Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project^[1] or the construction of a building.^[2]

Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market.

The importance of cost reduction in relation to other strategic business goals is often debated.^[3]

Cost reduction strategies

• Supplier consolidation: see examples in the aerospace manufacturing industry
• Component consolidation
• Centralisation of procurement activity ^[4]: 6
• Low-cost country sourcing
• Request for quotations (RFQ)
• Supplier cost breakdown analysis
• Function cost analysis / Value analysis / Value engineering
• Design for manufacture / Design for assembly
• Reverse costing
• Cost driver analysis
• Activity-based costing (ABC), which assigns a cost of each activity undertaken in the production and delivery of each product and service according to the actual consumption by each activity including a share of overheads. Peter Turney in a 1989 article examines the role of ABC in the achievement of manufacturing excellence and the product cost information needed by managers working towards this goal.^[5]
• Product benchmarking
• Competitor benchmarking
• Design to cost
• Design workshops with suppliers
• Half cost strategies: ambitious strategies which aim to reduce the costs of specific production processes or value adding stages to 1/N of the previous cost.^[6]
• In a public sector spending review, an overall target for reduction in expenditure may be identified: for example, in the United Kingdom, the 2010 spending review anticipated a reduction of £81bn in public expenditure over the four year budget planning period.^[7] In order to meet the challenges of a significant reduction in expenditure, government departments are expected to look at how they can "take cost out of the business" rather than simply cut services.^[4] One of the main principles expected of government departments in order to reduce costs is a "data-driven approach", i.e. ensuring that staff within the department have "a good understanding of the distribution and profile of costs in their business".^[4]