Decrease costs framework

Hey,

I completely see where you are coming from. Cost Reduction is such a broad area and in the real world it generally is a big focus at the moment. Cost reduction can span the entire organisation or in a particular area such as IT, HR etc.

For such cases and depending on the case prompt and details they give, you can use the FC and VC model and drill in from there or use an alternate approach below that I teacht my candidates.

Any company that operates in any industry will have following layers:

• Customers they sell to (B2B or B2C)
• Channels to sell to those customer (e.g. retail, online etc)
• Product & Service to sell through those channels to the customer
• All underlying processes
• Data to enable the processes
• Technology/Tools to execute the processes
• People & Organisation
• Physical assets (offices, warehouse, stock etc)

So, again depending on the case you can pick each of these layers and come up with ways to reduce cost. E.g. in Channels use AI to reduce customer care costs, or reduce IT spend in the Technology layer. Hope you get the point.

Go a step further and prioritise your cost reduction cost into quick wins, medium and long-term and also provide a lever of complexity for actually implementing them.

Feel free to send me a message if you wish discuss further.

COST ISSUES
In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Major Costs - Areas to Cut

FC

• Rent
• Labour (salaried employees)
• Transport (if we own the trucks, etc.)
• Capex
• Utilities (for the office, warehouse, etc.)

VC

• Labour (hourly employees)
• Transport (if we pay a company per load)
• Fuel/truckers (if we own our own trucks etc. for transport)
• Utilities (if you need more energy to make more widgets)
• Raw Materials

Hi there. Depends on client's role in the supply chain, some has fairly simple cost structure (e.g. the company simply buys completed products and sell them to customers) and others have more complicated cost structure (e.g. if the company both produce and sells). 

While breaking cost down by fixed cost and variable cost works for many cases, for companies with more complicated cost structure, I always recommend breaking cost down based on value chain, which varies company by company, industry by industry. 

If you come across an unfamiliar industry and you don't know what would be the key component of its value chain, you can always start a conversation with your interviewer and ask he/she can provide this information to you. 

Hope this helps!