Cost_reduction

Cost reduction

Cost reduction

Process used by organisations to reduce costs

Cost reduction is the process used by organisations aiming to reduce their costs and increase their profits, or to accommodate reduced income. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project[1] or the construction of a building.[2] In the public sector, cost reduction programs can be used where income is reduced or to reduce debt levels.[3]

Importance

Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market. The importance of cost reduction in relation to other strategic business goals is often debated.[4]

Examples of cost reduction strategies and programmes

Commercial businesses

Public sector

In a public sector spending review, an overall target for reduction in expenditure may be identified: for example, in the United Kingdom, the 2010 spending review anticipated a reduction of £81bn in public expenditure over the four year budget planning period.[7] In order to meet the challenges of a significant reduction in expenditure, government departments are expected to look at how they can "take cost out of the business" rather than simply cut services.[8] One of the main principles expected of government departments in order to reduce costs is a "data-driven approach", i.e. ensuring that staff within the department have "a good understanding of the distribution and profile of costs in their business".[8]

Centralisation of procurement activity has been hightlighted as a beneficial public sector strategy.[8]: 6 

References

  1. [1]
    Barton, J. A. et al., Design determines 70% of cost? A review of implications for design evaluation, Journal of Engineering Design, Volume 12, published 1 March 2001
  2. [2]
    Designing Buildings Wiki, Cost control in building design and construction, last updated 15 August 2021, accessed 11 September 2021
  3. [3]
    McKinsey & Company, A smarter approach to cost reduction in the public sector, published 8 June 2018, accessed 19 April 2024
  4. [4]
    Green, W., Growth trumps cost cutting, says survey, Supply Management, published 31 January 2018, accessed 12 September 2021
  5. [5]
    Turney, P., Activity-Based Costing: A Tool for Manufacturing Excellence, Association for Manufacturing Excellence, published summer 1989, accessed 13 September 2021
  6. [6]
    High, P., AstraZeneca CIO Makes IT Twice As Good At Half The Cost - Here Is How, Forbes.com, published 3 January 2017, accessed 10 January 2021
  7. [7]
    BBC News, Spending Review 2010: George Osborne wields the axe, published 20 October 2010, accessed 13 February 2024
  8. [8]
    National Audit Office, A Short Guide to Structured Cost Reduction, reference 009328-001, published June 2010, accessed 13 February 2024

Further reading

  • Barrett R. Crane. "Cycle time & cost reduction in a low volume manufacturing environment". MIT DSpace. hdl:1721.1/11020.
  • Apichart Jearasatit. "Using a total landed cost model to foster global logistics strategy in the electronics industry". MIT DSpace. hdl:1721.1/60836.
  • Bryan K. Parks. "Cost and lead time reduction in the manufacture of injection molding tools". MIT DSpace. hdl:1721.1/12092.

See also
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