Cost reduction is the process used by companies to reduce their

cost In 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 of acquisition, in whic ...

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 the ...

becomes a differentiator in the market. The importance of cost reduction in relation to other strategic business goals is often debated.

Cost reduction strategies

* Supplier consolidation: see examples in the aerospace manufacturing industry * Component consolidation *

Low-cost country sourcing Low-cost country sourcing (LCCS) is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called ...

* 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 st ...

* Function cost analysis / Value analysis / Value engineering * Design for manufacture / Design for assembly * Reverse costing *

Cost driver According to the most simple definition, a cost driver is the unit of an activity that causes a change in the activity's cost: A different meaning is assigned to the term by Michael Porter: "cost drivers are the structural determinants of the cost ...

analysis * Activity-based costing (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 ...

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