Strategic Cost Reduction Program

In principle, organizations have two paths to achieve strategic gross margin optimization. They can either chose to implement a Multichannel Performance Pricing (MCPP) Strategy or a cost reduction program. Effective strategic cost reduction programs do not only increase profits, instead, they also increase available cash flows. IIt is not uncommon for organizations across various industries and different sizes to require a gross margin optimization. Cost reduction programs can become necessary either due to inflation or supply chain issues or in fast growth companies when overhead costs exceed revenues.

Effectively executed cost reduction programs enable organizations to achieve maximized gross margins which is necessary to generate profits that cover the significant upfront investments arising from new product launches. Additionally, cost reduction programs increase margins in new growth markets and support organizations in raising capital during crises and in high interest rate environments.

Figure 1: Necessary steps for successful gross margin optimization

An effective strategic cost reduction program entails three phases: The market sounding phase, the target costing and product design phase and the validation and implementation support phase.

• Market sounding: The first project phase focuses on the identification of value adding components and product features. The market sounding aims at the identification of product features highly valued by the end-customers.
• Target costing and product design: Target costing involves the process of systematically reducing the organization’s spendings on product features not valued highly by customers and increasing the spendings on high-value product features and calculating the overall target costs per individual SKU.
• Validation and implementation support: FOSTEC & Company prepares a bottom-up calculation of the possible cost reduction and visualizes the impact on the organization’s product portfolio. The FOSTEC & Company SKU portfolio optimization tool will aid in setting margin thresholds to eliminate low performing products. Additionally, the FOSTEC & Company experts will support the organization actively in re-negotiations with suppliers and service providers.

An effective strategic cost reduction program requires detailed analysis of the companies’ product portfolio to achieve sustainable results without compromising the customer value perception of the products.

We are pleased to support you in establishing a tailor-made successful strategic cost reduction program.