“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
Every organisation to run the business would require to incur expenses as well if they are aiming at improving business. No business can only run on Income. But what happens if one fine day the organisation loses track of the costs being incurred? Along with the Planning of how business has to be conducted, Cost optimization is another important Strategic approach that should be followed for future benefits.
What is Cost Optimization?
Cost Optimization is not an immediate action. It is continuous effort, particularly designed towards cost reduction while maximizing business value. The main theme behind Optimization believes in getting paid back for every penny they spend for the company.
Cost optimization can be implemented on various types of levels of business. The targets set for each level can vary depending on the risks involved, channel management, sustainability.
What are the Steps to be followed to integrate Cost optimization strategy in our business?
The key to effective enterprise cost optimization is to have proactive processes in place as part of business and technology strategy development to continually explore new opportunities. Many programmes fail to deliver the plan or either stick with it. Primary focus should be on possibilities on value rather than on cost or volume. There are 5 major steps for a successful and comprehensive cost optimization program:
What are the different stages Cost Optimization can be implemented?
When the cost optimization program is instead intended to counteract a longer-term decline in results, the focus is on paring away products and programs that are less likely to generate profits or cash flows over the longer term. While implementing a plan, the below stages can be followed:
This refers to an immediate strategy that can be implemented in a small level. Even if the expense is over small nature, this can be applied easily. This can be made on random criteria. Few examples are given below:
1. An area where you can reduce the cost is on the electricity bill by purchasing the eco-friendly bulbs as well as energy saving bulbs. As of now the most energy efficient bulbs are “LED (Light Emitting Diode)” bulbs, these can be used as a replacement for the old traditional 60watt incandescent bulbs.
2. There may be a space in our office which is being unused for a long time and even though paying the rent for the same, in such cases it is beneficial to rent the same and generate some indirect incomes with some margins.
This involves a more systematic approach compared to cost cutting, as this not only involves reduction of costs, but involves estimating and controlling the resources and activities while implementing Cost optimization. More points can be added depending on the area focused on. Few examples are given below:
1. Create a budget for each process and evaluate whether it stays within such budget. If not, further develop and control accordingly. If yes, try to further improve.
2. While in need of an equipment, find out which is more beneficial for the company as to whether the same needs to be purchased or leased. The value of the machine, the employees that need to work on it, the repair costs, insurance costs etc should be thought about.
Cost designing focuses on the internal value chain and to improve the relationship among resources and the actual work performed to achieve results. Find out whether what amount a customer is ready to pay for the service/product provided and whether costs can be adjusted accordingly such that it reaps profits. Few examples can be:
1. In case of limited Capital, limit the resources to only the minimum requirement and make use of it in the maximum use and most efficient way.
2. In a manufacturing company, the design of products in the company focused on improving manufacturing efficiency to achieve lower unit costs.
Cost positioning focuses on the external value chain and enhance the relationship among supply chain and improve competitiveness in the market. Here, an analysis on market share of the product/service on sale and the price targets. Constant follow up on Supply chain management would be required such that neither the market share is lost, nor costs increase. Few examples can be:
1. After selling the product/service, analyse how do you need to receive payment to manage cash flow concerns. Whatever the payment terms may be, make sure whether you have the funds to manage cash flow until then.
2. At the stage of your marketing project, you are creating an initial target audience. So, it will not necessarily stay the same throughout your entire project. “Whether spending so much will help us achieve this target audience or not?” could be a question that can be kept in mind. Just providing a lot of discounts or freebies may not attract customers in the long run.
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