Driving out cost of goods is the fastest way to create investment for your growth agenda. But more than that, it’s a customer imperative: if you can offer them the same product at a lower cost and you don’t, you are not serving their interests. If they could get the same elsewhere for less, they would, and if you don’t offer it to them, someone else will. Here are four cost reduction strategies to help you focus your efforts:
1. Volume Based:
Challenge those suppliers who are growing to reduce their costs on the back of the extra volume. Challenge those who are static or declining to increase their investment to stimulate growth.
2. Across the Board:
Create a centrally led initiative to drive through (either covertly or overtly) a specific percentage reduction in cost or a change in terms, through a competitive process separate from day-to-day trading. Use specific events (e.g. an investment or expansion programme, an acquisition or a shift in cost base) to legitimise the initiative.
3. Auction Style:
Instigate category reviews, putting a range of levers into play (e.g. shelf space, listings, distribution, private label etc.) to secure cost reductions and investments in exchange for retaining or increasing trade.
4. Segment Led:
Split suppliers into groups based on a small number of criteria (e.g. relevance, size, profitability, number of alternatives, power balance, future potential etc.). Those “segments” will define the approach, e.g. collaborative growth, competitive negotiation, or strategic exit.
BOTTOM LINE: Any of these strategies could be appropriate for you. Your choice will depend simply on how advanced you are already and how willing you are to invest time and money in driving out costs.