Interesting Ways to Segment Cost-Focused Profitability Improvement Ideas

Hi there,

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.)
• Cbsolescence (wrong word...this is amortization/depreciation)
• Stolen objects (but shocked you heard this in a case)

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 (why wasn't this included? Big one to miss)

The more simplistic and arguably more tailored approach is to take the top 3-5 largest cost buckets of the business and think about how you can reduce the unit cost and/or volume. For example, fuel cost is a major cost item for an airline. Firstly, volume (i.e., consumption) can be reduced through better fuel efficiency programmes (e.g., pilots trying to fly more fuel efficiently, more fuel efficient aircraft, etc.). On the other hand, although limited, you can reduce unit cost by negotiating/changing suppliers or hedging.

Another segmentation I would think about to be expansive in your idea generation is to think about both direct and indirect costs to the business of which there is a sub-segment of procured costs which is you can think about from a supply-driven commercial (e.g., negotiating with suppliers) as well as demand-driven technical (e.g., changing the specifications) and process (e.g., procurement process) levers. 

Hello!

I would not recommend you to think about cases in this "generic" format. Instead, I suggest you to post here the real case where you are being asked to problem-solve Cost-Focused Profitability Improvement Ideas, and we can help you out with the ideation. 

Hope it helps!

Cheers, 

Clara