Strategic Cost Reduction

Optimizing costs and operating assets

When business objectives call for 5% to 20% cost reduction executive actions need to adopt strategic cost reduction, that is structural in nature, and get beyond operational improvements. Strategic cost reduction realigns the company’s cost structure to the market and frees up resources so that you can pursue growth initiatives.

Operational cost improvements only get you so far, whether leaner operations, stricter cost controls, tighter supplier rates, and gradual staff reductions. At best, these actions will cut 2% to 4% of total costs.

We employ strategic cost reduction and assist in cutting high costs with structural changes that sustain cost savings and margin improvements in the long term without hurting the business.

Are you experiencing these issues?

Cost cutting is
not working.

All quick wins
have been exhausted.

No more cost initiatives
left to take.

Cost reduction lacks
traction, not sticking.

Profits continue to
erode.

The financial position
is weakening.

If your company is experiencing any of these issues, chances are strategic cost reduction is needed. These symptoms typically arise from the need to get beyond short-term solutions and attack the drivers of cost.

In some cases, companies make many small cost cuts across the board, looking for minimal change and hoping that total savings will add to the desired performance level. This approach rarely works. In the best case, the initiatives provide Band-Aid fixes. At worst, they cut in the wrong areas and derail appropriate actions in times of continued profit deterioration and set the company further back.

Our Approach

Our strategic cost reduction approach re-focuses the company’s cost basis and operating assets to align with the market. We get to the firm’s cost drivers and underutilized assets and work on these without hurting the business.

The guiding principle that we follow is that not every dollar of cost and capital spend are equal. Some drive the creation of customer value; others don’t.

Ultimately, our objective is to build on the twin pillars of profitability and asset utilization and raise the firm’s Return on Capital Employed to secure a return well above the cost of capital.

The complication is that profitability and asset utilization are intertwined: asset utilization scales the benefit of increasing the profit margin and vice versa. Because one depends on the other, we work through the complexity.

How We Help

Focus on the cause of high costs and the actions to resolve it.

Product line
rationalization

Cost
sharing

Core effectiveness
improvement

Strategic
Sourcing

Capacity
rationalization

Value chain
restructure

Organizational
complexity reduction

Business
restructure

We offer a comprehensive set of services to address the underlying problem.

Product Line Rationalization

Unmanageable cost results by expansion into many product lines that eventually weigh down the company’s operating model. Product line rationalization is a robust method to improve profits an free up valuable resources ... learn more

Product Line Rationalization

Stop selling your highest-overhead “loser” product to maximize net margin
Gain the maximum number of customers with the minimum number of products to maximize revenue for each product
Invest in the products that make the most profit

We help clients rationalize existing product lines that are losing money, including product lines and product variations that exhibit the following characteristics:

are problem prone
have low sales
carry an excessive overhead cost
are at the end of their life cycle, or
have limited future potential

By eliminating unprofitable product lines, the company can reduce direct cost and means of production, including labor, plants, equipment, working capital, material, and energy.

Value Chain Restructure

Companies with long value chains become weighed down by massive cost structures. Long value chains tie up large amounts of capital and infrastructure ... learn more

Value Chain Restructure

Companies with long value chains become weighed down by massive cost structures. Long value chains tie up large amounts of capital and infrastructure. They also expose the company to competitors to conceive new models of value delivery and ultimately disrupt the firm’s competitive position.

We help clients eliminate non-value-added activities and processes in all functional areas of the value chain. Our approach involves identifying the hidden costs of long value chain and reducing costs through the following actions:

Disaggregating various stages of the value chain
Reducing the process cycle time
Removing duplication
Outsourcing non-core activities and non- core processes
Shortening the value chain through enabling technologies

As a result of value chain improvement, companies typically eliminate large chunks of direct cost, indirect cost, fixed assets, and inventory.

Organizational Complexity Reduction

Growth initiatives place a burden on the organization and add significant complexity to the administration of the business ... learn more

Organizational Complexity Reduction

Growth initiatives place a burden on the organization and add significant complexity to the administration of the business. If left unchecked, organizational complexity can add substantial indirect cost to the company.

