3 Steps for Cutting Costs in Business- Step 1: Value Analysis
24 Feb. 2012 General
With the current state of economy, it’s more than likely that most organizations would have fallen short of their cost reduction targets for the year. With a steady decrease in industrial outputs, corporations are left with no other alternative but to find methods for cutting costs in business and adhere to the cost reduction targets this year. But, how does one go about doing this?
In a series of 3 articles, we will browse through 3 simple yet effective ways of cutting costs in business while avoiding friction at your workplace.
Our first step toward cutting costs would be Value Analysis. Surely, you’ve heard of it and either implemented it or rubbished it saying it’s only for the ‘Top Notches’. But, is it? After all, it’s not rocket science and is an area to work on for Small Medium Businesses (SMBs) as well.
Step 1 for Cutting Costs in Business : Value Analysis/Value Engineering
The root cause for the ‘Cost’ component can be traced back to the original supplier for the item and the Supply Chain that advances the same item to you. Quite often the suppliers and the Supply Chain Management personnel (or engine) are themselves not aware of the areas where they can tap a potential cost leakage. A thorough Value Scorecard should be developed to analyze the following aspects and their sub-components depending upon the type of item (or category):
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- Manufacturing costs
- Quality costs
- Delivery costs
- Purchasing costs
- Overhead costs
- Engineering and design
It’s more than likely that the Supplier lacks the expertise and ‘intent’ to evolve with this exercise. This is where ‘Collaboration’ comes into picture. A detailed value analysis, based on cost centers for matrices developed in tandem, by you and the supplier will help you understand the cost structure better.
The next step is to quantify the benefit. Once, step ONE is out of the way. Ask the supplier to reduce for example 5% cost in these areas without compromising on quality.
Caution: Merely, putting up a stipulation will not serve the purpose. It has to be backed by adequate compensations for the suppliers in order to motivate them. It can even be in soft terms like,
- Payment term lenience
- Consolidated Orders
- Scrap Sale at reduced (or free) rate
- Freight or FOB rate changes
- Any thing that makes them happy and incentivizes them!
But, how do you go about it? Do you leverage IT for this initiative or go the traditional route of manual calculations?
Purely, up to you. It’s about you believing in the necessity and comprehensiveness of the exercise. Needless to say, an IT Enabled application would be a better and a systematic option, but the other school of thought could be “Let me see if it works and then take a call!” Good for you!
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That brings us to the end of our first edition of the series 3 Steps for Cutting Costs in Business. Watch this space for more action…