Cost Control & Reduction
Cost Control & Reduction
Management in most companies misunderstood cost control and reduction as an initiation that will only be considered when businesses are experiencing a contraction phase. However, there are many reasons why companies should adopt a constantly active cost control and reduction program and it is not an option if companies want to remain competitive in the market on a long-term basis. Firstly, when a company’s products and/or services, especially those companies which operate in the industry with low entry barriers, are experiencing rapid price decline to remain competitive, the associated costs need to be dropped accordingly to maintain the desired profit. Therefore, the decline in revenue in line with the fall in selling price is the driving factor to cost control and reduction for the company to remain competitive. Secondly, certain companies may have a high fixed cost base which requires companies at a high level of capacity to remain profitable. However, the high fixed cost base will lead to severe inflexibility to selling price adjustments and changes in business models as driven by market changes. Furthermore, the default costs of operation will increase over time if there is no active cost control and reduction program. Increases in default costs could be coming from several factors including inflation, the increasing complexity in the existing process when companies expand to account for new products and services, increasing level of benefits entitlements within the companies, and many more. The abovementioned reasons are merely the tip of the iceberg.
We recommend any companies have an active cost control and reduction program as part of their annual business planning process and include it as one of the key initiatives for the new fiscal year. Unfortunately, our prior experiences conclude most poorly managed companies typically share a similar fashion of ignoring cost control and reduction until they get into financial difficulties and then impose a sudden across-the-board cost control and reduction. The better approach is through constantly conducting an analysis of every area of a company on an ongoing basis, with an emphasis on maintaining full funding of the overall strategic direction and a careful paring of other costs with high precision.
Careful analysis to precisely identify areas with the largest potential for cost control and reduction is an extremely important process which often time, it was overlooked or ignored by most companies. Cost control and reduction strategies were executed without fully considering the full aspects of the consequences of their executions. As a result, we evidenced cost control and reduction strategies have led to impairment of customer loyalty and the weakening abilities of companies to achieve their long-term goals. Our team could assist with the analysis process to accomplish cost control and reduction while maintaining a robust operation of the companies.
Our professional team members have earned reputable merit in successfully assisting the company in dealing with complex cost control and reduction issues. We generally classify cost control and reduction according to different business functions such as sales and marketing, product design, production, payroll, benefits, and special areas such as mergers and acquisitions.
Selling and Marketing
The focus of cost control and reduction in this area is not reducing the costs associated with selling and marketing activities, but rather it primarily deals with reapportioning the relevant costs to maximize gross profit which in turn achieves the highest profitability level. The scopes of our services generally comprise assisting with analysis of customer mix, analyzing customer class, lost of customer analysis, sales by region analysis, throughput analysis required for price setting, analyzing sales effectiveness, reviewing and advising sales process flow, introducing cost control and reduction measures on marketing costs and many more. The successful implementation of these measures and practices will assist companies in achieving their sales goals while minimizing selling and marketing costs associated with sales generation.
Product Design Analysis
It is crucial for any company engaging in manufacturing activities to ensure the product is initially designed with plenty of room to achieve sustainable profit in the long term. There are many target costing techniques of which our team could assist in this aspect. Furthermore, cost control and reduction merely represents one key aspect of the decision of the management in determining whether to add, terminate, outsource or customize a product. Our team could assist management in providing them with a full spectrum of aspects to be taken into consideration in reaching the right conclusion to these decisions. On the aspect of cost control and reduction, our expert team specializes in target costing and price increases, terminating loss-making products, adding new products, product outsourcing decisions and strategies, customizing product costs, and establishing product metrics.
Production Cost Control and Reduction
Most traditional manufacturing companies typically focus on the continuous running of the production process to minimize the per-unit cost for each manufactured product. Furthermore, other common practices as evidenced in most traditional manufacturers include significant investment in inventory to be set aside as a buffer for its production process followed by introducing efficiency exercises from time to time throughout the process to keep the costs per unit down. From our experiences, there are several areas of concern from these methods, some of which include the high inflexibility of the business model whereby manufacturers are not able to switch to new products on short notice to capture new market opportunities. Furthermore, the continuous accumulation of inventory as a buffer for the production process resulted in a significant amount of company capital being tied down for this purpose. The focus of our service is not to replace the existing production process but rather to introduce new methodologies and approaches to achieve a much leaner production facility that can be accomplished on an ongoing basis without causing production disruption.
Payroll Cost Control and Reduction
In many companies, payroll is the largest or if not the second largest expenditure in an organization. Attributing to its sizable nature, it offers plenty of cost control and reduction opportunities. However, despite the large amount which entitles payroll costs to rightfully deserve special attention from the management, payroll costs control and reductions are often neglected, and in some instances, management even considers payroll cost control and reduction to be a disgraceful or reprehensible action. Management generally perceived the existence of an employment contract with its employee in which employees will fulfill their duties through delivering improvement in work efficiency. Therefore, reducing the staff levels will directly impact the morale of their teams and cause a fall in efficiency levels. Some managerial personnel even go beyond the general employer-employee relationship and define the employee headcounts in their department as the primary measurement of their authority. In other words, the higher the staffing level in their department, the greater the authority of the departmental head and managerial personnel to overpower other departments. Given these concerns, our team shall go beyond the basic analysis needed for a workforce reduction and also address alternatives to a reduction as well as methods for managing payroll expenses on an ongoing basis, so that there will be less need for a workforce reduction.
