Fixed costs

Cost reduction
New answer on Jun 27, 2021
3 Answers
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Anonymous A asked on Jun 26, 2021

What are some general ways to reduce fixed costs?

(edited)

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Ian
Expert
Content Creator
replied on Jun 27, 2021
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

This is very industry specific! In general though, this is about spending less and/or gaining efficiencies. If my fixed cost is rent, I can look to move to cheaper location. If it's factory costs, I can shrink the size or look for efficiencies. If it's labor (salaried) I can replace them with automation/robots/capital. The list goes on.

My General Advice For Cost Cutting

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)

For more background on analyzing costs, look here:

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

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Henning
Expert
updated an answer on Jun 27, 2021
Bain | passed >15 MBB interviews as a candidate

Mainly four levers:

  • Operations and sales personnel
    • Reduce the number of people needed by making operations and sales more effective, letting them focus on adding value rather than unnecessary tasks and deliverables
  • Overhead personnel
    • Reduce number of admin FTE or shift balance towards more junior people (understand that this is a very painfull process and you should show empathy if this comes up in an interview case)
  • Indirect procurement
    • Reduce costs paid for IT systems, data subscriptions, etc. - this needs to look at price you're paying (negotiations, vendor consolidation, etc) and at consumption (do we really need a photoshop license for every person in the graphics department or are 3 licenses enough)
  • Fixed assets
    • Sell fixed assets (if unused)

(edited)

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Asim
Expert
replied on Jun 26, 2021
Strategy& Engagement Manager | Grad & MBA Interviewer| Ex-Investment Banker | Financial Services expert

To start - fixed costs are costs that occur on a regular basis including rent, admin. costs, depreciation, and salaries, and are independent of the level of activity (e.g., production).

1) Rent - you can reduce this by right-sizing your real estate footprint. This can involve reducing the number of offices e.g. by moving your workforce to 'work from home' as the status quo, or by other non office properties (e.g. plants, warehouses, bank branches)

2) Admin. costs - automation and technology could mean you spend less on manual administrative activity and can reduce third party supplier costs

3) Depreciation - you could do an accounting adjustment and extend the useful life to depreciate PPE. Alternatively, reduce your overall stock of PPE assets.

4) Salaries - reduce the number of FTE (make people redundant) or reduce cost per FTE (juniorise staff).

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Ian gave the best answer

Ian

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