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19 Examples of Cost Reduction

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Cost reduction is the process of identifying and implementing ways to reduce the opex and capex of a business. In some industries, cost per unit falls on a quarterly basis and firms must continually find cost reductions to remain competitive. The following are common types of cost reduction.

Waste Elimination

Identifying and eliminating waste such as materials that go wasted in a production process.


Modernization of equipment. For example, old computing hardware may be energy inefficient and slow as compared to new models.


Finding ways to use less physical resources. The classic example is an office that goes paperless.


The output you get for a unit of input. For example, improving the energy efficiency of a data center.


The output you get for an hour worked. Typically improved with automation and tools. For example, farming robots may improve the productivity of a farm as work is shifted from physical tasks towards knowledge work.


Outsourcing things in areas where you're not particularly efficient. For example, a small business that decides to outsource its financial accounting and tax preparation tasks.


Consolidating things to make them easier to manage or to gain negotiating power. For example, a manufacturer consolidates its suppliers and demands steep discounts for the greater volume of orders.


Renegotiating costs. For example, a retail outlet that renegotiates rent during an industry downturn.


Looking at processes, procedures, capabilities and structures that aren't adding much value and restructuring them.


Reducing perks such as business class air travel and stays at luxury hotels.


Looking at the scale or volume of your business. For example, unit costs may fall until an existing factory reaches its capacity. In this case, increasing sales through marketing efforts may result in declining cost per unit.


Measuring things and improving them continuously. For example, measuring processes to detect expensive bottlenecks and exceptions and finding ways to remove them.


Cutting back on quality. This can easily backfire as it may result in lower sales volume and revenue. In some cases, improving quality can result in long term cost reduction in areas such as marketing costs. For example, a hotel with high ratings may be fully booked without need to advertise.


Cutting back on service levels such as a restaurant that cuts back its business hours. This can also backfire. For example, customers may avoid a business that they perceive as often closed.

Cut and Run

Retiring business units, products, capabilities and processes that aren't working out. For example, an Australian bank expands to Asia but finds that it is a money losing venture year after year. The decision is made to cut and run.


Reducing transportation costs by putting things closer together. For example, an ecommerce company that moves from 12 regional distribution centers to 1200 distribution partners closer to the customer.


Finding partners who can reduce your costs. For example, a cloud platform that eliminates the need to own and operate your own computing infrastructure.


Designing processes, services, products and practices to be more efficient and productive. This can include subtle improvements or innovation that changes your entire cost base.

Organizational Culture

Asking your people for ideas for cutting cost and engaging them in the effort. This requires setting a tone at the top of financial discipline. For example, a CEO who regularly travels by economy may encourage others in the organization to spend responsibility.
Overview: Cost Reduction Examples
The process of identifying and implementing ways to reduce the opex and capex of a business.
Related Concepts

Business Costs

This is the complete list of articles we have written about business costs.
Applied Cost
Business Equipment
Capacity Cost
Capital Improvement
Carrying Costs
Closing Costs
Cost Of Capital
Cost Of Revenue
Cost Of Living
Direct Cost
Distress Cost
Fixed Costs
Friction Cost
Employee Costs
Holding Costs
Intangible Cost
Marginal Cost
Operating Cost
Operating Expenses
Legacy Costs
Outlay Cost
Lifetime Cost
Overhead Costs
Menu Costs
Relevant Cost
Normal Costs
Sunk Costs
Tangible Cost
Operational Costs
Travel Expenses
Unit Cost
Opportunity Cost
Variable Costs
Prospective Cost
Semi Variable Cost
Step Costs
Switching Costs
Transaction Costs
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