Cost reduction is the process used by companies to reduce their

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...

s and increase their profits. Depending on a company’s

services Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a p ...

products Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Produ ...

, the strategies can vary. Every decision in the

product development In business and engineering, new product development (NPD) covers the complete process of bringing a new product to market, renewing an existing product or introducing a product in a new market. A central aspect of NPD is product design, along wi ...

process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project or the

construction Construction is a general term meaning the art and science to form objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and com ...

of a building. Companies typically launch a new product without focusing too much on cost. Cost becomes more important when

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...

increases and

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...

becomes a differentiator in the market. The importance of cost reduction in relation to other strategic business goals is often debated.

Cost reduction strategies

* Supplier consolidation: see examples in the aerospace manufacturing industry * Component consolidation *

Low-cost country sourcing Low-cost country sourcing (LCCS) is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called ...

Request for quotation A request for quotation (RfQ) is a business process in which a company or public entity requests a quote from a supplier for the purchase of specific products or services. RfQ generally means the same thing as Call for bids (CfB) and Invitation ...

s (RFQ) * Supplier cost breakdown analysis * Function cost analysis /

Value analysis Value engineering (VE) is a systematic analysis of the functions of various components and materials to lower the cost of goods, products and services with a tolerable loss of performance or functionality. Value, as defined, ...

Value engineering Value engineering (VE) is a systematic analysis of the functions of various components and materials to lower the cost of goods, products and services with a tolerable loss of performance or functionality. Value, as defined, ...

Design for manufacture Design for manufacturability (also sometimes known as design for manufacturing or DFM) is the general engineering practice of designing products in such a way that they are easy to manufacture. The concept exists in almost all engineering discipl ...

Design for assembly Design for assembly (DFA) is a process by which product design, products are designed with ease of Manufacturing, assembly in mind. If a product contains fewer parts it will take less time to assemble, thereby reducing assembly costs. In addition, ...

Reverse costing Reverse costing describes the process of disassembling ( reverse engineering) a device to identify manufacturing technology and calculate its manufacturing cost Manufacturing cost is the sum of costs of all resources consumed in the process of mak ...

Cost driver According to the most simple definition, a cost driver is the unit of an activity that causes a change in the activity's cost: A different meaning is assigned to the term by Michael Porter: "cost drivers are the structural determinants of the cost ...

analysis *

Activity-based costing Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more ind ...

(ABC), which assigns a cost of each activity undertaken in the production and delivery of each product and service according to the actual consumption by each activity including a share of

overheads In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular revenue unit, unlike operating expenses such as r ...

. Peter Turney in a 1989 article examines the role of ABC in the achievement of

manufacturing Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to a r ...

excellence and the product cost information needed by managers working towards this goal. * Product

benchmarking Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost. Benchmarking is used to measure performan ...

*Competitor benchmarking *

Design to cost Design-to-Cost (DTC), as part of cost management techniques, describes a systematic approach to controlling the costs of product development and manufacturing. The basic idea is that costs are designed "into the product", even from the earliest co ...

* Design workshops with suppliers *Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes or value adding stages to 1/N of the previous cost.High, P.
AstraZeneca CIO Makes IT Twice As Good At Half The Cost - Here Is How
Forbes.com, published 3 January 2017, accessed 10 January 2021

Cost reduction strategies

References

Further reading

See also