127-Reducing Costs by Eliminating Non-Productive Input

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.

A company may make the Inputs more directly variable with the Output of the product by reducing the amount of Input that is wasted or idle.

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.

There are several examples of savings the government will achieve by reducing the number of Inputs that are wasted or idle. Here are a few of them:

• The Office of Thrift Supervision eliminated unused phone lines.

• The Army will increase the number of soldiers traveling on each airplane chartered for rest and relaxation leave.

• The Navy will save money by deleting inactive internet accounts.

• The Justice Department will save money by setting up its printers and copiers to use both sides of the paper.

• The Department of Homeland Security will save money by emailing instead of printing some documents.

In our research into several thousand examples of cost reduction techniques, we have found that you can reduce the Inputs that are idle or wasted by using the following techniques:

• Assisting the Input in increasing Output
• Shifting demand to use unproductive resources
• Improving the accuracy of the demand forecast
• Using short term sources of Input to meet peak demand.
• Speeding the process.

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 StrategyStreet.com/Improve/Cost/Brainstorming Ideas.

Posted 8/10/09

Update:

Outsourcing part or all of the cost function involves trade-offs, especially for those cost functions that are customer facing. The trade-off is between the cash savings outsourcing brings compared to the potential negative effects on the quality of the product and customer service. See HERE for some thoughts on effective cost reduction.

8/22

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