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What is a Cost Reduction Program?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 November 2016
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    Conjecture Corporation
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Cost reduction programs are structured plans that have the goal of minimizing the current level of costs incurred by an entity. In terms of a cost reduction program for a business, the idea is to lower expenses while maintaining production levels, a process that ultimately results in higher returns for the operation. Households may also engage in a cost reduction program as a means of continuing to responsibly manage all monthly expenses, while take steps to minimize the amount of cost associated with flexible or variable expenses.

Developing a cost reduction program for a business involves looking closely at each line item in the operating budget. Often, the program is structured as a process that is implemented in phases. For example, the first phase may involve looking closely at the cost of the raw materials used in production, and attempt to secure the same or similar materials of equal quality at a lower unit price. A second phase may address the issue of labor, determining if there are some tasks in the production process that can be refined, revised, or eliminated altogether. Last, the business may look at current shipping and delivery costs, and implement changes that lower the cost of shipping goods to clients, while not impacting the efficiency and timeliness of those shipments.

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Cutting costs within any type of business requires thoughtful planning before actually initiating any phase of a cost reduction program. This includes identifying possible outcomes of each phase, and determining what impact each of those scenarios would have on the overall operation. If a given change in one phase is likely to lead to increasing expenses in another area of the operation, owners and managers will want to determine if going forward with the changes will lead to overall cost reduction, or simply shift expenses from one area to another.

Engaging in cost reduction is more than simply making the profit margin on a financial statement look more attractive. At its best, a cost reduction program creates a situation where the available resources are used to best advantage, employees find themselves able to function more efficiently, and customers receive the highest quality of goods and services possible. The cost cutting efforts must make the process easier and more productive for all concerned, as well as save money. For example, if using different raw materials reduces the cost of the material, but results in an increase of labor costs, the effort may lead to higher overall costs for the operation, a move that results in lower profits for the company as well as increasing the workload of the employees.

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