Cost Reduction Tool

Four stages, in order

Each stage asks one question and hands its answer to the next. You can stop after any stage: save your progress file, and pick up later on any computer. The cost reduction playbook explains the method behind each one.

1. 1

   Stage 1 of 4 · Variance Analysis

   Where did costs run over plan, and why?

   1 to 2 weeks

   You bring

   Last year's budget and actual spending, line by line, and for anything bought by the unit, the prices and quantities.

   You get

   Each large overrun split into price, usage and other named causes, with the person who could change each one.

   How variance analysis worksUse the Variance Analysis Tool on its own

2. Each overrun split into causes, with an owner for each
3. 2

   Stage 2 of 4 · Benchmarking

   Which costs are out of line with others?

   2 to 4 weeks

   You bring

   Cost figures for comparable businesses, usually from an industry association's survey, as a share of sales or per unit.

   You get

   The areas where you spend more than comparable businesses, what each gap is worth, and the gaps kept on purpose.

   How benchmarking worksUse the Cost Benchmarking Tool on its own

4. The cost areas out of line, with the deliberate gaps marked
5. 3

   Stage 3 of 4 · Activity-Based Costing

   What actually drives those costs?

   4 to 6 weeks

   You bring

   A year of activity data: what each activity costs, and how many setups, shipments or changes each product or customer type used.

   You get

   Each product or customer's margin with overhead traced to it, the ones that lose money, and what you'll do about each.

   How activity-based costing worksUse the Activity-Based Costing Calculator on its own

6. The true cost and margin of each product or customer
7. 4

   Stage 4 of 4 · Zero-Based Budgeting

   What would you fund if you started from zero?

   6 to 8 weeks, once a year

   You bring

   A decision package from each manager: what the activity does and costs, at a lower and a higher level.

   You get

   A ranked list funded down to the line, what didn't make it, and the budget as a CSV to check every month.

   How zero-based budgeting worksUse the Zero-Based Budgeting Tool on its own

8. Next year's budget, ranked, and the full report

What you finish with

A PDF report of the whole playbook. One headline for each stage, as in the example, then each stage's diagnosis: what it found, what that means, and what to do next. It ends with next year's budget, what didn't make it, and the measures to check every month.

A progress file you keep. An Excel workbook with a sheet for every stage, updated each time you save. Choose it on this page or on any stage, and the playbook reopens where you left off. The new budget also downloads as a CSV that stage 1 reads, for the monthly check.

Checks along the way. An overrun that is mostly price is sent to purchasing and customers, not operations; a benchmark with no named source is not trusted; a gap customers pay for is kept out of the cuts; work that loses money is repriced before anything is cut; and a budget that cuts what customers pay for, or what the business can't run without, is stopped.