Cost optimisation potential is usually sought within operational functions. Of course, it makes sense to always look for savings potential in each department. However, experience shows that professional work is done in the functional areas themselves. The greater cost optimisation potential often results from eliminating deficits in cooperation.
What is cost optimisation?
Cost optimisation is the search for and realisation of cost reduction potential throughout the organisation. Cost optimisation is an ongoing activity that should be performed alongside the execution of value-adding activities. Cost optimisation can be a component of the continuous improvement process (CIP) or it can be carried out as a project.
Cost optimisation opportunities in companies
Opportunities for cost optimisation exist in all operational functions, departments and positions. Everyone can still operate more cost-effectively in their own area.
However, cost reduction must not be at the expense of the quality of cooperation, at the expense of the continuous business process or at the expense of the quality perceived by customers. In practice, it happens that savings measures in one area have negative collateral effects on other areas or even on the entire operational interaction. In many cases, such effects are not recognised because problems are considered in isolation and not in their operational context. Therefore, it is important to coordinate cost-saving measures with adjacent functions.
Cost reduction in purchasing
In most companies, there is potential for cost reduction in purchasing. The possibilities for cost reduction in purchasing are not limited to negotiating price reductions. The following additional possibilities can contribute to cost reduction in purchasing:
- Introduction of the Total Cost of Ownership (TCO) approach in the company (reliability, quality, service, price over the product cycle).
- Reduction of complexity by reducing the variety of procurement goods: (Standardisation and modularisation in product development
- Design-to-cost approach already in product development in coordination with product management and purchasing: systematic selection of cost-effective processes, materials, structures, designs)
- Bundling of a large share of the procurement volume with a few proven suppliers
- Long-term supply framework agreements
- Tight supplier management, supplier assessment and supplier development
- Reduce own inventory levels through agreed consignment stocks with suppliers (cost-benefit analysis required); even kanban/just-in-time delivery arrangements if necessary
- Eliminate over-specification by reviewing and lowering technical requirements for procured goods
- Ongoing systematic search for and development of suitable lower-cost suppliers
- Participation in purchasing cooperations with competitors
This article looks in detail at the possibilities for cost reduction in procurement.
Cost reduction in logistics
Logistics is an essential operational function that has a significant impact on process performance. Thus, logistics can contribute to the smooth running of the business process. On the other hand, logistics offers many opportunities for cost reduction. This article describes and discusses in detail this area of tension in which logistics operates in companies.
Cost reduction in production
In manufacturing companies, there is considerable cost reduction potential in production and in the operational functions adjacent to production. This article goes into detail on these possibilities for cost reduction in production. In this article you will also see the possibilities for cost reduction in production through quality assurance.
Example: A manufacturer of mass-produced articles for the construction industry, which was integrated into a group and suffered greatly from overcapacity in the market and the comparability of products, was asked by the group to drastically reduce costs. The person in charge of production single-handedly distinguished himself from the group superior and implemented radical cost savings by changing the characteristics of the products so that they just met the presumed requirements of the customers. The cost reductions actually realised, however, did not reach the company’s bottom line, as the sales team had great difficulty selling the products, which were now perceived as inferior, on the previous scale. In addition, the cost-cutting measures increased the costs for rejects and adjustment of the production machines. Turnover and earnings fell sharply under the supposed optimisation measures, in short: costs were cut without considering the overall effect.
Effective profit increase through optimised costs
Costs have a significant influence on the profit situation of companies. Any identified potential for optimising costs is valuable for the company; however, quick implementation of an isolated project is often not effective. Ensure a fine-tuned approach. Cost reduction programmes should not be driven by good intentions, but by effects.
The reciprocal, dynamic causalities and effects within the organisation must be recognised even before the concrete plans are made. It is very helpful here to visualise the actual procedures, processes and interrelationships and dependencies within the company. Involve those directly and indirectly affected in your planning and take well-founded objections and justified concerns seriously. Also consider the effects on the external perception of your organisation and take these findings into account in the planning of your concrete cost optimisation projects.
The method developed by Dr. Boysen "CyberPractice" is recommended for implementation.
In times of crisis, the pressure to reduce costs is particularly high. However, Cost reduction must not stifle the operative business.