Internal and external forces in the current business environment have increased the competitive pressures in the market. The market has become value-driven and competitive, with customer and brand loyalty tied to value creation. Coupled with the deflationary market trends, these factors have mandated cost reduction strategies to help companies cope with the competition. This paper explores cost reduction strategies across the supply chain by synthesizing literature from five professional journals and comparing the authors’ perspectives on cost reduction. Companies can achieve lean supply chains by implementing cost reduction strategies throughout a product’s lifecycle.
Sustainable supply chains have become significant sources of competitive advantage in the market. Companies need to have critical finance, manufacturing, human resources, design, and engineering capabilities to stay competitive. However, the challenge is utilizing the limited resources to produce quality products/services, which, in turn, can enhance a firm’s competitive advantage (Afonso & Cabrita, 2015). Lean supply chains offer value to customers by minimizing wastes and offer organizations the opportunity to involve suppliers, distributors, customers, and other stakeholders in lean thinking. This process requires optimizing a company’s limited resources to produce the highest value.
Costs, quality, and continuous improvement are critical metrics for the supply chain’s lean performance. According to Afonso and Cabrita (2015), these metrics measure the supply chain’s outputs after implementing lean principles. Unfortunately, the deflationary market trends have increased costs throughout supply chains. As these costs increase, a company’s profitability reduces, threatening its viability in the highly competitive market. Various strategies have been developed to help companies keep profitable margins while concurrently offering customers high-quality products at low costs. These strategies include target costing, product-specific Kaizen costing, general Kaizen costing, functional group management, product costing, outsourcing, economies of scope, and product/service redesign.
A close analysis of these cost reduction strategies reveals that significant cost reductions can be achieved throughout the product’s lifecycle. Many companies have been operating under the assumption that a product’s design process accounts for the most organizational costs. It has been a long-held belief that 80% to 95% of a product’s cost is determined by its design (Cooper & Slagmulder, 2004). However, Cooper and Slagmulder (2004) debunked this myth and demonstrated that significant cost reduction could be achieved throughout the product’s lifecycle rather than its design. This view contradicts the notion that little can be done on costs once the product has gone into production.
Of the eight strategies, the target costing approach is the only technique directly involved in reducing costs in product design. Six of the eight strategies are all tied to the product’s manufacturing phase. They include product-specific Kaizen costing, general Kaizen costing, functional group management, economies of scope, product/service redesign, and product costing (Cooper & Slagmulder’s, 2004; Rodrigo, 2016). Outsourcing is a cost-reduction strategy that can be applied after the product has been launched into the market after its maturity phase. These strategies support Cooper and Slagmulder’s (2004) assertion that cost reduction can be achieved throughout the products’ life cycle.
General Kaizen costing technique involves empowering the workforce to find ways to reduce costs during production. The functional group management strategy involves treating each stage of the product development as a profit center rather than a cost center. Different functional groups at the company come up with ways to generate revenues or profit from their production lines. According to Cooper and Slagmulder (2004), this process enhances performance improvements and helps each functional group understand their contribution to the organization. Product costing involves ensuring that all procedures and practices are operating within the established target costs. It also involves replacing any unprofitable products or operations. Rodrigo’s (2016) product/service redesign strategy can reduce costs by improving production efficiency and minimizing inputs and raw materials. Similar to Cooper and Slagmulder’s (2004), this strategy is also based on the product’s production stage. Redesign involves modifying a single product component, simultaneously improving its quality and reducing its production and assembling costs. Like Rodrigo, Cooper, and Slagmulder, Swenson et al. (2003) also recommended streamlining the product’s development process to achieve the company’s target costing goals.
A common theme about these cost reduction strategies is that they are all tied to total quality management (TQM) principles. TQM philosophy is based on three main principles: continuous improvement, employee involvement, and customer satisfaction(Krajewski et al. (2019), p.101). The primary purpose of constant improvement is to reduce wastes in organizational products, services, and processes. Cost reduction strategies such as product/service redesign are based on continuous improvement concepts; they aim to improve the existing product or services. Typically, changing a product’s part or component is expensive because it requires new tooling and equipment. Furthermore, while adopting up-to-date technological advancements is essential, these adoptions can also be costly. Therefore, companies can incorporate the innovations into existing models to keep up with market trends while still keeping costs low.
