Cost reduction and cost cutting
Reducing cost to a target without breaking the business, by sizing the big buckets, choosing the right levers, and counting the one-time cost of each cut.
Key takeaways
- Size the cost buckets, estimate a realistic saving for each from benchmarks, add them up against the target, and rank by size, ease, and risk rather than cutting the most visible expense.
- Turnaround and private-equity contexts push cost cases hardest, often asking what you would protect even under pressure, to test judgment as well as arithmetic.
- The strong answer goes where the money is and proves the target is reachable.
What this case type is and when it shows up
A cost-cutting case asks how to reduce cost, often to a target such as "10 percent in two years." The discipline is to size the cost buckets first and go after the biggest ones that can be cut, while protecting anything that quietly drives revenue or quality.
The underlying theory, in plain language
Costs split into a few big buckets (for a manufacturer: materials, labor, overhead, distribution). Size them before touching anything, because a small percent cut on the biggest bucket usually beats a deep cut on a small one.
Each bucket has its own levers. Materials and bought-in services: pay less (renegotiate, combine suppliers, run tenders), buy less (reduce waste and over-ordering), or specify smarter (simpler designs, standard parts). Labor: automation, better shift planning, and fewer management layers where teams are small. Overhead: zero-based budgeting (building each budget from zero rather than from last year's figure), shared services, and closing underused sites.
Most cuts need one-time spending first (severance, new machines, IT), so count it and show the payback. Then judge each cut on what breaks if you make it: cutting the sales force or quality checks can reduce cost and revenue at the same time.
What the prompts sound like, from simple to hard
- Simple: a bakery chain in the UK has costs that are too high; where to cut.
- Medium: a manufacturer in the Czech Republic must cut 10 percent of cost in two years.
- Hard: cut deeply in a downturn without losing the ability to recover.
Finding and narrowing the real problem
Key idea
Size the cost buckets, estimate a realistic saving for each from benchmarks, add them up against the target, and rank by size, ease, and risk rather than cutting the most visible expense.
Frameworks for this type, each as a thinking tool with its limit
- Cost-bucket tree: Split total cost into buckets that do not overlap and size each. Limit: Buckets vary by business; build the tree for this one, not a generic one.
- Price, quantity, specification: For any bought item, cost = price paid x quantity used, and the specification drives both. Limit: Specification changes need quality checks before they go ahead.
- Cut versus consequence: Score each saving on size and on possible damage to revenue, quality, or capability. Limit: Consequences are easy to underestimate.
Methods for solving this type
- Build a cost tree and size each bucket
- Estimate a realistic saving per bucket from benchmarks
- Add the savings up against the target
- Count one-time costs and payback
- Check each cut for damage to revenue or quality
The math patterns it relies on
- Each bucket as a share of total cost
- Savings = bucket size x percent cut
- Sum of savings versus the target
- Payback on one-time costs
Worked cases
Worked case
Finding EUR 10 million of savings
The prompt
A car-parts maker in the Czech Republic has total costs of EUR 100 million a year: materials EUR 60 million, labor EUR 30 million, and overhead EUR 10 million. The owner wants EUR 10 million of yearly savings within two years without hurting quality. The table below shows each cost bucket and what benchmarks suggest. Where would you find it?
Interviewer-led: the interviewer shows the cost table and asks whether overhead alone can reach the target, then for the savings by bucket, then for the one-time cost.
Clarifying questions, with the interviewer's answers
- Is the target a yearly saving or a total?Answer: A yearly saving, fully in place by year two.
- Are there limits, such as no plant closures?Answer: No closures; quality and delivery must not suffer.
- What do benchmarks suggest?Answer: Similar plants pay about 8 percent less for materials and have about 10 percent lower labor cost.
A hypothesis to say out loud: Materials are 60 percent of cost, so my hypothesis is that most of the saving must come from materials, with labor second, and that overhead alone cannot reach the target.
