Next, determine the category of each cost. Costs are usually classified as fixed or variable (depending on whether the cost changes based on how much you produce), and direct or indirect (depending on whether the cost is directly linked to a product or service). Pick the top two or three costs that have gone up or where you think you can make reductions—and focus your cost cutting there.
As an example, for most manufacturers, labour and material costs are the main components of direct variable costs. Procurement optimization, operational efficiency and lean thinking are a great way to reduce variable costs.
Here are some additional cost cutting tips.
Explore supply options
Go over each of your external expenses, and see if you can renegotiate a better deal from suppliers or find alternative sources.
In manufacturing companies, supplier goods and services can amount to as much as 80% of total expenses. Many companies rely heavily on “relationship sourcing”—going to a person they happen to know. Relationship sources may be necessary for some goods and services, but is certainly not the only way to purchase.
“Study whether any other companies can supply the same thing at a lower cost,” Gude says. “You have to objectively assess the entire supply market, not just go to the person you get it from all the time or his neighbour.”
Optimize inventory management
Excessive inventory can be a big source of unnecessary expense. Regularly check for excessive or obsolete inventory to control and reduce storage costs. Work to better match inventory to demand and, over the long term, implement just in time production.
Boost your use of technology
Explore information technology tools as a way to reduce costs. They can offer user friendly and affordable ways to improve productivity.
Continuously measure your performance with dashboards to make cost reduction a part of your business culture. Dashboards that track key performance indicators allow you to evaluate the impacts of cost-reduction initiatives.
Making your business greener is a great way to cut costs—not to mention raise employee morale, enhance your image and improve your community’s environment. Initiatives can include turning off lights and equipment when not in use; reviewing water usage; going paperless; purchasing energy efficient equipment; and servicing equipment regularly in order to maintain its energy efficiency, prolong its lifespan and reduce repair costs.
To learn more about operational efficiency, download your free copy of our eBook Create a leaner, more profitable business: A guide for entrepreneurs.