Cost reduction is the process used by companies to reduce their

cost In Production (economics), 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 o ...

s and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development 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 ...

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, ind ...

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 t ...

becomes a differentiator in the market. The importance of cost reduction in relation to other strategic

business goal A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on t ...

s is often debated.

Cost reduction strategies

* Supplier

consolidation Consolidation may refer to: In science and technology * Consolidation (computing), the act of linkage editing in computing * Memory consolidation, the process in the brain by which recent memories are crystallised into long-term memory * Pulmon ...

: see examples in the aerospace manufacturing industry * Component consolidation * Low-cost country sourcing * Request for quotations (RFQ) * Supplier

cost breakdown analysis In business economics cost breakdown analysis is a method of cost analysis, which itemizes the cost of a certain product or service into its various components, the so-called cost drivers. The cost breakdown analysis is a popular cost reduction s ...

Function cost analysis Function cost analysis (FСА) (sometimes called function value analysis (FVA)) is a method of technical and economic research of the systems for purpose to optimize a parity between system's (as product or service) consumer functions or properti ...

/ Value analysis /

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 assembly * Reverse costing * Cost driver 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 i ...

(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. 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 ...

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