As mentioned earlier, employee involvement and customer satisfaction are TQM principles. Swenson et al. (2003) recommended six target costing principles that emphasize cross-functional and value chain involvement during the product development process. Swenson and associates highlighted the importance of engaging the supply chain’s stakeholders in a cost reduction strategy. According to Swenson et al. (2003), appropriate target-costing approaches should involve customers, value chain members (distributors, suppliers, and customers), and cross-functional teams. Most importantly, these authors incorporated two TQM principles: lean manufacturing and continuous improvement. According to Swenson et al. (2003), the case company being studied used lean manufacturing, paper kaizen, manufacturing design, and value engineering activities to improve productivity and reduce costs.
Paper Kaizen is a continuous improvement concept that is applied after product design but before manufacturing is initiated. During this stage, the company optimizes all process flows, workstation setups, and assembly steps are optimized on paper before any actual expenses are incurred. On the other hand, lean manufacturing was achieved by involving all players in the value chain to improve material flow, reduce setup times, and eliminate unnecessary inventory movements. These practices lead to cost savings by eliminating wastes in the mentioned processes.
The lean six sigma model is based on the assumption that a company can achieve continuous improvement by eliminating wastes in the value chain through optimizing resources and reducing inventory levels. The model mainly focuses on eradicating product, service, and process defects that can incur additional costs to the organization. Therefore, as Cooper and Slagmulder (2004) point out, simulating the assembly steps and process flows on paper reduces the likelihood of product and process defects. Through the simulations, the company can eliminate wastes generated from such defects, improving cost savings.
The target costing strategy also incorporates the lean principles’ application into a company’s operations. This technique involves reducing the number of product parts, replacing raw materials with cheaper alternatives of similar quality, and eliminating labor-intensive processes (Cooper & Slagmulder, 2004). The product-specific Kaizen cost reduction strategy also involves replacing materials with more affordable alternatives. Replacing labor-intensive processes helps to save time and labor costs. Replacing raw materials with cheaper alternatives resolves inventory level issues. This cost-reduction strategy is applied when the product has reached the maturity stage. The product-specific Kaizen strategy involves transferring production processes in regions where the overall costs are lower. This strategy is consistent with Rodrigo’s (2016) recommendation to outsource non-core activities to third-party service providers to reduce costs. Outsourcing turns fixed costs into variable costs, leading to savings in labor and operating costs.
The critical difference between Cooper and Slagmulder’s (2004) surveys and Rodrigo’s (2016) is that Rodrigo recommends outsourcing non-value chain activities. The former endorses outsourcing production, which is a core value chain activity. Thompson (2020) indicated that outsourcing value chain activities could weaken the company’s ability to produce an innovative product. According to Thompson (2020), activities such as engineering design, manufacturing, and product development help companies develop innovative products, a source of competitive advantage. Therefore, outsourcing these activities to third parties narrows a company’s core capabilities, consequently affecting its competitive advantage.
Cost reductions in the supply chain can be achieved throughout a product’s lifecycle. While companies can achieve significant cost savings throughout the product’s lifecycle, most savings will be realized in the manufacturing and production phase. Effective cost reduction strategies should involve cross-functional teams, customers, suppliers, distributors, and other stakeholders. Active involvement of these stakeholders in lean thinking will improve the organizational performance and encourage lean thinking.
Afonso, H., & Cabrita, M. R. (2015). Developing a lean supply chain performance framework in a SME: A perspective based on the balanced scorecard. Procedia Engineering, 131, 270–279. Web.
Cooper, R., & Slagmulder, R. (2004). Achieving full-cycle cost management. MIT Sloan Management Review, 46(1), 45–52. Web.
Krajewski, L. J., Ritzman, L. P., & Malhotra, M. K. (2010). Operations management: Processes and supply chains (12th ed.). Pearson.
Swenson, D., Ansari, S., Bell, J., & Kim, I. W. (2003). Best practices in target costing. Management Accounting Quarterly, 4(2), 12–17. Web.
Rodrigo, J. (2016). Cost reduction strategy. The WritePass Journal. Web.
Thompson, A, (2020). Strategy: Core concepts and analytical approaches. McGraw-Hill Education.