Sustainable Cost Reduction Explained

Posted in category: Supply Chain

Cost reduction has become a much more vital element to any business in recent years due to the current economic state. However, cost reduction can often backfire and cause a disturbance in the supply chain, which is why it is key that businesses find a sustainable and effective cost reduction solution that will work in the long term as well as short term.

There are many ways that you can implement cost reductions, but in order to make this work you will need to have a multi functional methodology and you must have a good working relationship with the supply chain community as a whole.

You need to understand exactly what is being produced, where it is being produced and how much it costs to be produced. Once you have a clear understanding of this you can work towards constructing good framework agreements that are set up purely to ensure value for money on both sides.

Work out what you are spending the majority of your money on. Then work at reducing the cost of this, be it by making new agreements, transferring your provider or exploring different avenues.

Value analysis tools can help you harvest great results, but this will only work when you use a systematic approach. Draw your attention to what is fit for purpose and what is a real need and then eliminate the aspects that are not essential (things that you simply ‘want’ rather than ‘need’). This will massively reduce costs without harming the functionality of your overall business model.

The next thing you need to recognise and understand is the suppliers and the marketplace itself. Carrying out a supply market analysis will help you to get a better understanding of where you are more likely to achieve cost reduction and where you are not. For example, seeking cost reductions in a market that is currently thriving is pointless. You need to look at the markets that have room for negotiation.

You may also find it useful to leverage not only the spend but also the relationship. If you have spent years building up a good relationship with partners and providers it is now time to see the rewards of this and with good co-ordination from suppliers this should be something easy to achieve and will most certainly help in terms of cost reduction.

One way that you can reduce costs is to simply base your business model on a no gain, no payment method. This means that if you do not see the results agreed you do not pay out.

Practical Contract Management

DPSS are making a new chapter of Practical Contract Management available for download on a fortnightly basis.

Practical Contract Management


Chapter 4 - Tendering Methodologies