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.
Example:
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.