We help clients streamline the company’s organizational structure to fit the strategy and reduce unnecessary indirect labor. As part of our approach, we conduct the following tasks:

We measure organizational efficiency, including the input cost of resources for coordinating and administrating the organizational unit and the relative amount of output.
We analyze the organization from a bottom-up perspective, including
- – operating structure
- – secondary structure
- – primary structure
We examine the alignment to the strategy and identify pockets of inefficiency, including
- – duplication of effort
- – delayed decision making
- – poor information flow
- – poor lateral links
- – management layers and management functions
- – support activities, including human resources, accounting, finance, public relations, contract administration, and legal
- – oversized structures
We identify organizational improvements and corrective design options
We help clients redesign or restructure as necessary

As a result of organizational simplification, companies can reduce significant amounts of indirect cost of labor.

Capacity Rationalization

Falling demand may result in excess capacity. When this condition becomes permanent, it may require closing down some production capacity or marking structural changes to reorganize the firm’s operation to be more in line with demand ... learn more

Capacity Rationalization

We help clients rationalize capacity to achieve optimal cost and asset structures to meet ROA targets. Our approach examines fundamental economic assumptions about the business. To make the correct strategic decision regarding operations, we assist clients in evaluating the full effects of the structural changes needed, including

Operations consolidation
Asset rationalization
Operations restructuring
Acquisition
Divestiture

Our approach involves the following activities:

Determine value shifts in the industry
Examine the company’s plant cost, product cost, and profitability
Calculate the amount of excess capacity carried by the company and the level of rationalization the company will need to maintain in the next 4 to 5 years to be profitable and competitive
Calculate the effects of capacity rationalization on the plant, the division, and the company
Design alternative options for capacity reduction, including reconfiguration of plants, production lines, machinery and equipment
Identify disposal options, including transferring production, transferring assets, idling, mothballing, or disposal

As a result of capacity rationalization, companies can eliminate substantial hidden costs (direct and indirect), significant fixed assets, and large amounts of net working capital.

Business Restructuring

From time to time, companies find themselves operating in mature of declining markets where the company cannot be cost competitive. This condition exposes the business to mounting competitive intensity, erosion of advantage, decreasing market share, and ultimately declining profits. The issue is not necessarily to improve positions in mature markets but to improve competitiveness in new, growth markets.

We help clients restructure the business and its geographical portfolio by shifting away from mature markets into profitable segments. Our approach examines the fundamental economic assumptions about the markets and the cost to serve them, and involves the following steps:

Determining the company’s net profitability by product line
Identifying shifts in the industry and the markets, and what customers value
Calculating the cost to serve and the firm’s relative cost advantage by market segment
Identifying attractive segments for profitable growth
Evaluating the investments required to serve
Establishing the necessary products or services to compete effectively

This approach helps clients restructure the business (i.e., focus deployment of resources, product lines, and business lines against profitable markets), and achieve significant cost reduction and rationalization of unnecessary fixed assets.

Cost Sharing

As companies expand across diverse markets, they increase resources to be able to serve customers closely. Over time, these resources create duplicate costs, a condition that can bloat the organization and requires pairing back ... learn more

Cost Sharing

We help companies reduce costs by eliminating duplicate costs that arise within their cost structure. Cost duplication can occur across geographies, product lines, divisions, channels, and lines of business. Our approach involves identifying cost duplication through the following actions:

disaggregating processes
breaking down processes into steps and activities
identifying duplicate activities
measuring costs and cost drivers
determining potential cost reduction
analyzing the impact on quality and cycle time
redesigning activities, steps, and common processes bottom-up
calculating the overall impact on the cost structure

As a result of cost-sharing, companies can eliminate large amounts of direct cost, indirect cost, fixed assets, and inventory.

Strategic Sourcing

Strategic sourcing helps managers acquire goods and services on a cost-effective basis while improving value creation. The objective is to maintain effective supply chains ... learn more

Strategic Sourcing

Strategic sourcing helps managers acquire goods and services on a cost-effective basis while improving value creation. The objective is to maintain effective supply chains and bring significant bottom line improvements to the organization.

We assist our clients in assessing and prioritizing sourcing opportunities to leverage the firm’s purchasing power. The ability to take a strategic approach within a company’s supplier markets provides multiple levers to reduce cost.

