Want a Profit Boost? Take a Scalpel to Your Expenses

Today's post is the second of a three-part series where we look at how small changes can have a big impact on profits. Read the first post here.
In our last post, we showed you that when it comes to your business's finances, 1+1+1 can equal 19. How? Once you pay for your overhead, every change you make affects your bottom line: All price increases and expense reductions -- even changes as small as 1% -- go directly to your net profit.

Last week, we showed you how to increase prices by 1% without adversely impacting sales. This week, we're going to talk about simple strategies to bring down your cost of goods by 1%. If you have a service organization, don't stop reading! You have the cost of direct labor required to provide your services.

So how do you decrease your direct expenses without sacrificing quality or service?

Strategy #1: Look at your processes and products with fresh eyes.
Past decisions were based on past circumstances. What was best then, may be germane no longer.

To illustrate, say a woman bakes a ham every Easter. Before putting the ham in the oven, she slices off the end. One year, her husband asks her why. "Because my mother always did it," she says. She then calls her mother and asks the same question. Her mother gives the same reply: "Because my mother did it." The woman then asks her grandmother. Her grandmother answers, "Because my pan was too small."

Social scientists call this path dependence. It explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant.

Look at each aspect of your products or services and ask, is there a better way to do this today? When ATA Retail Services, a leading supplier of impulse merchandising systems for grocery stores, sought to redesign their displays, they discovered materials available today that made it possible for them to omit the metal rivets necessary in their previous design. The result was hundreds of thousands of dollars to their bottom line.

Strategy #2: Buy strategically.
To be a strategic buyer, you should first establish your strategy. Determine which materials are necessary to maintain your quality and which are commodities. For a furniture manufacturer, the wood and leather would be strategic. The packing materials and labels would be commodity purchases.

Re-bid commodity purchases frequently and among multiple vendors. A business that was using approximately $20,000 worth of plastic shrink-wrap per week was able to save close to $5000 each week using this technique. The pricing for shrink-wrap or pallet wrap is volatile as it petroleum-based. The variance per vendor was typically close to 25% on any given week. By getting price quotes from three or four trusted vendors every week, the company was able to add close to a quarter of a million dollars per year to their bottom line.

Look at your direct labor costs similarly. Are your high-level (and high-paid) producers doing low-level work? For example, a law firm went to a three-tier system by adding case managers to their paralegals and lawyers. The case managers had great customer service skills but no legal background, so the firm paid them a third less than the paralegals. By offloading the non-technical work, they were able to cut the cost of each case by hundreds of dollars.

Strategy #3: Design with expenses in mind.
Great innovation generally begins with the question: "Wouldn't be cool if...?" It would be even cooler if the manufacturing, distribution, and pricing was considered in the creative process as well.

Strategy #4: Don't just think outside the box -- think about the box.
How are you delivering your products and services? Once, we ordered food to be delivered for a working lunch in New York. Our $30 lunch arrived in what looked liked $50 worth of containers.

Scrutinize your distribution. What can you do differently? This goes for processes as well as packages. Changes can as dramatic as the shift from hard-case CDs to music downloads. But they don't need to be. After all, you are only looking for 1%.

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Flickr photo courtesy of aesop, cc 2.0