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Cost Minimisation

Cost minimization is a strategy that aims to deliver goods and services in the most cost-effective way while maintaining quality. It focuses on eliminating waste, simplifying processes, outsourcing non-core activities, and negotiating better supplier prices. Popular cost reductions include pruning unprofitable products and customers, improving communication, and controlling non-essential expenses. However, cost minimization must be done carefully to avoid negatively impacting quality, customers, or capacity.

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114 views

Cost Minimisation

Cost minimization is a strategy that aims to deliver goods and services in the most cost-effective way while maintaining quality. It focuses on eliminating waste, simplifying processes, outsourcing non-core activities, and negotiating better supplier prices. Popular cost reductions include pruning unprofitable products and customers, improving communication, and controlling non-essential expenses. However, cost minimization must be done carefully to avoid negatively impacting quality, customers, or capacity.

Uploaded by

Aarthi Muthusami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cost Minimisation

 Levels: AS, A Level
 Exam boards: AQA, Edexcel, OCR, IB

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Cost minimisation is a financial strategy that aims to achieve the most cost-effective way of
delivering goods and services to the require level of quality.

It is important to remember that cost minimisation is not about reducing quality or short-
changing customers – it always remains important to meet customer needs.

The low-cost or "no-frills" airlines are some of the best examples of businesses where cost
minimisation has been taken to an almost obsessive level. Airlines like Ryanair and Easyjet
have either removed or charged customers for many non-essential parts of the airline service.

Similarly, the discount retailers such as Poundland, Lidl and Aldi base their business around a
relentless focus on minimising costs and operating efficiently.

In theory a reduction in costs results in higher profits and better cash flow. But not always!
The trick is to identify cost-reduction actions which do not adversely affect revenues, quality
or customer service.

Businesses tend to go through phases of cost minimisation.

During an economic boom or when a business is enjoying rapid growth in revenues, cost
structures do not necessarily get the attention they deserve. A business that is adding new
locations, launching new products or entering new markets will often see revenue
expenditure as a kind of "investment". Before too long, and often not spotted by
management, the business has substantially grown its cost base and added much complexity
to the organisation.

It sometimes takes a severe economic downturn to prompt a business to take a hard look at its
costs to see where savings could be made. The recession of 2008/09 saw nearly every well-
managed business look for ways to reduce overheads, improve efficiency and reduce
production capacity.

Popular sources of cost reductions in a well-established business include:

 Eliminating waste & avoiding duplication (note the link to lean production)
 Simplifying processes and procedures (the acronym KISS – "keep it simple,
stupid" is always worth applying in business)
 Outsourcing non-core activities (e.g. transaction processing, payroll
administration, call handling)
 Negotiating better pricing with suppliers
 Improving communication (often by cutting out unnecessary communication)
 Pruning product ranges and customer accounts to eliminate unprofitable
business
 Using the most effective methods of training and recruitment
 Introducing flexible working practices that benefit both the employee and
employer
 Aggressive control over non-essential overheads (e.g. banning first or
business class travel unless essential)

Actions aimed at minimising costs need to be taken with care. The danger is that over-
aggressive pruning of overheads, using cheaper raw materials or cutting pay rates might have
a detrimental effect on quality and customer service.

Being too aggressive with cost minimisation has several other potential disadvantages. For
example:

 The business can be left with insufficient capacity to handle unexpected or


short-term increases in demand
 Cost reductions by one department may surprise and/or annoy other functions
if they are not properly communicated and coordinated

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