Our approach is based on the client’s buying power and the supply market complexity. As a result, we use one or more methods as required by the situation. Our methods include the following:

Volume concentration
Product specification improvement
Relationship restructuring
Global sourcing
Best price evaluation

We assist clients with developing the strategy, quantifying the benefits, planning the negotiation, helping with the implementation, finalizing contracts, and transitioning new suppliers if needed.

Core Effectiveness Improvement

Core effectiveness improvement refers to the practice of enabling a company to utilize its inputs better. The primary objective is to align the business with realistic measures of customer demand, including cycle time, cost, and quality. The activities that cause the customer’s critical-to-quality issues and create the most extended time delays offer the most significant opportunity for improvement in cost, quality, and lead time – and shareholder value. Core effectiveness improvement creates breakthrough performance.

We assist companies to improve their core effectiveness and reduce cost through faster cycle time and process simplification. We use a disciplined approach that involves the following steps:

Determine the value stream map including the flow of material and flow of information
Identify areas of waste and its sources by classifying each activity regarding
- – competitive advantage
- – value-added work
- – non-value added work
- – time traps
Make “hidden” pain points explicit
Identify areas of improvement
- – Type of improvement method at each step
- – How much improvement is needed
- – Sources of cost reduction (e.g., shorter lead time, less handling, less cost for storage, fewer customer service activities, and more)
- – Shortest delay time at the station and for the entire process
Calculate the impact on cycle time, cost, and quality
Determine a plan of action
Support the execution as needed

This practice achieves significant reductions in direct and indirect costs, working capital, and lead time in less than a year.

Client Results

5-20%

Average cost reduction identified per client project

1-3X

Identified improvement in operating asset utilization

5-25%

Average ROCE increase per strategic cost reduction project

50%

Value achieved in the first year

25X

Average ROI of our strategic cost reduction projects for our clients

How We Have Helped Clients

Satellite manufacturing

Reduced total cost by 10% by streamlining G&A cost and reducing materials spend.

Titanium Dioxide production

Improved Return on Capital Employed by 5% through preventive maintenance.

Aviation MRO

Reduced total cost by 13% by rationalizing select product lines and improving the effectiveness of the core business.

Car parts injection molding

Raised profitability by 4% and improved asset utilization by 2.75x by reducing product lines and rationalizing capacity.

When business objectives call for 5% to 20% cost reduction, the actions executives need to take to reduce costs are strategic, not tactical. Some managers take a tentative approach by making small, uncoordinated cost cuts across the board hoping that total savings will add up to the desired level of performance. Unfortunately, these cuts never get to the drivers of cost; they delay improvement; cost reduction doesn’t stick, and eventually, costs creep back up over time.

Other managers opt for short-term solutions, including squeezing suppliers, higher operational efficiencies, reduced spending, tighter cost controls, gradual staff cuts, and other immediate fixes. In the best cases, these cost-cutting programs provide band-aid solutions and delay real improvement. In the worst cases, they cut the wrong areas and set the company further back.

Achieving significant cost reductions requires managers to use strategic approaches that attack the
drivers of cost and deliver lasting value.

COST REDUCTION

The fundamental challenge is the following: Where can you cut costs to achieve 5% to 10% cost reduction that achieves lasting value? Where will the savings come from? Several levers are available.

Rationalize product lines: Product lines tend to proliferate as companies offer more product variety to penetrate smaller market segments. Some companies may find themselves offering too many products, actually hurting profitability – in which case products must be rationalized. By eliminating The Challenge of Cost Reduction unprofitable product lines, the company can reduce direct cost and means of production, including labor, plants, equipment, working capital, materials and energy.
Rationalize customers: According to the 20/80 rule, 20% of your customers contribute 80% of
your profits. Review your profitability by customer and rationalize marginal accounts. These customers produce razor-thin margins and absorb large amounts of overhead cost. In addition, by eliminating marginal customers, the company can also reduce significant outlays of working capital.
Improve core effectiveness: The primary objective is to align the business with realistic measures of customer demand, including cycle time, cost, and quality. The activities that cause the customer’s critical-to-quality issues and create the most extended time delays offer the most significant opportunity for improvement in cost, quality, and lead time – and shareholder value. This lever achieves significant reductions in direct and indirect costs, working capital, and lead time in less than a year.
Rationalize production capacity: Falling demand may result in excess capacity. When this condition becomes permanent, it may require closing down some production capacity or marking structural changes to reorganize the firm’s operation to be more in line with demand in the interest of the effective use of assets.
Simplify the organization: If left unchecked, organizational complexity can add substantial indirect cost to the company. Over time, growth initiatives place a burden on the organization and add significant complexity to the administration of the business. An economic slowdown presents a timely opportunity to streamline the company’s organizational structure and reduce unnecessary indirect labor.
Source strategically: Review your suppliers and your procurement practices to acquire goods and services in line with market demand on a cost-effective basis. Assess and prioritize sourcing opportunities to leverage the firm’s purchasing power. The objective is to maintain effective supply chains, reduce cost of goods sold, and bring significant bottom line improvements to the organization.

