How to Identify Cost Reduction Opportunities

How to Identify Cost Reduction Opportunities






January 8, 2019

hudgeon12By Doug Hudgeon The Cost Reduction Tip Certain problems when you first look at them seem intractable. But once you understand their natural fracture lines, breaking them up and solving them is actually quite easy. Most business process problems fall into this category and cost reduction problems are no exception. The natural fracture line for cost reduction opportunities are people and COGS. It’s easy to get lost in arguments about what is and what is not included in COGS so it’s best to simply think of COGS as costs that do not vary with the number of staff you have. In fact, I’ll call these non-People costs in this and subsequent posts. For example, desktop support costs are driven by People costs whilst marketing expenses are driven by non-People costs. Certain expenses can fall into both or either category such as data centre costs where your data centres support both your intranet and internet sites. For these, you can split them by percentage or just lump the entire expense into the biggest driver – People or non-People Identifying your cost reduction opportunities then is just a matter of categorising each expense line in your management accounts as being driven by People or non-People. Tackle the former by considering how you can deliver the same value with fewer people and the latter by identifying the drivers of that cost and looking at ways of minimising it. Sound simple. It is. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

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  • A spend analysis is the process of systematically analyzing your organization’s historical spend, or purchasing data in order to make cost reduction opportunities easier to identify.

  • Mainly Spend Analysis is the best Opportunity to Identify the Cost Reduction
    In recent years, supply management developed into a significant driver of improved organizational performance as well as improved risk management. Spend analysis plays a critical role in achieving world-class performance because it can provide an in-depth guide to cost reduction opportunities, prioritization of sourcing projects, negotiation and results, and the tracking needed to ensure the opportunities are reaching your bottom line.

    Are you aware of spend analysis?
    What is a Spend Analysis?
    A spend analysis is the process of systematically analyzing your organization’s historical spend, or “purchasing”, data in order to make cost reduction opportunities easier to identify.

    As an example, if your spend with non-preferred vendors is high, then this category is clearly where spend leakage occurs because the terms and conditions negotiated (or lack thereof) with this set of suppliers aren’t ideal. Once this problem is identified and you determine the root cause, it’s easy to make the proper correction, i.e. only make purchases through preferred vendors or negotiate better with a non-preferred vendor to change its status.

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