14 Cost Tactics for Creating Value in Business

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Creating value within a company often hinges on cost reduction without sacrificing the quality of products or services. By implementing strategic cost tactics, businesses can streamline operations, maximize profits, and enhance customer satisfaction. Let’s explore how to utilize 14 innovative cost tactics to create value.

1. Asset Standardization

Standardizing assets refers to using common parts or processes across different products or services. This reduces operating costs and increases flexibility. For instance, an automotive company might use the same chassis for multiple car models to save on manufacturing costs.

  • How-To: Standardize equipment, raw materials, and processes to reduce maintenance and training costs. Focus on modularity to interchange parts and accommodate different production lines.
  • Example: A textile factory might standardize looms and knitting machines, so the same parts and maintenance protocols apply across the board, reducing operating costs.

2. Cost Leadership (No Frills)

This involves offering basic products or services at a lower price than competitors. By keeping variable costs low, companies can sell high volumes at low prices. A supermarket chain could source products directly from manufacturers and buy in bulk to offer lower prices to consumers.

  • How-To: Target the broadest customer base by simplifying product offerings and focusing on efficiency to offer the lowest prices.
  • Example: A fabric manufacturer might produce a high-volume, standard-specification fabric for budget-conscious customers, foregoing variations and customizations.

3. Costs per Unit

Reducing the cost per unit can be achieved by improving operational efficiency. An example is a technology firm investing in advanced machinery that speeds up production, thereby reducing labor costs per unit.

  • How-To: Increase production volume and optimize operations to spread fixed costs over more units.
  • Example: By increasing the batch size of dyeing processes, a textile manufacturer can reduce the cost per yard of fabric dyed.

4. Decrease Service Level

Companies can decrease service levels by implementing automation or encouraging customer self-service. For instance, banks have moved towards online banking services, reducing the need for in-person tellers.

  • How-To: Automate customer service where possible and create self-service options for customers.
  • Example: Introducing an online fabric customization tool allows customers to design their patterns, reducing the need for in-person consultations.

5. Economies of Scale

As production volume increases, the cost per unit typically decreases. This is due to spreading fixed costs over a larger number of goods. A classic example is a cloud services provider that invests in more servers, reducing the cost of data storage for a growing customer base.

  • How-To: Expand production and leverage bulk purchasing to reduce the cost per unit.
  • Example: A garment factory increases its output to leverage bulk discounts on raw materials and distribute fixed costs over a larger number of garments.

6. Economies of Scope

This tactic involves expanding the scope of operations to reduce costs. A catering company might start offering event planning services, utilizing its existing staff and equipment to provide additional services at a lower cost.

  • How-To: Diversify product offerings to share the costs of operations across multiple products.
  • Example: A textile company produces both clothing and upholstery fabrics, sharing marketing and distribution channels for both product lines.

7. Fixed to Variable Costs

Switching from fixed to variable costs means you pay for what you use. Instead of purchasing equipment, a company could lease it, turning a large upfront investment into smaller, regular payments.

  • How-To: Shift from owning assets to leasing or pay-per-use models to turn fixed costs into variable costs.
  • Example: Instead of purchasing machinery, a textile company could lease it, thereby converting a large upfront investment into a monthly operating expense.

8. Fractional Ownership

Through fractional ownership, multiple parties share the costs of an asset. Private jet sharing among businesses for corporate travel is a prime example of this tactic.

  • How-To: Share the ownership and usage of assets among different parties to distribute costs.
  • Example: Several small fashion brands could co-own a fabric printing machine, sharing usage and maintenance costs.

9. Location

Relocating operations to areas with lower costs can dramatically cut expenses. Many tech companies, for instance, have moved their customer service departments to countries with lower labor costs.

  • How-To: Move operations to areas with lower labor, raw material, or overhead costs.
  • Example: Relocating a manufacturing plant to a region with lower labor costs can significantly reduce production expenses.

10. Outsourcing

Outsourcing non-core activities can reduce costs and allow a business to focus on its strengths. Apparel brands often outsource production to specialized manufacturers to save on costs associated with running their own factories.

  • How-To: Identify non-core activities and contract them to specialized third parties.
  • Example: A clothing company might outsource fabric cutting and sewing to a third-party contractor, focusing on design and sales internally.

11. Physical to Digital Assets

Moving to digital assets from physical ones can slash costs significantly. Retailers are increasingly turning to e-commerce platforms, thereby reducing the need for physical store space and related expenses.

  • How-To: Transfer physical operations to digital platforms to reduce overhead.
  • Example: A fabric retailer moves from a physical storefront to an e-commerce platform, cutting down on rent and utilities.

12. Pool Purchasing Power

Collaborating with other businesses to buy in bulk can lead to significant savings. Small businesses often join cooperatives to get discounts on supplies that would be unavailable to them individually.

  • How-To: Collaborate with other businesses to buy in bulk and negotiate better terms.
  • Example: Small textile companies could form a consortium to purchase raw materials in bulk, accessing discounts usually reserved for larger entities.

13. Shared Incentives

Implementing shared incentives can align the interests of stakeholders to reduce costs. A sales team could be offered a commission based on profit margins, encouraging them to sell more while keeping costs in mind.

  • How-To: Implement incentive programs that align the interests of stakeholders with cost-saving measures.
  • Example: Offer bonuses to production staff for reducing waste material or improving energy efficiency on the production floor.

14. Virtual Office

Virtual offices eliminate the need for physical office space, thereby reducing rent and utility costs. Many IT companies have adopted remote work models, where employees work from home, to cut down on office space expenses.

  • How-To: Implement remote work policies and digital collaboration tools to eliminate the need for physical office spaces.
  • Example: A design team for a fashion brand works remotely, using digital collaboration tools to design and prototype new clothing lines, saving on office space rent and utilities.

Implementing Cost Tactics: A Step-by-Step Approach

  1. Identify Opportunities: Analyze your operations to find where these tactics could be applied.
  2. Calculate Potential Savings: Assess the financial impact of each tactic to prioritize their implementation.
  3. Develop a Plan: Create a detailed plan for implementing the tactics, including timelines and responsibilities.
  4. Communicate the Changes: Ensure that all stakeholders understand the changes and their benefits.
  5. Monitor Progress: Track the effectiveness of each tactic and adjust your strategy as necessary.

By carefully applying these 14 cost tactics, businesses can optimize their operations, reduce waste, and increase their competitiveness in the market. Remember, the goal is not just to cut costs but to create value in the process.

Note: The above tactics have been drawn and adapted from Doblin and UNITE’s works.

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