The structure
- Savings by bucket versus the EUR 10 million target
- Key: Materials: price, quantity, specification
- Labor: automation and shift planning
- Overhead: zero-based budgeting
- One-time costs and quality checks
The exhibit
| Cost bucket | Cost (EUR m a year) | Benchmark gap or possible cut (%) |
|---|---|---|
| Materials | 60 | 8 |
| Labor | 30 | 10 |
| Overhead | 10 | 20 |
Working it through
1. Can overhead alone do it?
Even a deep 20 percent cut in overhead saves only EUR 2 million, a fifth of the target.
Overhead saving (EUR):10,000,000 × 0.2 = 2,000,0002. Materials
Close the 8 percent gap to similar plants through supplier tenders and simpler specifications.
Materials saving (EUR):60,000,000 × 0.08 = 4,800,0003. Labor
Close the 10 percent gap through automation of two manual steps and better shift planning.
Labor saving (EUR):30,000,000 × 0.1 = 3,000,0004. Add it up
Materials plus labor plus overhead.
Total saving (EUR):4,800,000 + 3,000,000 + 2,000,000 = 9,800,0005. One-time cost
Interviewer: "The labor saving needs about EUR 6 million of one-time spending on machines and severance; the materials and overhead savings need little upfront spending."
Payback on labor saving (years):6,000,000 ÷ 3,000,000 = 2
What the exhibit shows
Materials are 60 percent of cost, so even a modest cut there is worth more than a deep cut in overhead.
The recommendation
The target is reachable, but only with materials at the center. First, an 8 percent materials saving gives EUR 4.8 million and needs little upfront spending, so start there. Second, a 10 percent labor saving gives EUR 3 million but needs about EUR 6 million of one-time spending, paid back in about two years. Third, a 20 percent overhead cut gives EUR 2 million, bringing the total to EUR 9.8 million, close to the EUR 10 million target; the last EUR 0.2 million needs only about a third of a point more off materials (0.2 of 60 is about 0.3 percent), for example from lower scrap. Check every specification change with the quality team before it goes ahead.
Risks: Suppliers may resist price cuts or cut service; Specification changes could hurt quality if not tested.
Next steps: Run tenders on the ten largest purchased items; Plan the automation project and its timeline.
A strong candidate
Sized the buckets, used benchmarks per bucket, added the savings up against the target, and counted the one-time cost.
A weak candidate
Proposed cutting travel and office costs, which are tiny, and never showed a path to EUR 10 million.
Worked case
Cutting non-medical cost at an Indian hospital group
The prompt
A private hospital group with twelve hospitals in India must cut INR 40 crore a year of cost without hurting patient care. Where would you find it?
Candidate-led: you build the cost tree and ask for the size of each bucket; the interviewer answers and pushes back.
Clarifying questions, with the interviewer's answers
- Which costs are in scope?Answer: Non-medical costs only. Doctors and nurses are out of scope, and patient safety must not suffer.
- Is the target yearly, and by when?Answer: INR 40 crore a year (1 crore is 10 million), fully in place within 18 months.
- How many hospitals, and do they buy together today?Answer: Twelve hospitals, and each buys its own supplies.
A hypothesis to say out loud: Twelve hospitals buying separately usually pay different prices for the same items, so my hypothesis is that purchasing is the biggest lever, with shared back-office services second.
The structure
- Non-medical cost buckets, sized, against the INR 40 crore target
- Key: Consumables and supplies: price and specification
- Non-clinical staff: shared services for billing, HR, and IT
- Facilities: energy and service contracts
- Protected: doctors, nurses, patient safety
Working it through
1. Size the target
Candidate: "How big is the non-medical cost base?" Interviewer: "About INR 500 crore a year: consumables and supplies 250, non-clinical staff 180, facilities 70." Candidate: "So the target is 8 percent of it."
Target as a share of non-medical cost (%):40 ÷ (250 + 180 + 70) × 100 = 82. Consumables: pay less
Candidate: "Do the hospitals pay different prices for the same items?" Interviewer: "Yes. Buying as one group could cut prices by about 6 percent."
