C2.4.3 Cost Reduction – Products to Discard

Over time, the range of products that you have on offer will grow.  Not all of these are good contributors to your Profit. Make positive product decisions and eliminate the ones that detract from your Profit. Take into account such things as inventory, warehousing, sales, personnel, price discounts, time commitment and similar. Product Decision Focused […]

C2.4.4 Cost Reduction – Locations to Abandon

You want to decrease costs but you do not know where to start. Have you built up a number of locations from which you operate? Do these locations vary in profitability? This can depend on the same criteria as mentioned for products to discard. Ones where the market is saturated and ones that still have […]

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 […]

C2.4.8 Cost Reduction – Reduce Fixed Costs

Fixed Cost or Overhead Cost are those that will exist even if the business does not hypothetically produce anything. Alternatively, they can be thought of as costs that do not vary directly with production output. They include things like office and factory space, furniture & fittings and realistically speaking include all labour other than casual labour. […]

C2.4.10 Cost Reduction – Reduce Staff Cost

Earlier on we wrote about the importance of having “the right people on the bus”. It is crucial to reduce Staff Cost to boost your Profit. At this point in the project you have decided: What products and what locations you want to retain What products and locations that you no longer need. There are […]

Overhead Margin Analysis Explained

Overhead Margin relates to Overhead Costs, which are the costs in your business that do not change directly with a change in your Revenue and/or a change in your Cost of Goods Sold (COGS).

They include such things as:

  • Rent, insurance.
  • Interest.
  • Salaries of permanent staff.
  • Administration costs in general; telephone, office costs.
  • Some elements of the sales process that are not directly related to your Sales Revenue.

These Overhead Costs tend to grow over time and may lead to inefficiencies in your business. This is due to activities no longer being relevant to your business but remain as a cost. 12Faces has several tools for helping to remove these “barnacles” that detract from your Operating Profit. Yellow Belt

C2.4 Optimise100 – Cost Reduction

The fastest way to improve your profit is to reduce the costs in your business!

However, we need to bear in mind that this is a very limited step.  If you save costs to the ultimate degree, you no longer have an operating business!  Clearly there is some point below which cost cutting can damage the business rather than improve profitability.

Nevertheless, it is very often the first step undertaken by businesses and very often is undertaken without much discrimination.  

We often see overly simplistic cost reduction exercises where, for example, 10% of the staff are made redundant across the board without giving thought to necessary skill sets and the products and locations that are to be maintained.

This Yellow Belt project illustrates a number of cost centres that you can consider overhauling on your road to Optimising Your Existing Operation in 100 Days.

Benefit from Labour Efficiency Ratio Metric

The cost of labour is one of the largest overhead expenses in most businesses.  Any inefficiency here is an expense that must be recovered from the potential Profit of the organisation.  Labour tends to grow of its own accord and it is very difficult for the business operator to know just how labour productivity is going as costs are rising.  The Labour Efficiency Ratio discussed in this article is an early warning alert if wages are moving in the wrong direction.    Read this if: You have have sufficient staff to find yourself losing track of their costs and contribution to company productivity / profitability or if you are looking at putting on staff, like accountants, that don’t directly contribute to profit generation. Probably more likely to appeal when you have 10 staff or more.    Relies on: mentions a metric dashboard to monitor your business. Audio/visual materials: none  Degree of Difficulty: Blue Belt (intermediate)

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