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Cut cost

Cost restructuring

Procurement, footprint, automation, shared services

Examples checked

In one minute

Lowering the cost base for good by changing how and where the work is done.

The big idea: A cost programme pays when the yearly savings outweigh the one-off cost and do not damage what customers pay for. Savings that come from changing the work last; savings from freezing spending usually creep back.

Works when
When costs are high against peers for clear reasons (too many sites, scattered buying, manual work) and the one-off cost pays back in two or three years.
Fails when
When cuts hit what customers value, the best people leave, or the savings creep back because the work itself did not change.
Check this number first
Cost per unit against peers, line by line. Shows where the gap is and how big.
In the worked example
Net savings a year: EUR 110 (EUR millions a year, at full run rate). See it add up

What it is

Restructuring means changing the cost base, not only trimming it. The usual levers are procurement (buying better), footprint (fewer, fuller plants, offices or stores), automation (machines or software doing manual work), shared services (one centre doing finance, HR or IT for the whole group), and fewer layers of management.

  • Procurement. Fewer suppliers, better terms, buying together across the group.
  • Footprint. Close or merge plants, warehouses, offices or stores so the rest run fuller.
  • Automation. Machines and software replace manual steps.
  • Shared services. One centre, often in a lower cost location, does finance, HR or IT for every unit.
  • Organisation. Fewer layers and wider spans of control (more people per manager).

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Scale. Buying and back office work done once for the whole group costs less per unit.
  • Utilisation. Fewer, fuller sites spread fixed costs over more volume.
  • Focus. Money saved can fund growth or protect margins when prices fall.

When it creates value, and when it destroys it

Creates value when

  • Costs are clearly above peers for reasons you can name and fix.
  • Savings come from changing the work, so they last.
  • The one-off cost pays back within two or three years.
  • Customer-facing quality is protected and measured during the change.

Destroys value when

  • Cuts hit service, quality or innovation that customers pay for.
  • The best people leave and the remaining ones are stretched.
  • Savings are counted but never tracked, and costs creep back.
  • Closing sites raises freight, lead times or risk more than it saves.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Cost per unit against peers, line by line. Shows where the gap is and how big.
  2. Savings a year by lever. Procurement, footprint, automation and shared services each add a part.
  3. One-off cost and payback. Severance, closures and systems.
  4. Costs that rise as a result. Freight, travel, consultants.
  5. Service and quality measures. Checks that the cuts do not reach the customer.

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A food manufacturer has a EUR 2,800 million cost base, of which EUR 2,000 million is bought materials, and runs six plants. It plans better buying, two plant closures and a shared finance and HR centre.

Worked example for Cost restructuring: procurement, footprint, automation, shared services, in EUR millions a year, at full run rate. Illustrative figures.
LineEUR millions a year, at full run rate
Procurement: 3 percent off EUR 2,000 million of purchasesEUR 60
Footprint: close 2 of 6 plants, saving their fixed costsEUR 45
Shared services for finance and HREUR 15
Extra freight from serving customers from fewer plantsminus EUR 10
Net savings a yearEUR 110

Check: the lines above add up to the total.

The numbers that decide it

One-off cost (severance, closures, systems): EUR 220 million; payback
2 years
Savings as a share of the EUR 2,800 million cost base
3.9 percent

So what: The programme saves EUR 110 million a year, about 4 percent of the cost base, and pays back its EUR 220 million cost in two years. Procurement is more than half the gain and is the fastest to deliver; plant closures are slower and add freight, so they need the closest tracking.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend the programme, starting with procurement, because together the levers save about EUR 110 million a year, about 4 percent of costs, and pay back in two years.

Procurement alone saves EUR 60 million with little risk; closing two of six plants saves EUR 45 million but adds EUR 10 million of freight.

The risk is service levels slipping during plant closures; next I would set delivery and quality targets for each closure and track savings monthly against the plan.

The numbers to quote: Savings a year by lever; One-off cost; Payback; Service measures to protect.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Listing cuts without sizing them. Put a number on each lever and add them up.
  • Forgetting the one-off cost and the costs that rise, like freight after closing a plant.
  • Cutting what customers pay for. Say what you will protect.
  • Counting headcount cuts without the work that goes with them; if the work stays, so does the cost.

Where it is common

Sources

Practise it

Where this move comes up in cases

Related moves