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Cost Reduction Ideas for Business

Non-fiction by Roger Lacroix

This “book” is being written to help businesses cut their expenses.  You have probably seen books on cutting expenses that tell you very little.  Many of these books suggest forming a committee, having meetings, brain storming, having more meetings, etc, etc.  This method can be productive if you can stay the course.  However, I am trying to offer immediate cost reductions.  Most of these ideas have been successfully implemented, some are theoretical, and some are whimsical.  Some Cost Savers can be implemented merely by changing a procedure.  Some ideas will require an investment.  Reading through these ideas will make you think and should prompt Cost Reduction clues for your particular circumstance.  This book is a work in progress and will grow over the next few months.  If you know of a cost reduction idea, I would be very glad to include it in this book with credit given to you.  Please email me at: Roger@Stationhill.com  .

Roger Lacroix has worked as an Accountant/Cost Accountant/Controller for 30 years.  Roger has worked in Retail, Textiles, Paper Making, Lumber, Apparel, Hosiery, Vehicle Dealership, Composite Manufacturing and Food Manufacturing environments.

Roger lives and works in the USA and all of the ideas relate to the USA.  However, most ideas should have an application in other countries.   These cost reduction ideas have intentionally been placed in random order to make the reader read all of the ideas.

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We actually have to give our customers a 5% cost down every year- whether we incur the same cost downs from our suppliers or not. It is part of our agreement which is usually established during the negotiation phase of programs that are being quoted by our facility. It keeps us competitive since other vendors usually offer the same incentive. On one hand, it promotes innovation and process improvement, but on the other hand, the possibility of "padding" a quote exists so that the cost reductions are compensated for over the interim of the program.

This is very commonplace in the automotive industry where it might be unheard of in other markets.
John Shoulders

Posted 08/24/2006

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Make an effort to find your lawyers, certified public accountants, advertising agencies, banks, etc from your local area.   Using qualified local professionals will cut down on travel expenses, travel hours, and long distance phone calls.  Locally based professionals will be easier to get to know on a non-business basis. RL.

Control of certain supplies can be difficult.  Gloves, protective eyewear, respirators, disposable clothing, etc are items which many employees may want to take home for their personal use.  In addition, some of these items are thrown out long before necessary.  We will use gloves as an example in reducing theft and waste.  We suggest that the employee be given the initial pair of gloves that are needed.  Thereafter, the employee must turn in the worn out gloves before the supply room will issue a replacement.  If the gloves do not show sufficient wear, they should be returned to the employee.  If the employee has “lost” his Gloves, the employee should be charged a nominal amount to receive a new pair.  Submitted by Merle Haskins.

Many companies still use manual check embossers.  Traveling check embosser salespeople will occasionally visit your site and ask to inspect the embosser.  Some of the salesmen are unethical.  You should never leave the salesman alone with your check embosser.  Never allow the salesman to handle a screwdriver near your embosser.  The salesman can break your embossing plate right in front of you and you probably won’t even realize it.  They will tell you that your embosser is broken and needs to be replaced or repaired. RL.

Some companies are paying different prices for fuel oil that is used at the same location.  A factory may have a 10,000 gallon fuel tank that can hold a transport load (7500 gallons) of fuel oil.  This same factory may have one or more small fuel tanks that are serviced by a peddle truck.  The price of fuel from the peddle truck is $.15 to $.25 per gallon higher than the price of fuel from the transport.  Connect the smaller fuel tanks to the 10,000 gallon tank and save a lot of money.    You should look into all situations where you are paying different prices for the same commodity. RL.

Some factories will pump several different liquid commodities through the same pipe (especially food manufacturers).  When a liquid is pumped though a pipe, some of the liquid remains in the pipe and is wasted.  Later, the pipe must be flushed with cleaning solution and/or water.  The pipe must then be flushed with a small quantity of the new liquid.  Minimize this necessary expense by making these pipes as short as possible. RL.

Travel mileage reimbursement rate for use of personal vehicles varies greatly among businesses.  Some companies pay out a very low rate.  The rationale is that the company is paying for the “incremental” expense of operating the employee’s vehicle.  These low reimbursements sap employee morale and cost the company extra money.  Employees begin to refuse to use their personal vehicles and instead rent vehicles for business trips.  If you see most employees renting and almost no one driving their own vehicle, your reimbursement rate is too low.   Cut down the high cost of renting vehicles by increasing your mileage reimbursement rate. RL.   