Employee Benefits Cost Control and Reduction
In contrast to payroll costs, expenditures relating to employee benefits may vary significantly from company to company. Some of the benefit packages may be a significant expenditure of total expenses to certain companies, especially those companies that do not view employee benefits packages as an expenditure but rather the need to attract and retain top talents. As a result of this, we have evidenced companies dedicate a significant amount of resources to this aspect and with a constant increase in the size and varieties of employee benefit packages from time to time. The focus of our service is not to reduce benefit costs but in a similar fashion to selling and marketing costs, we aim to reduce some benefits that are identified as less necessary items. This will free out more cash for the company to concentrate on benefits that are most relevant and desired by the workforce. Identifying less valuable benefits firstly requires breaking down the benefits followed by discussing cost control and reduction opportunities in each component of the benefit with the management.
Procurement Cost Control and Reduction
The traditional procurement process is slow in obtaining goods and services and the process requires an immense amount of paperwork, error checking exercises, and manager approvals. Not only the efficiency level is largely discounted, but these activities as mentioned also increase the process costs. However, on the upside, this also presents cost control and reduction opportunities, particularly on the high costs associated with the procurement process which can be largely reduced through process streamlining. Furthermore, with more time savings upon introducing process streamlining, it will free out more time for the purchasing team to conduct spend analysis which shall further generate cost savings in the long term. Our team is equipped with relevant expertise to assist the company in realizing these goals. The scopes of our service are further expanded to conduct analysis and introduce cost savings on other key aspects such as maintenance, repairs, and operation spending.
Asset Control and Reduction – Inventory
Most companies define inventory as assets and rightfully so according to the definition of inventory under applicable accounting standards. However, inventory in essence can become a liability or a significant financial burden to companies if it becomes obsolete. Value of inventory is constantly reduced causing recognizing necessary impairments to bring down the inventory value which may have devastating effects on the business and the healthy financial records of the company. Therefore, the inventory level should be kept to a minimum level but sufficient to not destroy profitability. Companies often practice keeping a high level of inventories for various reasons, including using an inventory buffer as required under the traditional manufacturing process (refer above), the attempt of companies to meet customer orders at a fast rate, and increasing product range to attract and retain customers, and many other tactical reasons.
There are substantial cost control and reduction opportunities in reducing a company’s investment in inventory which can be achieved via a broad array of techniques that our team could assist with. These techniques cover a full spectrum of the process, from inventory purchasing, receiving, and storage to the bill of material, inventory obsolescence, and many more.
Asset Control and Reduction – Fixed Assets
Fixed assets in most companies operating in asset-intensive industries are their largest expenditures. Therefore, any incorrect decision to purchase the wrong assets and/or overspend on fixed assets will result in a significant amount of cash tied down to fixed assets. The common approach in assessing the fixed asset purchase is through developing a net present value analysis of the project’s future cash flows. The decision from this analysis is usually selecting a project with the highest ability in generating future cash flows. Furthermore, some of the assumptions supporting the projected cash flow as we have evidenced are not substantive, and with no reference to any reliable data source.
Should companies base their significant investment according to this method, this will lead to a major risk of funding misallocations in the wrong fixed assets. In our opinion, major investments in fixed assets should be based on improving the overall corporate throughput (revenue minus total variable expenses), irrespective of whether it’s a new or existing business activity. In other words, the safest and yet most rewarding bet is an investment in fixed assets with the ability to maximize the throughput of the company. There are a broad array of cost control and reduction approaches and considerations in this aspect, including feature reduction, the decision to buy or outsource, and many more. Our services also cover tracking of fixed assets’ conditions to determine the expected due date for fixed assets that should be replaced and funding should be set aside for this purpose.
Cost Control and Reduction in Mergers and Acquisitions
Cost control and reduction in mergers and acquisitions is a special area. In the nutshell, when an acquiring entity acquires or merges with another entity, in most cases, similar functions within the two entities are supporting similar business activities. Therefore, this has opened out plenty of cost control and reduction opportunities since a significant amount of duplicated costs are due to the mergers and acquisitions transaction. However, per our experience, realizing the cost control and reduction synergies in the underlying transaction requires more than just eliminating the duplicated functions in the entity integration process. Failure in correctly handling integration will result not only in failing to realize relevant cost synergies, but also the acquisition transaction will consume an inordinate amount of time and money of the acquiring entity. On the contrary, a successful integration exercise will bring acquiring entity a substantial number of synergies that are more than just cost synergies.
Our expert team recognizes the importance of an effective acquisition integration process. We could assist with providing advice on numerous topics comprising integration team set up, assist with the planning process, and executing the integration of a series of processes of the acquiree, including workers, process, systems, and other related functions, all of which are aiming to realize cost control and reduction to the highest potential whilst minimizing possible business disruptions. For more information on our service provision in this aspect, please refer to Mergers and Acquisitions.
Encountering Business Challenges?
Let’s talk about how we can assist and raise together.
Let us together build a flourishing business
When connected with us, you aren’t growing your business alone. We have your back and put in our best to contribute to the growth of your entire team and organization. So, if you are looking for the right consultant that’ll help you overcoming business and operational challenges, and bring in more conversions and revenue, we are right here!