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.

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.

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