128-Reducing Costs by Redesigning Products and Processes

Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.

In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:

1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.

Redesigning a product or process is a powerful approach to reducing costs by eliminating activities. A company may reduce an activity by reducing the number of times an activity is required to produce a product or by reducing the number of separate activities used to produce the product. If a company reduces its activities, it should reduce the total units of Inputs it uses in its cost structure.

During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.

The government’s effort to reduce its operating costs notes several examples of redesign of products and processes to eliminate activities:

• The Coast Guard will reduce its maintenance schedules for its small boats. Its schedules had assumed that these boats were for recreational use. When the Coast Guard adjusted its maintenance schedule to reflect their actual usage, it found it could reduce its maintenance.

• The Department of Labor will disband the Employment Standards Administration and an Assistant Secretary of Labor, two deputy assistants and an administrative office that oversees this group. The work of this group will be done as it has been done, just with less administrative leadership and support.

• The Bureau of Reclamation will increase its use of video conferencing and computer monitoring. This change in activities will enable it to eliminate an aircraft and many trips by engineers to the group’s offices in Washington State.

Our studies of cost reduction techniques have concluded that a company may reduce the activities it uses to produce a final product by the following actions:

• Redesign the product to eliminate components
• Redesign the process to eliminate activities
• Eliminate customer activities with low value to the customer

Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting the Improve/Cost/Brainstorming Ideas section of StrategyStreet.

Posted 8/13/09

Update:

Cost reduction always runs the risk of reducing the quality of the product or customer service. Every cost reduction must consider its impact on the customer. See HERE and HERE for more explanation.
8/22

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