Strategic Cost Reduction

Eliminating large, hidden, unnecessary costs and assets

Strategic cost reduction helps managers cut substantial costs without hurting the business.

 

Leading companies need to rein in costs all the time, for many reasons. Over time, a company’s cost structure increases if for no other reason than business growth and changes in the markets served, but many other factors can occur.

In some cases, costs can escalate well beyond the acceptable level of performance and place a massive burden on the company’s ability to operate profitably, remain competitive, or even plan for growth. When this happens, adverse conditions set in that deteriorate financial performance even more. At this point, management needs to focus on structural changes that sustain cost savings and margin improvements in the long term.

Are you experiencing these issues?

When businesses require cost reduction, managers often turn to short-term solutions. These include improved sourcing & procurement, higher operational efficiencies, reduced spending, tighter cost controls, gradual staff cuts, and other immediate fixes. In the best cases, they provide band-aid solutions. In the worst cases, they cut the wrong areas, diminish competitive advantage, and set the company further back.

Cost cutting is
not working.

Quick cost wins have
been accomplished.

Cost cuts are
not enough.

All cost cutting initiatives
are exhausted.

Cost reduction
does not stick.

Profits continue
to deteriorate.

These issues usually result from the fact that the company is not attacking the drivers of cost. Instead, managers tend to make small cost cuts across the board hoping that total savings will add up to the desired level of performance.

Our Approach

Our approach to strategic cost reduction takes a broad and deep look that examines the company’s value chain end-to-end and the entire cost structure to get to the heart of the issue. The realization is that not every dollar of cost is equal. Some costs drive customer value creation and profits directly; others do not. The goal is to know which costs, activities, and efforts yield the optimal return to the firm and its stakeholders and which don’t – and take strategic action that cuts costs and builds the relevant strategic control points.

The Results You Can Expect

  • QUANTIFICATION OF TOTAL COST AND COST DRIVERS
  • REVERSED PROFIT DETERIORATION
  • PROFIT IMPROVEMENT 5% to 10%
  • EARNING'S GROWTH FASTER THAN REVENUE GROWTH
  • ASSET UTILIZATION IMPROVEMENT OF 5% to 15%
  • RESTORED COMPETITIVE POSITION
  • RETURNS WELL ABOVE THE COST OF CAPITAL

How We Help

We assist clients in reducing large costs by determining
how to cut and how much to cut.

We offer a comprehensive set of services to go where the problem is.

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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 ...

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. The goals are three:

  • 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.

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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 ...

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.

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Organizational Complexity Reduction

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

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.

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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 ...

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 in the interest of the efficient use of assets.

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.

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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 ...

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.

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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 ...

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.

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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 ...

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.

How We Have Helped Clients

Satellite Manufacturer

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

Airline Maintenance Provider

Reduced total cost by 13% by rationalizing select product lines and repositioning the rest.

Car Part Manufacturer

Rationalized production capacity by 15% to align supply with demand.

Launch Vehicle Producer

Reduced total cost structure by 9% by leading active market consolidation in the industry.