Cost Reduction Strategy for Companies
In slow global economic growth and highly competitive market, maximization of revenue is not always easy to accomplish task. So company is now more focusing in reducing the cost to maintain a healthy business growth and better net profit percentage. Cost reduction saying is easy but actual implementation is much more complicated & most of the time companies takes wrong route. Companies instead of targeting other costs they often use to focus on the headcount to reduce cost. Reducing manpower is not the right option, it can effect in the KPI of the said department and actually it can hamper the work in long run.
People need to understand if a company need to go through a cost reduction they need to 1st go through a proper cost review and then decide the cost reduction strategy. Here for understanding will take an example of hypothetical company, where will go through a proper cost review and cost comparison and then will show cost reduction strategy.
- As per the cost review document sales figure of the company is same for both the years but the cost associated with sales like purchase, subcontractor cost, freight etc., has increase by ₹ 24 Cr. In the next year the average increase of all cost is around 6%. This cannot happen only due to increase in price. This is actually total inefficiency of SCM department. Company should focus on reducing cost in this segment by negotiating with labour contractor, freight forwarder, recruiting exclusive supplier for specific equipment or principle supplier.
- Company has recruited some employees for the future project which will provide revenue in the next year. This activity increased the payroll cost and recruitment cost. HRD should focus on recruitment of resources when it is actually needed, they should actually focus on the theory on ultimate utilization of resources.
- Travelling expenses increased by 32% but there is no increase in sales, so company should focus on reducing unnecessary travel expenses.
- Legal and professional expenses increased by 32% due to the consultancy fees like FP&A, banking, due diligence etc., which company would had done through internal team instead of paying consultants.
- Company should had filed and submit all their statutory report on time that will help them to control interest and penalty expenses.
- Shared service cost is one of the major problem for SBUs. If in one year SBU makes good profit corporate office used to put more share of expenses to the SBU but corporate office need to be lenient for allocating expenses.
- Finance cost has increased 50% that is mainly due to increase in LC charges and LC interest but if the supplier moves into LC terms then company should crack a better price deal but here purchases price has increased instead of LC. F&A department of the company should check on the issue and reduce cost.
- Company should have a control over its administration cost.
So if a company need to go through cost reduction process then company need to follow the above mention steps to complete a smooth implementation of the same.