The focus is to align the cost structure to market demand and supply. These levers get to the root of the problem and attack the drivers of cost; by so doing, cost reduction sticks.

COST RESTRUCTURING

When a company needs to reduce cost by 10% to 20%, traditional cost reduction measures don’t work. In this case, the right approach is cost restructuring. It is a strategy that leads to significant margin adjustments and efficient use of assets with long-term staying power. Several levers are available.

Reconfigure the value chain: Companies with long value chains become weighed down by massive cost structures. Long value chains tie up large amounts of capital and infrastructure. They also expose the company to competitors to conceive new models of value delivery and ultimately disrupt the firm’s competitive position.
Restructure the business portfolio: When companies find themselves operating in mature or declining markets, they may not be cost competitive. This situation exposes the company to mounting competitive intensity, erosion of advantage, decreasing market share, and ultimately declining profits. In this case, the business may need to restructure its portfolio of activities to reduce cost and rationalize unnecessary operating assets.
Redesign the business model: Companies may become vulnerable to displacement or disruption. Business model design (BDM) is the fundamental driver of economic value creation and the foundation for company performance upon which all actions follow. Its primacy cannot be overstated. New BMD provides a significant opportunity to put the company in a winning position ahead of competitors and industry shifts.
Lead active market consolidation: M&A is particularly useful in mature or declining industries. Some companies consolidate the market to gain scale and lower costs. They do so by acquiring related businesses and combining R&D, production, sales, and logistics activities; the underlying rationale for the deal premised on the value of synergies.

The focus is for the company to redefine its playing field. Cost restructuring fundamentally changes the business model, the value chain, or the business activities to align the cost structure to the ongoing economic system of the industry.

CONCLUSION

Situations that call for 5% to 20% cost reduction compel decision-makers to do their job. Typically, cost reductions are delayed and oriented to making small cuts across departments. Most of the times they miss the true nature of the problem. The aim should not be to improve the efficiency of activities that are losing economic value but align the cost structure to market demand and supply and the current economic system of the industry. Managers need to take strategic actions that attack the drivers of cost and provide lasting value. They also need to act quickly to reduce cost at once and prevent the business from further margin erosion.

Does you company need to reduce cost? By how much?
What is your approach?

How Can You Get More Value Out of Cost?

Article

Are too many product lines weighing you down?

Article

Do You Know Why Your Organizational Costs Are Rising?

Article

Is the Industry Value Chain Depressing Your Earnings?

Article

How are supply and demand impacting your profits?

Article

Are you tackling cost reduction head-on?

Assess yourself: what is the rationale for your cost reduction?

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Strategic Cost Reduction

Are you experiencing these issues?

Our Approach

How We Help

Product Line Rationalization

Product Line Rationalization

Value Chain Restructure

Value Chain Restructure

Organizational Complexity Reduction

Organizational Complexity Reduction

Capacity Rationalization

Capacity Rationalization

Business Restructuring

Business Restructuring

Cost Sharing

Cost Sharing

Strategic Sourcing

Strategic Sourcing

Core Effectiveness Improvement

Core Effectiveness Improvement

Client Results

How We Have Helped Clients

Further Reading

Articles

How Can You Get More Value Out of Cost?

Are too many product lines weighing you down?

Do You Know Why Your Organizational Costs Are Rising?

Is the Industry Value Chain Depressing Your Earnings?

How are supply and demand impacting your profits?

Are you tackling cost reduction head-on?

Assess yourself: what is the rationale for your cost reduction?