Optimising the cost structure

So how to approach cost reduction? You proceed by type of costs.

Variable Cost

First, let's look at variable cost.

What are the biggest shares of variable cost?

Look for way's how you can reduce the cost per item. Is there a way to re-negotiate prices with your suppliers? Can you change suppliers in order to save costs?

Fixed Cost

Then take the time to go through your fixed cost items step by step. Start with the biggest items and step by step navigate your way to the smaller items. This way you will keep your eyes open for quick wins, for items that can be reduced quickly and without any long-term harm to your business.

Ask:

• What are the main fixed costs items?
• Which ones can be adjusted most quickly?
• And which ones can be replaced most easily after the crisis?

Try to come up a list prioritised by

• speed of implementation
• amount of the cash impact.

For example:

• If you have real estate locations, you might think about renegotiating the rental agreements. If the crisis continues, the landlord will be at risk as well, because in a downturn few businesses will start renting a new location. Also many businesses have explored the benefits of remote work during the crisis, and have accordingly started to reduce their office space. This puts pressure on landlords and thus increases your leverage as a tenant.
• What about energy costs, administrative expenses, office supplies and so on? The savings opportunities here may be smaller than the big-ticket items, but on the other side they can be implemented much more quickly. Plus, you can delegate the identification and implementation of the various items to your teams. In sum, even small savings can add up significantly.

Crisis Economics

Next, take a step back to think about the impact that the crises may have on your cost. What impact could it have (i) on the volume you require, and (ii) on the market prices for the items?

There are cost items that become redundant and there are cost items that become cheaper due to the crisis.

First, are there any costs for services that you have no use for right now? Which cost items have become redundant because of the crisis? Obviously any subscriptions to travel services may become redundant. But may be it turns out that marketing initiatives might have only limited effect during the crisis. Try to make a calculation as to whether you would be able to cut  such expenses without seeing revenue decline? Anything that will not lead to revenue in the next few months may become redundant as well.

Then here is the complex part. What impact could the crisis have on the pricing of the items that you purchase? Could the crisis provide you with opportunities to get better terms? Do capacities on the markets have changed due to crisis? In other words, is there an oversupply for any of the items you need? What could be the possible impact on prices and pn demand? Could you make use of such a situation by renegotiating with your suppliers?