Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Some activities of the company have a fixed cost. A product design, for example, is a fixed cost of producing the final product. If the company can increase the units of product sold using that design, it reduces its effective unit cost.
Google dominates the search business. Its market share is 65% of the market and its share is steady. Microsoft has recently introduced its new search product, called Bing. This product holds 8% of the market and is gaining a bit of share. Its share gains are coming largely at the expense of the second ranked company in the search business, Yahoo. Yahoo has about 20% of the market and its share is declining.
Recently, Microsoft announced that it had reached a deal with Yahoo that would combine the Microsoft and Yahoo search businesses. This deal involves revenue sharing from advertising sales. Neither company will exchange significant upfront payments. Microsoft’s Bing becomes the search engine for Yahoo. This deal allows Microsoft to create powerful new leverage for the fixed cost of its Bing search product. Yahoo has two and a half times its search volume and Microsoft will pick up new sales volume with no addition to its currently fixed costs. There are other revenue and cost benefits from this combination as well, but this is a good example of a company finding new customer volume over which to spread its fixed costs.
The cell phone business is slowing in its growth. The reason: market penetration. Cell phone competitors have penetrated more than 80% of the U.S. market, so most new users coming into the market do so by way of the prepaid plans offered by several companies.
In another recent example, Sprint Nextel announced it will buy Virgin Mobile USA. This acquisition will make Sprint Nextel the number two seller of prepaid cell phone services in the country. The acquisition of Virgin Mobile’s 5.2 million customers will bring Sprint’s total paid prepaid subscriber numbers to 9.5 million customers. The industry leader, TracPhone, has 12.5 million U.S. subscribers.
Over the years of studying various approaches to cost reduction, we have found that a company can increase the product Output over which it spreads its fixed cost of activities:
* Acquiring a similar organization to spread fixed costs. This is an acquisition of another organization with a similar business.
*Using fixed cost activities with more customers. This approach uses fixed costs with competitors who employ outsourcing as well as combining fixed costs with competitors into separate businesses.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Showing posts with label reducing costs. Show all posts
Showing posts with label reducing costs. Show all posts
Monday, August 17, 2009
Thursday, August 13, 2009
Reducing Costs by Redesigning Products and Processes
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Redesigning a product or process is a powerful approach to reducing costs by eliminating activities. A company may reduce an activity by reducing the number of times an activity is required to produce a product or by reducing the number of separate activities used to produce the product. If a company reduces its activities, it should reduce the total units of Inputs it uses in its cost structure.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
The government’s effort to reduce its operating costs notes several examples of redesign of products and processes to eliminate activities:
* The Coast Guard will reduce its maintenance schedules for its small boats. Its schedules had assumed that these boats were for recreational use. When the Coast Guard adjusted its maintenance schedule to reflect their actual usage, it found it could reduce its maintenance.
* The Department of Labor will disband the Employment Standards Administration and an Assistant Secretary of Labor, two deputy assistants and an administrative office that oversees this group. The work of this group will be done as it has been done, just with less administrative leadership and support.
* The Bureau of Reclamation will increase its use of video conferencing and computer monitoring. This change in activities will enable it to eliminate an aircraft and many trips by engineers to the group’s offices in Washington State.
Our studies of cost reduction techniques have concluded that a company may reduce the activities it uses to produce a final product by the following actions:
*Redesign the product to eliminate components
*Redesign the process to eliminate activities
*Eliminate customer activities with low value to the customer
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Redesigning a product or process is a powerful approach to reducing costs by eliminating activities. A company may reduce an activity by reducing the number of times an activity is required to produce a product or by reducing the number of separate activities used to produce the product. If a company reduces its activities, it should reduce the total units of Inputs it uses in its cost structure.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
The government’s effort to reduce its operating costs notes several examples of redesign of products and processes to eliminate activities:
* The Coast Guard will reduce its maintenance schedules for its small boats. Its schedules had assumed that these boats were for recreational use. When the Coast Guard adjusted its maintenance schedule to reflect their actual usage, it found it could reduce its maintenance.
* The Department of Labor will disband the Employment Standards Administration and an Assistant Secretary of Labor, two deputy assistants and an administrative office that oversees this group. The work of this group will be done as it has been done, just with less administrative leadership and support.
* The Bureau of Reclamation will increase its use of video conferencing and computer monitoring. This change in activities will enable it to eliminate an aircraft and many trips by engineers to the group’s offices in Washington State.
Our studies of cost reduction techniques have concluded that a company may reduce the activities it uses to produce a final product by the following actions:
*Redesign the product to eliminate components
*Redesign the process to eliminate activities
*Eliminate customer activities with low value to the customer
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Tuesday, August 11, 2009
Reducing Costs by Eliminating Non-Productive Input
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
A company may make the Inputs more directly variable with the Output of the product by reducing the amount of Input that is wasted or idle.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
There are several examples of savings the government will achieve by reducing the number of Inputs that are wasted or idle. Here are a few of them:
* The Office of Thrift Supervision eliminated unused phone lines.
* The Army will increase the number of soldiers traveling on each airplane chartered for rest and relaxation leave.
* The Navy will save money by deleting inactive internet accounts.
* The Justice Department will save money by setting up its printers and copiers to use both sides of the paper.
* The Department of Homeland Security will save money by emailing instead of printing some documents.
In our research into several thousand examples of cost reduction techniques, we have found that you can reduce the Inputs that are idle or wasted by using the following techniques:
*Assisting the Input in increasing Output
*Shifting demand to use unproductive resources
*Improving the accuracy of the demand forecast
*Using short term sources of Input to meet peak demand.
*Speeding the process.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
A company may make the Inputs more directly variable with the Output of the product by reducing the amount of Input that is wasted or idle.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
There are several examples of savings the government will achieve by reducing the number of Inputs that are wasted or idle. Here are a few of them:
* The Office of Thrift Supervision eliminated unused phone lines.
* The Army will increase the number of soldiers traveling on each airplane chartered for rest and relaxation leave.
* The Navy will save money by deleting inactive internet accounts.
* The Justice Department will save money by setting up its printers and copiers to use both sides of the paper.
* The Department of Homeland Security will save money by emailing instead of printing some documents.
In our research into several thousand examples of cost reduction techniques, we have found that you can reduce the Inputs that are idle or wasted by using the following techniques:
*Assisting the Input in increasing Output
*Shifting demand to use unproductive resources
*Improving the accuracy of the demand forecast
*Using short term sources of Input to meet peak demand.
*Speeding the process.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
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