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3/2/2009
N.B
ALAJHI
 
C
OST CUTTING
 –
 
T
HE WAY FORWARD
 
Cost is meant to be incurred to create / add value but often businesses incur cost that adds no or little value. Identify optional and unwanted costs and attack them head-on 
 
N.Balajhi
-
Independent Business Consultant
 
Page 2 of 3Mobile - +919843544954nbalajhi@gmail.com
Cost Cutting
 –
The way forward
Cost is something that a business must incur to create and deliver value for itscustomers. However it is far from the reality. Businesses do incur costs that do notcreate value or costs that add little value to its customers. 'So what's the big fuss?Just remove costs that add no value and your job is over'. well it's not as simple andeasy as that. Each cost, rather each expense item that figures in the financialstatements of a company conceals both 'wanted' and 'unwanted' costs. Chaff shouldbe carefully separated from wheat as otherwise wheat could be mistakenly thrown out.Operational issues and problems (OIPs), a business virus, cause unwanted costs andto ward off against this virus a company needs to take a systematic approach that mayrequire changes at various levels and things, in-depth training and a change inattitude. OIPs and guarding against them is a big topic and could fill many blog posts.But for the moment we will focus on a framework to identify and reduce 'unwantedcost'.If you are on a cost cutting mission thenI would recommend you to consider thefollowing approach to cost reduction.
Reducing cost
We can classify costs (not in the costaccounting way) into four differentcategories viz., essential, necessary,optional and unwanted costs.
Essential costs
are those that areincurred to create and deliver value forcustomers. If by any chance these costsare reduced then a company will becompromising on the value that it offers.To distinguish essential from the rest,ask the question what if this cost isremoved or reduced? If the answer casts a shadow on quality, customer satisfaction,or sales then stay clear of it.
Necessary costs
are those incurred to keep the business running. Certain employeerelated expenses, statutory costs and the like do not add much value to the customer
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