Chapter 22
Cost Reduction
The typical corporation goes through cycles of growth and contraction. During a contraction phase, the controller will inevitably be asked which expenses should be reduced. The worst possible recommendation is to recommend an across-the-board cost reduction since it impacts both key areas and less crucial ones equally. A better approach is to undertake a carefully targeted analysis that results in the selective pruning of only those costs that a company can most easily afford to lose. This chapter describes various techniques for cost reduction analysis, including spend analysis, supplier consolidation, and workforce reduction. It also provides an overview of a number of analysis tools, including check sheets, Ishikawa diagrams, and value stream mapping.
Types of Reports Used for Cost Reduction Analysis
A cost reduction analysis project should start with a general overview of the target area that results in a graphical presentation of potential cost reductions. The format in Exhibit 22.1 shows the potential cost reduction impact of numerous projects across the bottom axis and implementation difficulty on the vertical axis. Cost reductions in the lower right corner are “low-hanging fruit” that generate significant returns in exchange for a modest effort. Conversely, items in the upper left corner require a great deal of effort and produce minimal returns. This format is a good guideline for deciding which projects to address first, and which can safely ...
