How To Reduce Operational COSTS (OPEX) 2023

Are you looking to reduce your company’s operational costs? If so, you’re in the right place! In this blog post, I’ll share some interesting tips on how you can reduce operational costs (OPEX).

Key Takeaways

  • Focus on automation, streamlining processes, and eliminating waste to reduce costs.
  • Negotiate with vendors, promote remote work, and embrace digital transformation.
  • Leverage Industry 4.0, outsource non-core activities, and optimize energy consumption.

OPEX, or operational expenses, are the costs associated with running a business on a day-to-day basis. They can include everything from rent and utilities to employee salaries and benefits. Reducing your OPEX can help improve your economic bottom line and make your business more efficient.

An audible narration β–Άβ™«πŸŽ§ is available for this article. Listen to our podcast below, it's FREE:
Audible Narration

Operational cost reduction strategies

The best operational cost reduction strategy follows the following steps:

  1. Identifying areas to reduce operational cost
  2. Conduct a cost analysis for all areas of the business
  3. Prioritize areas for operational cost reduction
  4. Implement the necessary reductions of operational costs

1. Identifying areas to reduce operational cost

OPEX cost reduction starts by identifying the areas where you need to intervene.

One way to identify areas to reduce operational cost is to look at your business’s financial statements. This will give you a good overview of where your money is being spent. You can then look for areas where you can cut costs or where you can increase efficiency to save money.

Another way to identify areas to reduce operational cost is to speak to your employees. They will be able to tell you where they think money is being wasted or where processes could be improved.

2. Conduct a cost analysis for all areas of the business

Conducting a cost analysis involves creating a spreadsheet to list all expenses, identifying potential areas for cost reduction. By scrutinizing every aspect of the business, including process efficiency and material usage, opportunities to decrease operational costs emerge.

Ensuring that pricing aligns with costs is crucial; too high prices might deter customers, while too low prices could reduce potential earnings. This balance is essential for optimizing profitability and maintaining competitive edge in the market.

3. Prioritize areas for operational cost reduction

To prioritize operational cost reduction, differentiate between fixed and variable costs, focusing on those with significant bottom-line impact.

Evaluate each cost’s potential savings against its operational consequences, ensuring that reductions, such as in manufacturing, don’t adversely affect core business functions.

For example, a 10% reduction in rent may have a much greater impact on profits than a 10% reduction in office supplies.

16 Ways to reduce operational cost

1. Automation

The first way to reduce operational costs is through automation. By automating certain processes, you can reduce the amount of time and money that is spent on manual tasks.

For example, you can use software to automate customer service tasks such as responding to customer inquiries and processing customer orders. You can also use automation to manage inventory and shipping.

2. Streamlining processes

Streamlining processes by removing unnecessary steps and enhancing communication and coordination is a key strategy to reduce operational costs.

Analyze current workflows, identify inefficiencies, and implement improvements, utilizing tools like project management software and video conferencing to foster better communication and task automation.

3. Eliminating waste

Eliminating waste is one of the best ways to reduce operational cost. There are many different types of waste that can occur in businesses, but some of the most common include:

  • Process waste – This is any waste that occurs during the production process. It can include things like excess materials, inefficient methods, or anything else that adds unnecessary cost or time to the production process.
  • Inventory waste – This is any waste that occurs as a result of excess inventory. This can include things like storage costs, inventory obsolescence, or anything else that adds unnecessary cost to the business.
  • People waste – This is any waste that occurs as a result of people not working to their full potential. This can include things like absenteeism, low productivity, or anything else that reduces the efficiency of the workforce.

There are many other types of waste that can occur in businesses, but these are some of the most common. By eliminating waste, businesses can reduce their operational costs significantly.

4. Negotiating with vendors and promoting competition

Negotiating with suppliers is a strategic method to reduce operational costs; asking for discounts or demonstrating loyalty can often secure better pricing.

Promoting competition among suppliers by comparing quotes can further drive down costs, sometimes significantly, as leveraging market alternatives can lead to substantial savings.

The potential savings from supplier negotiations can vary, with examples of reductions up to 90% in certain cases.

Regularly comparing prices with competitors and not shying away from renegotiation can reveal untapped opportunities for cost reduction, underlining the importance of this strategy in operational cost management.

5. Reviewing insurance policies

As a business owner, it is important to regularly review your insurance policies to make sure they are still appropriate for your needs and to ensure that you are getting the best possible value for your money and eventually reducing your OPEX.

Here are five tips for reviewing your business insurance policies:

  • Review your policy limits – Make sure that the limits on your policy are adequate to cover your potential liabilities.
  • Review your deductibles – Consider increasing your deductibles in order to lower your premiums.
  • Review your coverage – Make sure that you are still adequately covered for all of your risks.
  • Compare rates – Get quotes from different insurance companies to ensure that you are getting the best rate.
  • Review your policy regularly – Insurance policies and needs can change over time, so it is important to review your policy on a regular basis.

6. Reducing energy consumption

Implementing green technologies, such as replacing incandescent bulbs with LED lights, can significantly reduce energy consumption and operational costs.

Investing in renewable energy sources like solar panels, despite initial costs, offers long-term savings and environmental benefits.

Additionally, enhancing building insulation improves energy efficiency, further reducing energy expenses and contributing to cost savings.

7. Promote remote work

In order to reduce operational costs, it is important to promote remote work.

This can be done by providing employees with the tools and resources they need to be productive when working from home.

