational efficiency. Savings opportunities within an organization are identified at this stage.
2. Implement processes and a culture for continuous improvement.
This eliminates waste, rejection and inefficiencies within your organization. Consider processes such as Lean Six Sigma and Total Quality Management (TQM) to work more efficiently and reduce waste. The goal is to continuously streamline activities.
- Lean Six Sigma is an approach aimed at eliminating waste and rejection and increasing efficiency. For example, it includes methods to combat overproduction, waiting times, unnecessary movement of employees or goods and unnecessary information movement. It ensures that an organization saves money while improving the quality of products and services.
- TQM (Total Quality Management) is an approach to improving the quality of products and services through continuous improvement of procedures. This includes reducing costs, improving customer satisfaction, reducing customer complaints, reducing warranty claims, reducing rework costs, etc.
With the right approach, the organization can reduce its costs by improving logistics chain efficiency.
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3. Outsourcing (outsourcing) of work.
Everyone is undoubtedly familiar with the term outsourcing, but most likely thinks it is about cost reduction. This is not entirely accurate, as outsourcing is also about increasing efficiency in order to provide better quality to customers. It may even require additional investment, but in the long run it can greatly benefit the organization. But how do you determine which activity should be outsourced?
There are 5 factors to consider:
Core competencies
The key question here is “What core competencies determine the success and future of the organization? Core competencies contribute to the unique value proposition and are important to the competitive position. So you don’t want to outsource these activities. The remaining activities may well be outsourced. Also important here is whether there are market participants who can take over the non-core competence on interesting terms.
Complex activities
Outsourcing complex activities can offer possible solutions to the organization. Consider specialists on IT or tax issues, for example, who can provide better solutions.
Volume of activities
Volume activities often require significant resources and time. If these activities do not fall within the core competencies of the organization, it may be wise to focus on more important tasks. Examples include data entry, cold acquisition.
High-cost activities
High-cost activities may be better outsourced to suppliers who can provide a more sustainable solution or have the scarce expertise. Consider catering or building maintenance, for example.
Activities with specific regulations
Again, there is a good supply of specialists on “the market. Therefore, it is sometimes wiser to bring in specialists if it is a non-core competency. But, outsourcing can also bring risks.
Then choose a hybrid approach, keeping some of the expertise in-house
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4. Implementing automation
There are more and more processes that can be automated (at least in part). Therefore, stay tuned for developments in this area. Consider the automation of production, back-office work, business processes or digitization of administration.
5. Create a culture of cost-consciousness
Culture change is behavior change, and that takes time. Steps that contribute to this change are:
- Communicate the importance of cost awareness with your employees.
- Ensure transparency. This is because it is important for your employees to know how the organization’s costs relate to its revenues.
- Integrate cost consciousness into your organization’s daily operations.
- Reward or recognize employees who contribute to cost reduction.
- Use the necessary technology and tooling to make costs transparent (to everyone).
- Assign a team responsible for identifying and implementing cost reduction strategies.
Strategic cost reduction within the foreseeable future?
Unfortunately, this is virtually impossible. As we wrote earlier in this article, strategic cost reduction is an ongoing process. The process (or rather, “the “way”) requires continuous evaluation and adjustment. It is a never-ending process, in which opportunities for improvement can also be found and implemented continuously.
