C2.4.6 Cost Reduction – Supplier Relationship

One of the easiest, and least painful, places to start a cost cutting exercise is by looking at your supplier relationships.

Any activity in this area can have good pay offs.


Assume that about half of your expenditure is on products purchased from suppliers.
These could be:

  • Manufacture: Variable Costs
  • Retail: Cost of Goods Sold 

Reduce the price you pay by 5%, you get 2.5% of that saving going immediately to your Profits
(50% of 5% = 2.5%)

In our example at the start of the Program, we had a case study business with 5% net Profit.

  • The 5% price reduction mentioned here sends 2.5% straight to the bottom line Profit.
  • This gives a new Profit of 7.5%
  • A healthy 50% improvement over the current 5% Profit.

This topic is covered in greater detail in the article: How to Reduce Variable Costs for Better Profit

Learn what a Variable Cost is and how to reduce these costs. Businesses have experienced up to 30% savings in purchases.

Supplier relationship development can achieve up to 15% discounts in Overall Costs.

Then, by target costing you will choose the ones to reduce. Focus on the biggest cost items first – a 10% cost saving on the larger item will have a greater impact than a 10% saving on a small item.

Other areas to investigate are:

  • Substituting items for a cheaper product
  • Stretch the Accounts Payable period so that you pay for the product after you receive payment for the product.

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