What should you do with your waste paper?  Ship it to your customers!   Some companies that ship many small parcels use packing peanuts to cushion the contents.  Some companies may be able to use shredded paper as a substitute for packing peanuts.  If you do this, use only “clean” shredded paper.  You will lower waste disposal costs and eliminate the cost for packing peanuts. RL.

For companies that use a lot of batteries, I suggest that you use rechargeable batteries in flashlights, clocks, calculators, etc.  Do not use rechargeable batteries in Smoke Detectors or any use that has to be very reliable or is too difficult to change the battery.  This will save battery expense and cut down on hazardous waste disposal costs. RL.

Be sure to manage all consultants that you hire.  Here is a horror story from my career.  Consultants were hired to investigate all areas of the company and to make recommendations for improvements.  The consultants initiated study after study over a period of time without finishing any of these studies.  After a short time, the company had paid out $100,000 and not one project had been completed.  We had a very difficult decision on whether to fire the consultants or to continue on and possibly lose even more money.  One consultant claimed that he had worked for 4 hours one evening in his hotel room writing a cash flow procedure and billed us for 4 hours work.  But, none of the procedure was specific to our company.  Here are some pointers.  Create a contract or letter of understanding about what work is to be done by the consultants.  Narrowly define the task and refuse to pay for work not described.  Manage the consultants every day.  Insist the projects be completed.  Specify at the beginning if you want all work to be completed on site.  Do not pay billable hours for a canned procedure!   Be suspicious if the consultants demand immediate payment or that their payment be overnighted to them. RL.

Most factories will have more than one water meter.  Usually each meter is billed on a separate invoice.  Request that your water district total the water usage from all the separate meters onto one invoice.  This will allow the factory to take advantage of lower rates due to lower rates for greater volume of usage. RL.

Some factories do not have a meter on their outgoing sewer flow.  In this case many water districts will assume that the amount of water that goes into the sewer is the same as the amount of water that came in on the meter.  If you have a situation where a lot of water never goes into the sewer (used in product, evaporates, used to water lawns, etc) either request that a meter be installed on the sewer flow or get an agreement that only a certain percentage of water goes into the sewer. RL.

Practice the theory of Good Enough!  When purchasing (for example) office supplies, get a price that is good enough.  Do not waste 2 hours in order to “save” one more dollar! RL.

Say there is a production line that is very difficult to startup.  And that 2 shifts are run everyday.  And that due to the chaos/challenge of the shift change the line is shut down temporarily between shifts.  Consider having the second shift start work 15 minutes earlier so that the line can continue to run and will avoid a difficult startup. RL.

A word on costs.  Try to avoid costs.  Try to delay costs.  Try to reduce costs.  Try to have someone else pay your costs!! RL.

There are many state and local development agencies that will do almost anything to help a business to startup, expand or relocate to their area.  When a business starts up, expands or relocates there are always many costs.  There are costs for environmental studies, licenses, legal challenges, etc.  Sometimes huge amounts of money are paid out.   Try to get the development agencies to pay all of these costs on your behalf.  If that fails, try to get an agreement where the development agencies will reimburse your costs if the process is unsuccessful. RL.

If you are having trouble with employees abusing their work breaks, one solution would be to have all employees take their breaks at the same time.  A bell could ring to start the break and a bell could ring to end the break. One possible exception would be the receptionist/telephone operator. RL.

Small companies that send little mail should just buy postage stamps rather than lease a postage meter. RL.

Do not blindly recycle.  I have observed companies meticulously and at additional expense prepare their trash for recycling and then be charged more than it would cost to just throw the trash in the dump.  Unless you have a high social conscience, put the trash in the cheapest place. RL.

Some companies might benefit by building a second water system.  Collect rain water coming off your buildings roofs and direct the water into a cistern.  This water could be used for flushing toilets (would require repiping), watering lawns, washing vehicles, or any use where fairly clean but non-potable water could be used. RL.

Teach your employees that they must set the number of copies at 1 when they are done using the photocopy machine. How many times does someone mistakenly run 20 copies when they only wanted 1 copy because the previous user did not reset the quantity? Submitted by Anonymous.

I love rubber stamps. Rubber stamps can be a big time saver with paper work and also permanently record needed information. RL.

Have a high ranking or well trusted employee open and review the first class mail each day. This will give a sense of what is happening with the business. This will also: prevent theft if someone sends cash through the mail, prevent customer complaints from being thrown out, uncover employees exceeding their authority, etc. The highest officer should open the first class mail himself at least once per month. Submitted by Jake.

