Cost Optimization Strategies

Volume 2

The novel corona virus has impacted every aspect of our lives. This is Volume 2 of assisting small businesses on guidelines during these uncertain times. In Volume 1, we covered Reinventing Your Business Model.

In an uncertain economy every penny counts, and this is time when every business should refocus on their cost structures. I was fortunate to lead the cost optimization initiative of a large conglomerate. With the efforts more than $350 million cost saving was achieved within six months. This article is a summary of ideas that came from my experience for small and medium sized businesses.

Every business will have to quickly develop strategies of cost optimization to survive in coming months or even weeks. I have outlined both macro and micro level suggestions for businesses in this article.

Macro Level Strategy

  1. The first step before putting any cost optimization strategy into practice is to first understand the costs associated with the business.
  2. Differentiate between fixed and variable costs. Fixed costs are those that do not depend on the quantity produced by the company, and variable costs, those that fluctuate according to production. These could be the raw material purchase, machine wear, fuel costs for deliveries, etc.
  3. Depending on the size of the company, define a task force for all major categories for ideation and execution of the strategy.
  4. The ideas are to come from the teams so they will own and execute them. Post ideation, the task force for execution across divisions or group companies is to be created. In order to succeed, the process has to be top down, but the execution has to be bottom up across businesses.
  5. Create a mechanism of measuring and reporting on weekly / monthly basis. You can compare the spend month on month to see the effects on the optimization.

Now let us look at some of the ideas that you could use to optimize your cost.

Micro Level Actions

1.Renegotiate Your Lease

Typically for all businesses, office / retail lease is the biggest cost. This should be first to renegotiate. Remember, the property owner will also find it difficult find new tenant so he will agree on a new agreed property price

2. Consolidate / Make the most of your space

Analyze your current use of physical space. Consolidate or centralize the different functions. A meeting room can always double up as break room or storage room. The ideas and opportunities will vary depending on the business. Lease unused space to another business or individual.

3. Renegotiate / Switch suppliers

Put pressure on your current suppliers and renegotiate rates. Pool in purchase across divisions to create central purchase team. Volume purchase will offer greater discounts to your team division / group companies. Identify alternate supplier(s) to put pressure or even switch supplier to optimize your costs.

4. Re-evaluate your marketing efforts

Re-evaluate your marketing efforts. Renegotiate with your advertising partners. Cut marketing costs by doing more in-house. Increase social media use and reduce traditional marketing. Build a referral program, a recommendation from a current customer is far more likely to result in a sale than traditional marketing.

5. Harness virtual technology.

Reduce business costs by operating in a virtual manner whenever possible. Virtual meetings help minimize travel expenses and virtual offices can eliminate the need for physical space. While we certainly don’t want to eliminate personal contact altogether, save it for the instances when it’s most beneficial.

Technologies such as Google docs (soon to be Google Drive) or Basecamp centralize company documents and product collaboration as an alternative to paper documents and meetings.

6. Telephone and internet

These are two fixed costs (depending on the branch of the company) that are essential for any business to function today. Evaluate the requirement to reduce the number of line or the plan that you may have.

Use technology in your favor, application like WhatsApp, Skype  or Viber can come handy. But be careful that these alternatives do not make your internet much more expensive.

7. Water and energy bills

These could account a lot for many businesses. It is possible to reduce costs by investing in cheaper taps and outlets, replacing incandescent lamps with LEDs or fluorescents. For large corporations, it might be handy to get an energy audit done to see where the maximum consumption is happening and evaluate the changes required.

8. Bank rates and fees:

Negotiation with creditors and banks is key. Renegotiate possible rates and fees with your creditors and banks. This may be an alternative to lowering interest rates. But, beware! It is important to evaluate in advance if you company will have financial conditions to deal with the new negotiated conditions.

9. Logistics and freight costs

If Logistics a large bucket of your expense, focus on identifying new suppliers / renegotiating with current suppliers.

When comparing supplier for the good delivered, study the expenses related to logistics and freight, which may increase the price that seemed attractive at first.

10. Production Costs

Things on how you could cut material costs. Selling left over cardboard, paper, metal instead of just sending to recycling center. Be creative to consider new products that could be created from the waste from your business.

You may be already tracking and measure the operational efficiency of your business. Set new performance parameters, set new targets.

11. Stock

Analyze and determine which products are selling and which are not. Decrease the production of stocks that are selling less immediately. Having slow-moving stock leads to financial losses. Reevaluate the pricing for stocks that are selling less. They will be just taking space.

12. Insurance & Banks Accounts

Evaluate the insurance policies and financial account that you have. Compare insurance providers with new rates and then renegotiate your with your current insurance provider to match the rates. Evaluate on consolidating insurance policies or bank accounts if possible. Evaluate insurance policies to see you are not over-insured or duplicating coverage.

13. Paper & Printing

Think before printing and if you have to print, print using both sides of the sheet which will save paper. Scan documents and make use of collaborative online sharing tools such as Google Drive, Dropbox, or OneDrive.

14. Manpower:

This is the most difficult one but businesses will have to consider either reducing the number of hours or salary cut strategies. Some businesses may have to take consider termination of employees.

15. Maximize Employee Skills

It is time to assess the current usage of employee experience and skills. Give new responsibilities and evaluate efficiency to take new tasks. You will have to reskill your employees to use new technologies to work remotely.

Finally, here are three suggested focused steps in these tough times.

#1: Invest more on bottom-up approaches. Engage and have your employee contribute to cost optimization strategies.

#2: Remove fears. It is time where you should explain to your work force on the shared mission.

#3: Be Resilient. It is time to think out of the box to cut cost and create a cost-conscious culture.

The most important is the make your organization agile and adaptive. Cost optimization methodologies are to be implemented to make decisions that better reflect market needs and allow real-time adaptation to change in those needs.

About Baljit

Baljit Singh has been fortunate to be part of teams that have brought innovation and game changer product & services to the market. He has experience in building successful product and services companies. He is currently an advisor to companies for developing their innovative journey. He is a motivational speaker and gives talks on how to cultivate habits and change lifestyle to drive innovation. Baljit is currently driving cross border partnerships.

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