Group purchasing saving (INR crore):250 × 0.06 = 153. Consumables: specify smarter
Candidate: "Could the doctors agree on fewer versions of common items, such as gloves and catheters?" Interviewer: "A clinical committee thinks about 4 percent is possible without any effect on care."
Standardization saving (INR crore):250 × 0.04 = 104. Facilities
Interviewer: "Energy audits and new service contracts could save about 10 percent."
Facilities saving (INR crore):70 × 0.1 = 75. Non-clinical staff
Interviewer: "Nurses are our biggest cost. Should we look at them after all?" Candidate: "You put clinical staff out of scope, and I agree with that: nurses drive patient safety and revenue, so I would protect them. For billing, HR, and IT, one shared center for all twelve hospitals could save about 5 percent through natural turnover rather than layoffs."
Shared-services saving (INR crore):180 × 0.05 = 96. Add it up
The four levers together, against the target of 40.
Total saving (INR crore a year):250 × 0.06 + 250 × 0.04 + 70 × 0.1 + 180 × 0.05 = 417. One-time cost
Interviewer: "The shared center needs about INR 12 crore of new IT." Candidate: "That pays back in about 16 months from its own savings."
Payback on shared services (years):12 ÷ (180 × 0.05) = 1.33
The recommendation
The group can save about INR 41 crore a year, just above the target, without touching clinical staff. First, consumables are half the non-medical cost, and buying as one group plus standardizing common items gives INR 25 crore, more than half the target. Second, a shared center for billing, HR, and IT saves about INR 9 crore and pays back its INR 12 crore of IT in about 16 months. Third, energy and service contracts add about INR 7 crore with little risk. Start with group purchasing, which needs no investment, and have every specification change approved by the clinical committee.
Risks: Doctors may resist standard items they did not choose; Suppliers may cut service levels when prices fall; The shared center may disrupt billing during the move.
Next steps: Compare prices for the 100 highest-spend items across the twelve hospitals; Set up a clinical committee to approve standard items; Plan the shared center in two waves, billing first.
A strong candidate
Sized the cost base first, protected clinical staff with a clear reason, built four levers that add up to the target, and counted the one-time cost.
A weak candidate
Proposed cutting nursing staff by 5 percent because it is the largest cost line, which risks patient safety and revenue.
Prompt: "We need to cut costs; where?"
Weaker answer
Jumps to cutting travel and office perks, which are tiny, and never sizes the real cost drivers.
Stronger answer
Builds a cost tree, sizes the buckets, estimates a saving per bucket from benchmarks, shows a path that adds up to the target, and counts one-time costs.
Why the stronger answer wins: The strong answer goes where the money is and proves the target is reachable. The weak one cuts visible but small costs.
Common mistakes, traps, and curveballs
- Cutting a small bucket for show while the big one is untouched
- Cutting costs that quietly drive revenue
- Across-the-board cuts instead of targeted ones
- Ignoring the one-time cost of making the cut
- Stopping before the savings add up to the target
Turnaround and private-equity contexts push cost cases hardest, often asking what you would protect even under pressure, to test judgment as well as arithmetic. Formats differ by office and change over time, so check the current process for your target office.
Practice
A company's costs are INR 500 million a year: materials 300, labor 150, overhead 50 (all INR millions). A 5 percent materials cut or a 20 percent overhead cut: how much does the materials cut save, in INR millions?
A UK bakery chain spends GBP 8 million a year on flour. A supplier tender cuts the price by 5 percent, and better planning means it buys 2 percent less flour. What is the yearly saving, in GBP?
Closing a regional office in Dubai costs AED 3 million one time and saves AED 2 million a year. What is the payback, in months?
Overhead is 5 percent of total cost. The chief executive wants a 10 percent cut in total cost from overhead alone. What do you say?
Cutting the sales team by 10 percent would save money. What must you check before recommending it?
The chief executive asks every department to cut 10 percent. What is the main weakness of this approach?
Size the buckets, build a path of savings that adds up to the target, and count the one-time cost of every cut.
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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