Cost improvement vs. cost-cutting

 15/09/2020
By Dr. Alin Posteucă

Often over time you have had to deal with cost reductions. More recently, some of you have decided that you need to find additional solutions to reduce costs by 5%, 10%, 20% or even 30%, in addition to the compensation for certain orders. In this context, you simply do not see how the cost reduction can be done.

However, you often hear people talking about cost improvement or cost-cutting. Others seem to use terms like cost elimination, cost optimization, cost avoidance or cost savings just to talk elegantly about cost reduction.

But in reality, cost improvement and cost-cutting mean very different things. So what exactly is the difference and which can help you when your manager constantly asks you to reduce the spending budgets?

Cost-cutting refers to immediate, direct single actions designed to reduce the company’s spending levels. A fixed amount to be reduced is often set and a date is identified by which the savings must be made. The most common ways to reduce costs are related to staff, such as layoffs, pay cuts, benefit reductions and so on. Other initiatives could include reducing space, creating home-based work options for employees, shortening working hours, reducing marketing costs, reducing consumables, and so on.

Cost improvement is defined as a continuous effort, designed specifically to stimulate cost improvement based on increased productivity, while maximizing business value. A continuous theme of improvement is ensuring that a customer receives what he pays or gets the most for the money paid. According to the Manufacturing Cost Policy Deployment (MCPD), the activities that are usually part of cost improvement efforts are those related to costs of losses and waste – CLW (unnecessary costs which, if improved, do not affect the quality and on-time delivery of orders, but on the contrary help to achieve the targets of quality improvement and deliveries), namely:

  1. for the sales increase scenario (in other words, making a profit by maximizing outputs), the aim is to improve the related costs: equipment losses; losses with the development of new products; losses with the development of new equipment; losses with changes/ adjustments to the production plan; losses with obsolete equipment; losses with internal/ external distribution;
  2. for the sales decrease scenario (in other words, making a profit by minimizing inputs) the aim is to improve the related costs: labor losses – fixed costs; losses with maintenance materials – fixed costs; material losses – variable costs; energy losses – variable costs; WIP from set-up (WIP-S); WIP from transfer (WIP-T); bear to line inventory waste; raw material inventory waste; components inventory (if any) waste; losses with packaging stocks; finished products inventory waste; losses with area/ square meters.

Therefore, unlike cost-cutting, cost improvement is not an immediate and unique activity. Instead, it offers a long-term solution for the company’s budgets.

For over 15 years, Exegens has been helping companies improve their costs, while helping them improve their productivity. Using Manufacturing Cost Policy Deployment (MCPD and Speed-Based Target Profit (SBTP) technologies, globally recognized technologies, we ensure that your cost improvements are always aligned with the needs of profitability and competitiveness. MCPD and SBTP are the results of my ongoing research for over 23 years in over 100 companies.

So, do you want to improve your costs starting today? Then Exegens cost improvement experts are the solution to your problem.

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Dr. Alin Posteucă is a consultant in productivity and profitability, CEO of Exegens® and the author of Manufacturing Cost Policy Deployment (MCPD) and Speed-Based Target Profit (SBTP) concepts. His major research areas include manufacturing policy deployment, manufacturing cost improvement and visible profitability of operational excellence by improving productivity. His recent research includes the impact of Industry 4.0 on planning and developing synchronous profitable operations and on information systems of cost and budget in order to substantially improve the operational unit costs.

He has been actively involved in various industrial consulting and training projects for more than 20 years, delivering training/ workshop programs in Productivity, Innovation, Business Transformation and Leadership for over 5,000 participants.

He has a Ph.D. in Industrial Engineering and a Ph.D. in Managerial Accounting. He has an MBA Degree and a BA Degree in Accounting and Computer Science and he is certified Public Accountant in Romania. He has published in various research journals and presented papers at numerous conferences and congresses regarding Productivity, Profitability and Industrial Engineering.

Dr. Alin Posteucă is the author of Manufacturing Cost Policy Deployment (MCPD) and Speed-Based Target Profit (SBTP) concepts, published in four books at Productivity Press – Routledge/ CRC, New York (USA).