How to cut costs in your operations
Beyond simply finding more affordable suppliers, there are a host of strategies you can take as an entrepreneur to cut costs in your operations. In fact, to remain competitive, it is essential to evaluate your activities on a regular basis to determine how to make the most of your resources.
We ask Éric Trudeau, Senior Business Advisor at BDC Advisory Services, six questions to find out how to approach this process.
1. What is cost reduction and why is it important?
Reducing the costs of your various expense items in your business is a strategy you can use to increase your productivity, and therefore your profits.
“It’s important because, especially in a small-business context, resources are not infinite, and you have to make the most of them, whether they are human, financial, material or technological resources,” says Trudeau.
2. What is cost elimination?
Cost elimination is a more drastic action that consists of looking at your various expenses and eliminating some of them. The real purpose of this action is to increase profits.
However, there are various ways to achieve that objective, with the following three strategies being the most common:
1. Cost elimination
As the name implies, this technique consists of identifying and eliminating unnecessary costs. Depending on the costs identified, this technique may have medium- and long-term implications. (For example, eliminating marketing costs may have an effect on sales in the long term. If positions are cut, staff morale may be affected.).
2. Cost reduction
This technique consists of partially eliminating certain costs. It therefore has less of an effect than the first technique, and its impact may also be more limited. Examples of cost reductions could be reducing staff hours or redesigning certain products to reduce the cost of the materials used to make them.
3. Increasing capacity
This technique has the greatest potential impact on an organization’s profits. It consists of finding more efficient ways of using the organization’s resources (human, material, technological and financial) to increase its overall capacity, and thus its sales. An example of this technique is reducing operational waste to increase the efficiency of operations, the availability of production equipment, etc.
3. What techniques can be used to cut costs?
With so many things you can do to reduce your business costs, you need access to accurate data to make informed decisions.
Establishing performance indicators for all your company’s activities will give you a good idea of what is happening each day, week and month, whether it comes to health and safety, quality, costs, turnaround times, staff engagement, etc.
Once you have the right information, you can benchmark it against industry data. “It’s also a good idea to compare your current diagnosis with one from a few years ago to see how the company has evolved,” Trudeau says.
Performance indicators include three elements
To improve your productivity through these indicators, you need to give your employees clear objectives.
“The clearer and more specific the goals we set, the more likely we are to achieve them,” says Trudeau. “For example, telling your team that you will meet tomorrow in Quebec City is not the same as saying that you will meet tomorrow in Quebec City in front of the Vidéotron Centre at 2 p.m. With the second version of the information, there’s a much better chance of the whole team being at the right place at the right time.”
Ideally, continuous improvement should be pursued by measuring the impact of changes on results as they are implemented.
“It’s always better to make efforts to cut costs a little at a time than to make a big move and then do nothing for the next few years,” Trudeau says. “And thanks to the performance indicators, you can quickly see if what you are doing is working. A day without improvement is a day lost. Because tomorrow, you will be doing the same thing as today if you are unable to improve.”
However, this small-step approach should not be done randomly. It must be based on strategic objectives targeted by the company’s management.
“Don’t hesitate to seek help and consult with your employees to identify your priorities,” advises Trudeau. “The best entrepreneurs are those who manage to go after more earnings. To do this, you have to be able to recognize that everything is not perfect, that you have to question yourself and that seeking help will make it easier to progress. This will help you avoid stagnating and being surpassed by competitors.”
Dashboards provide an important way to cut costs. They help you keep an eye on your operations, and to track efficiencies and waste. Learn more by reading our article How to use dashboards to boost performance. Below is an example of a business dashboard.
4. How can a company cut costs through its human resources?
Target the right skills
While human resources are precious, and often scarce, you need to make sure you seek out employees whose skills are directly related to the company’s needs.
“The business environment is changing, business models are also changing, and the trades that were needed in the past may not be 100% what is needed today, so you have to adapt,” says Trudeau.
He gives the example of a company that does machining for the aerospace industry. “Traditionally, this work was done by machinists, but now everything is automated, so we need mathematicians to do the programming instead,” Trudeau says. “This is a big change in the type of workforce.”
Invest in training
To ensure that the skills of its workforce evolve with the company’s needs, continuous training is important. Training must reflect the development of new products, the purchase of new equipment and the adoption of new processes.
“Training is not an expense, but rather an investment, and it’s essential,” says Trudeau. “This is particularly true in the context of labour shortages. But often, we see that companies train their employees intensively for a certain period of time, then stop, fall behind and start again rather than making a continuous effort to stay on top of it.”
Making the necessary efforts to keep employees engaged is also a good strategy to cut costs.
“When employees care about the company, they are more productive, so you need fewer employees to get the job done,” says Trudeau.
5. How can a company cut costs by how it structures its communications?
According to Trudeau, one of the biggest causes of inefficiency in a business is not having the right information available at the right time.
“From the construction site across the province to the office next door, people waste a lot of time waiting for information, or redoing work because they didn’t have the right information,” he explains. “The dissemination of information needs to be well structured from the bottom up and laterally, for example through regularly scheduled small meetings. These communications reduce inefficiency and therefore costs.”
6. How can a company cut costs through operations management?
It is worthwhile to dig into your various business processes to find areas where you can make improvements and thus cut costs.
“Reviewing work methods, eliminating non-value-added activities and redesigning plant space to reduce movements are examples of effective strategies for cutting costs,” Trudeau says.
Manage inventory strategically
It is important to think about strengthening your negotiations with your suppliers in order to cut your costs.
“But companies rarely have the upper hand in this area,” says Trudeau. “Nevertheless, they must ensure that they have the right inventory in the right quantities. Because there is a cost to keeping inventory. This represents approximately 20 to 30% of the value of the inventory to hold what is not needed. You have to eliminate the superfluous.”
Know your profit margins
To determine how to cut costs, it is important to have a system that can tell you which products and services generate the best profit margins. You also need to know which business sectors are the most profitable.
“Typically, a company has 10% of its customers generating 200% of its profit, 10% losing 100% of its profit, and 80% essentially breaking even to comprise 100% of its profits,” Trudeau says. “Since companies have finite capacity, it is crucial that they have the right information about the real costs of their activities to make informed choices.”
Invest in technology
Investing in technology, especially to automate production, can be an effective strategy for cutting costs. But first you have to make sure you know the objective behind it.
“For example, automating non-value-added tasks and tasks that are hazardous to employees can really help reduce labour costs and health and safety costs,” says Trudeau.
Want to take it to the next level? Explore operations management software to increase the efficiency of your business.