The problem that the essay will focus on is the problem of cost reduction in companies and businesses. In today’s business world, every company searches for solutions to reduce their costs while at the same time increasing their profitability. It is every company’s aim to maintain a continuous cost reduction trend that will in turn push their revenue and profits upwards (Bragg 4). The company in focus has a profit margin of 25%, in the scenario the company can either save a dollar or make an equivalent of four dollars in revenue. In this study, there are solutions that a company can apply in order to save their costs; the cost half approach, which aims at maintaining the company at lower costs for the long run and making the organization strong, as well (Suzue 9). The second solution as proposed by Russell (9) divides into two circumstances, the itch, and the rash circumstance.
The company in focus has trouble in maintaining their profitability levels. Their profits have been fluctuating especially in the recent market. The presence of competitors is also posing a problem for the company to maintain their profitability margins. As per the last five years, the company has not had stable and sufficient profits to maintain its profitability levels of 25%. This has caught the attention of the stakeholders and management has to solve the problem.
It is crucial and easier for a company to save cost in order to maintain their profitability levels rather than increasing their revenue. The increasing of revenue is difficult especially in a competitive market that has fluctuation in prices and unpredictable consumer behavior. This, therefore, calls for to find ways that will reduce their costs and consequently maintain its profitability levels.
The first approach proposed for the cost reduction problem is the cost half approach. In this approach, it important for a company to go beyond the setting of a goal to considering aspects of cost reduction. Suzue (10), states that goals for cost cutting must address two questions. The question of how cost-cutting activities will affect the business result. In addition, the question of how much cost a company has to use to produce a product to make this product competitive in the market.
The cost half approach is a radical approach that relies on the business utilizing three strategies. The first strategy is that a company has to achieve market development strength. This strategy aims at a company acquiring and maintaining consumers. These consumers must either be new or maintaining their current consumers. A second strategy is the maintenance of a competitive advantage by offering quality goods. Third is to ensure cost a company efficiently maintains both production and sales costs.
The cost half approach approaches the problem of cost from two-dimensional or direction way (Suzue 10). It focuses on reducing product cost and a setting of costs that are competitive in the market. A company that uses this approach will have to put up strategies that will cater for such costs from the two directions. In this study if the company is to use this approach, to maintain or improve on its profitability margin of 25%, the company will have to focus on reducing both production and sales costs but still are competitive to the other market players.
The cost half approach has worked for Eu Zus Inc Company. The company had been using goals or targets to achieve cost reduction. This did not bring the results that the company expected and with time, the company was heading for the worst. Luckily, the company adopted the cost half approach. It first compares its costs and sales prices with its competitors. The discovery was that Eu Zus Inc was selling at higher prices and producing using higher costs as compared to its competitors. The solution to this problem was to maintain and establish a cost effectiveness strategy. This strategy then made their prices and costs decline to almost same level as their competitors.
The second possible solution to the cost reduction problem the itch and rash approach. In the itch approach, it focuses on the small items that a company ignores (Russell 9). These items are usually items that cause harm to the profits or revenue of a company. Nevertheless, a company never deals with such items immediately but rather ends up postponing them. The approach proposes that such items become dealt with immediately to avoid their consequences.
The itch approach identifies or likens an itch to costs that are not relevant to incur in the company. The company can easily eliminate such costs and go without suffering or harming its revenue or profits. An example of such costs includes useless purchases or practices in the company. Russell (10) says that ignoring an itch only increases ones annoyance, this likened to costs imply that ignoring such effortless costs will lead to harming a company’s revenue.
In the rash approach, Russell suggests that just as treating a rash will improve one’s health and prevent damage; the same should apply to unnecessary costs. The items that Russell compares to a rash are those practices or purchases in the company that are continuously incurring money and causing the company redundant costs.
The itch items are items treated immediately and with a simple action. This includes the issue of a memo to stop the purchase of unnecessary items. These measures are part of cost reduction that may not be felt massively but contribute largely to reducing costs of a company immensely. As for the rash items, these items require some time or treatment before a company eliminates such items. Rash items require an in depth evaluation and inquiry before they become eliminated. Russell (9) though insists on the elimination of both the rash and itch items present in a company to reduce costs.
Company A will immensely benefit from the implementation of both the itch and rash approach. This is because the approaches pay attention to the simple costs that companies tend to ignore. The ignorance of these petty costs then leads the company to incur immense costs in the future that will have a negative effect on their profits. It is, therefore, advisable for a company to treat the petty costs with a high level of importance immediately and avoid consequences that may arise later.
Cost reduction approaches propose ways and means of a business reducing their costs both in the long term and the short term. Company A has had problems in maintain their profitability margins due to the large amounts of costs that they are incurring. This study has proposed two approaches that Company A can use to solve its problems. This first is the cost half approach that mainly focuses on the long term and in achieving cost effectiveness from two-dimensional ways. The second approach is a short-term approach that aims at saving the company costs before it too late. These are the itch and the rash approach that propose the treating of both the itch and the rash in companies.