Cost Reduction Strategy Example | Operational Cost Reduction Strategies

In the wake of today’s global pandemic, many businesses have suffered severe and sometimes irreversible setbacks to their profit margin.

Now more than ever, finance executives are preoccupied with cutting costs where justifiable. Other than mandating employee furloughs and layoffs, or slashing salaries, which has become quite commonplace, what else can be strategically done to benefit the bottom line?

The answer lies in dissecting the operating expenses in your company’s income statement. Operating expenses are the fixed and variable costs incurred through normal business operations, and they act as the demarcation between gross margin and operating income.

When the curtains are pulled back on this line item, we find a variety of areas where costs can be reduced by focused negotiation and innovative thinking. These include but are not limited to shipping, logistics and freight, non-manufacturing supplies and rent, and utilities.

Cost Reduction Strategy Example

As an example, negotiation with the third-party logistics service provider to centrally host and administer this shipping, inventory movement, and the receding process can result in a much lower cost than if they were managed in house.

All of these are embedded in the procure to pay process cycle, which is essentially the approach and organization outlines, to obtain goods and services needed for sustaining business operations before the purchase actually takes place.

There are a series of upstream decisions and dependencies that must be carefully considered by procurement.