Additionally, it is important to have clear communication and expectations with employees regarding remote work.

Finally, it is also beneficial to provide employees with incentives to work remotely.

8. Digital transformation

Adopting digital transformation technologies streamlines operations and cuts costs by automating tasks and digitizing traditional processes.

Utilizing cloud computing and automating data entry minimizes manual labor, while converting paper-based systems to digital ones reduces material expenses.

Implementing personalized pricing and using smart chatbots enhance service efficiency, potentially transforming business operations fundamentally and providing competitive advantages in pricing and customer service.

9. Implement Industry 4.0

Industry 4.0 introduces advanced automation and data analytics to manufacturing, utilizing technologies like IoT and additive manufacturing to enhance efficiency.

By analyzing data from manufacturing processes, companies can pinpoint and rectify inefficiencies, reducing waste and operational costs.

Additive manufacturing allows for on-demand production of custom parts, decreasing inventory and storage expenses, while automation and robotics further cut labor costs, contributing to significant reductions in operational expenditures.

10. Outsource secondary activities

Outsourcing non-core activities allows businesses to concentrate on their main strengths, enhancing efficiency and reducing costs. It provides access to specialized skills and economies of scale that might be too expensive to develop internally.

When considering outsourcing, it’s vital to identify suitable activities, select the right service provider based on cost, quality, and reliability, set clear expectations, and continuously monitor the outsourcing relationship to ensure it meets the business’s objectives and cost-reduction goals.

11. Cancel unused subscriptions

Operational costs can easily spiral out of control if left unchecked. One of the things that have the tendency to sit there even if unused are subscriptions.

Cancel any subscriptions that are no longer being used. This may seem like a no-brainer, but it’s easy to let unused subscriptions continue month after month, year after year.

If you’re not using a service, there’s no reason to keep paying for it. So take a close look at your list of subscriptions and see if there are any that can be canceled. It could save you a significant amount of money over time.

12. Improve sustainability

Enhancing sustainability in business operations not only boosts reputation and attracts ESG investors but also leads to cost savings by fostering resource efficiency, reducing waste, and lowering emissions.

Sustainable practices, such as adopting circular economy principles, leveraging industry 4.0 for just-in-time production, and utilizing renewable energy, contribute to significant operational efficiencies and brand value enhancement.

Implementing sustainable business strategies like recycling, using less water and energy, and investing in energy-efficient technologies can substantially cut costs and build customer loyalty.

These efforts align with environmental responsibilities and improve a company’s social and environmental performance, creating a positive impact on its overall sustainability profile.

13. Prefer online marketing

Online marketing is another tool that can be leveraged to reduce the operational costs of for the business.

Here are some benefits of online marketing:

  • Cost effective – Online marketing is much more cost effective than traditional marketing methods such as print, TV, or radio advertising. For example, after an initial investment, having a website and improving its ranking on Google by performing Search Engine Optimization (SEO), can help reduce your OPEX in the long run by giving you a constant flow of online visitors free of charge.
  • Targeted – You can target your online marketing campaigns to specific groups of people, making sure that your message is reaching the right people.
  • Measurable – With online marketing, you can easily track the results of your campaigns and see how effective they are.
  • Flexible – Online marketing is flexible, so you can easily change your campaigns to respond to the latest trends.

If you want to reduce your operational costs, switching to online marketing is a great way to do so.

14. Reduce business travel

Business travel can be a significant operational expense for many businesses. There are a number of ways to reduce the cost of business travel, such as:

  1. Review your travel policy regularly and update it as needed.
  2. Encourage employees to use video conferencing and other technologies to reduce the need for travel.
  3. Use travel management companies to get the best rates on travel and accommodations.
  4. Review your travel expenses regularly to identify areas where you can save money.
  5. Negotiate discounts with airlines, hotels, and other suppliers.
  6. Take advantage of loyalty programs and other discounts.
  7. Use public transportation when possible.
  8. Carpool or use ride-sharing services when traveling to meetings or events.
  9. Combine business and personal travel to save money.
  10. Plan your travel in advance to take advantage of discount rates.

By following these tips, you can reduce the cost of business travel and save your company some money.

15. Leverage internships

Internships provide a way for businesses to bring in workers at a lower cost while also providing them with the opportunity to learn new skills and build their resumes. This can be especially beneficial for businesses that are looking to reduce their workforce or have the capability to train interns in house.

16. Pay the bills before the deadline

Make sure you pay your bills before the deadline. This may seem like a no-brainer, but it’s amazing how many businesses let their bills pile up and then end up paying late fees.

Paying your bills on time will not only save you money in late fees, but it will also help you build a good relationship with your vendors. When vendors see that you’re prompt with your payments, they’re more likely to work with you to improve price and terms in the future.

If you’re having trouble staying on top of your bills, there are a few things you can do to make the process easier:

  • Set up automatic payments for all of your recurring bills. This way, you’ll never have to worry about forgetting to pay a bill.
  • Set up a system to track your bills. Having all of your bills in one place will make it easier to stay on top of them.
  • Make sure you have a budget readily available for your regular bills.

Reasons to reduce oPEX

There are a number of reasons why it is important to reduce OPEX. The benefits of reducing operating costs include:

  • It can free up funds that can be reinvested in other areas of the business.
  • Improve the business economic sustainability and profitability.
  • Increase cash flow.
  • Reduce the risk of business failure.

Operational cost savings are an important part of running a successful business. By taking steps to reduce costs, companies can improve their bottom line and their cash flow.