Reducing Business Costs
by Ron Kurtus (revised 20 November 2011)
Cost reduction is an important factor in improving the state of a business. It can obviously result in higher profits and a stronger enterprise. Most business leaders and managers would like to reduce costs, but many find it difficult to do the right things.
Questions you may have include:
- What preparations should be made for reducing costs?
- What are some damaging methods to avoid?
- What tools can be used to reduce costs?
This lesson will answer those questions.
Preparations for reducing costs
Before attempting to reduce operating and production costs in a business, you must lay some groundwork. Succeed in Business is organized in the order of actions you should take to establish a successful business.
Prior to working on reducing costs, you should have:
- Measured your business and established a starting point.
- Organized your business operations.
- Stated a mission, concept and vision.
- Initiated ISO 9000 standards.
Only after fulfilling these items are you ready to start working on reducing costs. Company leaders, who bypass these steps, end up damaging their businesses with "quick fix" methods that don't work in the long run.
There are several methods business leaders or managers use to reduce costs that can be damaging to the health of the organization. These include downsizing, reducing customer service, and cutting corners in production methods.
Some company leaders feel they can reduce costs by simply downsizing or reducing the number of workers or middle managers.
If this is done after applying ISO 9000 and defining the exact role of everyone, it may be a necessary and effective method. Unfortunately, most companies that downsize do so without really knowing the impact on the company's operations.
One of the biggest effects of downsizing to reduce costs is that the good employees quickly leave the company for greener pastures. Thus the company is left with the deadwood employees, who are supposed to do twice the work as before.
Reducing customer service
Customer service can be a nuisance and is often expensive. Sometimes companies will reduce or eliminate the service they give to the customers.
Unfortunately, a neglected customer is an ex-customer.
(See Satisfy the Customer in the TQM section to see the importance of customer service.)
A quick way to cut costs is by cutting corners in production or service methods. Some company leaders feel that by using cheaper materials and labor, and by eliminating part and steps, they can cut costs and save money.
It is true that costs may be cut in the short run, but often the product or service is of such a low quality that repairs and rework costs go through the roof. Also customers may become unhappy with the low quality and move on to another supplier.
Effective Ways to Reduce Costs
Reduce costs means to reduce waste. That is wasted materials, wasted effort, and wasted time. Effective ways to reduce costs include training your workers, getting quality goods from suppliers, and using Total Quality Management (TQM) tools.
In these days of changing technologies and methods, it is necessary to train your workers to keep them up to date.
(This is explained in detail in Train Your Workers.)
Get Quality from Suppliers
Low quality goods from suppliers are a major source of waste. You should not only try to get quality suppliers but also work with your suppliers to help them improve their operations and quality of output.
(This is explained in detail in Get Quality Goods From Your Supplier.)
There are a number of improvement methods that can be placed under the umbrella of Total Quality Management (TQM).
(These are explained in: Reduce Costs with TQM Tools.)
Crude methods to reduce costssuch as downsizingare not effective and can actually harm a business. Helping your suppliers, training your workers, and using TQM-type improvement tools can help to eliminate waste and improve the profits of your business.
Look to your workers for good ideas on reducing waste.
Resources and references
The following are resources on this subject:
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