In most cases, however, increased net profit (and ultimately, happy stockholders) is the basic motive for doing a cost reduction program and, thus, is the thesis of this article. Many times some of the other incentives are automatically covered when cost reduction occurs exclusively with competition and profit in mind.

How should Cost Reduction be approached?

Some efforts to reduce a company’s overall costs include deleting resources and product lines. This approach is not within the scope of this article, however. How, then, can product or service costs be reduced while preserving existing resources and product lines? Using cheaper components and lower labor costs are the traditional and most common considerations.

Bloated, traditional and ‘good-times’ processes and support & supply chains are some other key targets to consider. But, one really needs to take a holistic view of all the costs of product development, promotion, production, distribution and maintenance in order to effectively reduce these costs without compromising the whole product structure.

Definitions ...

Price is what a Consumer pays for goods and services. Cost Of Goods Sold (COGS) is what a company expends to supply the goods and services to the Consumer. Revenue is the quantity of sold goods or service multiplied by the Price. Gross Profit is the difference between the Revenue and the COGS. Net Profit is the Gross Profit less other corporate and tax expenses.

For this discussion Cost Reduction is defined to be that subset of revenue enhancement scenarios which actually increase the Net Profit. This definition does not, in general, include the practice of embedding new features or technologies into a mature product, for example. Many times these efforts do not generate a net profit increase even though they may enhance revenue. Therefore, it is very important to distinguish between profit and revenue in a cost reduction program.

10 CANONS OF COST REDUCTION ...

1. EVERY COST REDUCTION TASK IS UNIQUE!

The vagaries of corporate structures, cultures, owners; the various types of personalities, market expectations and philosophies within companies; and the design and manufacturing techniques impose uniqueness to the task of defining a cost reduction program.