Think of customer and supplier complaints as an asset instead of an irritant. These complaints may point out problems that need to be rectified. You may not even know that a problem exists. Sometimes the complaint (or suggestion) may point out a solution or a new product idea. Do not let a subordinate brush off the complaint as coming from “an idiot or troublemaker”. Keep the mindset that the complainer is an asset and may be correct in his observation. Even if the complainer is obviously wrong in his facts, this complaint may point out a negative perception held by customers or suppliers. You should consider responding to the complainer for more information. You may also consider sending a gift and letter of appreciation. If this person shows remarkable insight, you may consider offering him a job. Keep all complaints/suggestions on file for at least 5 years. Categorize the complaints/suggestions. RL.

Here is a method that some companies use to cut down on travel expense. Instead of reimbursing a traveler’s actual expenses, reimburse a standard daily expense for hotel rooms. Set the standard reimbursement at a rate that is somewhat lower than the current actual average rate for that category of travelers. The idea is that the travelers will do a good job of controlling their hotel expense because they keep the difference between the reimbursement rate and the actual cost. This will work best when the travelers travel to the same small group of cities. This will not work for travelers whose time is very valuable or who must entertain a lot. Submitted by L Miami.

Food packing line efficiency!? Say for example that a food packing company will pack 2 similar foods one after the other (product A and product B). If product A has a certain allergen (that is necessary to the product) but product B does not contain that allergen, a long and costly cleanup will be needed between the products. It may be financially beneficial to add the allergen to product B (and update product B labels) in order to perform only a minor cleanup. The slight reduction in sales of product B may be more than offset by the greater packing line efficiency as a result of avoiding the more costly cleanup. Depending on what was packed before product A, an alternate possibility would be to pack product B and then product A. RL.

Check out your state employee training programs. Many states will reimburse up to 50% of employee training expenses up to a certain limit. RL.

Sometimes a supplier will demand payment in advance of shipment or in advance of beginning the work. Often the supplier will demand payment in advance because your company is a bad credit risk or you are an unknown to them. But, sometimes it is actually the supplier who is in a position of weakness. You should demand a 10% discount for payment in advance. You can go lower as a result of bargaining but you should get at least a 4% discount. RL.

Do not pay Sales Tax on Exempt purchases. In my state labor, services and freight charges are Sales Tax exempt. Raw materials that are part of a manufactured product are Sales Tax exempt. Capital purchases or construction of manufacturing machinery and repair parts for this machinery are Sales Tax exempt. Check through your Sales Tax laws. Summarize the cases that are most likely in your situation. Have a competent person review every invoice for inappropriate Sales Tax. Cross out the Sales Tax and compute the corrected invoice total. Send a form letter to the supplier with hand written notes of which invoice has been altered, why it was altered and the corrected total. You might also note on the Purchase Order which items are Sales Tax exempt. RL.

Simple ways to reduce or manage IT costs:
Software:
Set fixed numbers for software licensing (review the numbers on a
quarterly basis - or whatever interval works best for your business)
Place these numbers in a "Checkbook"
When someone needs a license - you see if there is one in the checkbook,
if there are none available then you check to see if there is someone
who has a license that is not utilizing it for a benefit to the business
- then you transfer the license.
Example
Company determines that they want to set licensing for MS Project to 5
User Hours of use or frequency Justification rating 1-10
X1 10 hours/week 8
X2 2 hour/month 1
X3 20 hours/week 10
X4 20 hours/month 6
X5 2 hours / week 5

A new user wants to get MS Project - their expected use is 1 hour per month

--- this request is denied, since there is no real benefit to the company
and the asset will remain relatively unused
A new user wants to get MS Project - their expected use is 20 hours per
month with a justification of 6 --- user X2 would lose their license to
the new user.
Ideally you want to achieve at least a 5-10% asset utilization of a
software package to justify the use - this can be set in the beginning to
say in order to get a license you must utilize the software a minimum
number of hours.
What I have typically found in IT is that many people have software that
they never use --- I am working on getting rid of Visio - 75 people have
the software and only 2 people use it and their use is very limited.
Submitted by Mark Shell
Regional IS&S Manager
GM Powertrain Baltimore Transmission

Roger Lacroix  Contact: Roger@Stationhill.com
Copyright 2003  Roger Lacroix

Reviews and comments requested
Updated 10/27/2003

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