All questions tagged Cost reduction - Consulting Q&A - PrepLounge.com

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

Hey, do you want to post your solution here for us to comment? Best way to learn..

If you need a nudge to get started, think about following aspects (and add more from your thinking):

• Move to partnership based model i.e have one or two consulting partners do strategy->operations->execution
• Get procurement involved to build a preferred consultants list i.e 20% consultants cover 80% of the requirements
• Bring back work in-house
• Stronger SLA and performance management i.e tie payments to value delivered

Hi there,

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191

General Profitability Logic

Some ways to think/brainstorm of possibilities include:

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

Cutting Costs

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

Increase Sales

Some major ways companies boost sales include:

• SAAS (software as a service)
• (Relatedly) Subscription revenue
  • Get people onot subscription plans (i.e. Netflix)
• Behavior-changing "memberships" - i.e. Amazon Prime
  • When people enter Prime membership, they actually actively spend more than they did before
• Bundling
  • I.e. sell a few things together
• Radiation
  • Sell products similar to the current one
• Low-price entry
  • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

Hi Ish,

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

Hi,
I agree with you. From the screenshot you provided on the case, it seems that it is comparing profit with variable cost. The correct consideration is comparing revenue and variable cost (i.e. the loss in profit -> 1.5k loss). Of course, you should even consider the fixed cost saved (wages, machines, utilities, part of the plant, ...), but from those data you only get 1.5k of loss as you said.

Best,
Antonello

There is no one best way. Industries will usually have a very significant fixed cost component, Services often a larger variable cost component - but inside FC & VC, a number of parameters will come into play depending on the business model.

If it helps though, you can think of the following: Rent/Utilities (fixed but you can always move if needed) / Machinery & amortization / G&A / "Others".

I never expect a candidate to think of all the costs; what I do expect however, is that you take a crack at it and suggest a couple of potential costs; asking me then "is there any other cost I should be concerned with" is perfectly acceptable and moves the case efficiently along.

Hi Anonymous,

at the highest level approaching a "strategic action case" entails the following three elements:

1. Define the OBJECTIVE of the client (without knowing the objective, it is logically impossible to come up with a meaningful structure)

2. Define the criterion according to which the concrete question of the client can be answered, given the basic objective

3. Outline side conditions that need to be met (usually these include capabilities (operational and financial) as well as the ability to manage risks associated with the recommendation

Cheers, Sidi

Spitballing:

• Instead of buying (expensive) office chairs and tables, buy them at IKEA and have your employees assemble them (Amazon did that).
• Use AirBnB instead of hotels for business travel
• Use open source software
• Use motion detectors in office lamps and meeting rooms to automatically turn of lights (Deutsche Telekom does that)
• Use heat from data center to heat buildings
• Set default printer settings to grayscale and double-sided print
• Use tap water filtration/cooling machine instead of traditional water cooler bottles (not a good idea if your business is in Flint, though)
• Get people public transport tickets and company bikes instead of company cars
• MOST EFFECTIVE: Treat your people well to lower attrition and reduce search, hiring and onboarding costs!

Hi,
Bringing than one more supplier is indeed more than necesseray but can be challenging for the client :
- He will need to esablish clear specifications : depending on his business this is something he might not be able to do easily, especially if he worked for one same suppliers who know its business for years

- He needs to look for alternative and reliable suppliers : depending on the business could be not that common and in the end risky

The additonal reasons (on top of what you mentionned already) why it's important not to be too much exposed to one unique supplier :

- risk management : in case of supplier failure, breakdown, conflict. Make sure you have an alternative

- cost reduction : even though the relation is excellent, always good to create a comptetion to optimize your cost

Hope this helps

Benjamin

Hi,

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

1. Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
2. Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
3. Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut
4. Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on the real consulting projects.

Best,

Hi,

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

1. Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
2. Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
3. Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut
4. Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on the real consulting projects.

Best,