How to Optimize Cost Structures in Firms

The Hidden Supply Chain Costs Quietly Draining Your Profitability Supply Chain Management is a constant balancing act between efficiency, cost control, and customer satisfaction. But here’s the catch: the real cost killers are often invisible until they erode your margins. Let’s break them down 👇 Key Cost Components 1️⃣ Supplier Mapping & Risk Assessment Costs start long before production; supplier evaluation, onboarding, negotiation, and audits. These ensure reliability but can silently inflate budgets if overdone 2️⃣ Production / Manufacturing Raw materials, energy, labor, QC, and scrap all add up. Kaizen thinking can transform these from cost centers into value engines 3️⃣ Transportation & Warehousing Freight rates, fill-rate, fuel volatility, and inventory levels quietly eat into profitability. Optimized fill, routing and better warehouse utilization can turn the tide 4️⃣ Delivered Cost Shipping, handling, customs, and last-mile delivery impact both costs and customer satisfaction. Streamlining this delivers a double win 5️⃣ Installed Cost Costs don’t stop at delivery; assembly, testing, training, customer integration also matter 6️⃣ Operating Cost Obsolescence, returns, repairs, and service operations. Lifecycle thinking and predictive maintenance help minimize expense leaks 7️⃣ Cross-Category Costs Labor, technology, insurance, real estate, compliance, sustainability affect every stage. Visibility here is key to managing total spend. Insights for Cost Optimization ✅ See the “true” Cost‑to‑Serve Build a cost‑to‑serve view by customer, channel, and SKU to expose where you earn vs. where you bleed ✅ Design segmented supply chains Create different flows for stable vs. volatile demand and premium vs. standard service instead of a one‑size‑fits‑all model ✅ Automate hidden manual work Target planning, warehousing, and order processing for automation to cut errors, lead times, and “just in case” buffers. ✅ Tune inventory across lifecycle Align inventory policies with product life stage and variability, using multi‑echelon logic instead of blanket safety‑stock rules. ✅ Turn suppliers into cost partners Shift from price haggling to joint cost roadmaps, VMI/SMI, and long‑term agreements focused on total landed cost ✅ Make cost a governance topic, not a project Embed cost KPIs into S&OP/IBP, with clear ownership, link decisions to margin and resilience ✅ Embed Total Cost of Ownership Integrate TCO into sourcing, make‑or‑buy, and network design so “cheapest” and “best” stop being different answers. Supply chain cost management isn’t cutting expenses. It’s building resilience in a world shaped by volatility and disruption. By understanding hidden costs and applying right strategies, leaders safeguard profitability while sustaining high service levels. What cost optimization lever is working best for you right now : visibility, analytics, or process standardization?

Procurement teams are no strangers to supplier price hikes. But the truth is: Not every price increase is justified. Inflation, tariffs, and labor costs are real, but so is cost softening. And if you're not tracking those shifts down to the commodity and component level, you’re likely leaving savings on the table. This type of insight should be done for every product, component, and direct material. Here’s a simple, repeatable method to push back with facts, not assumptions: Step 1: Identify Commodity Trends ➡️ Track input commodities. The commodities that are part of the products you buy. If commodity/component prices have decreased, that’s your opportunity window. Step 2: Map Commodities to Products ➡️ Connect those commodities to the SKUs and products in your portfolio. How much does the commodity get used in your buy-space? Which goods are exposed? What suppliers are being affected? What products have that commodity? Step 3: Analyze Cost Structures ➡️ Drill into the cost breakdown of every product that uses that commodity. What % of the total cost does that commodity represent? Repeat the analysis for every product that uses that commodity. Step 4: Supplier Attribution ➡️ Now link those products to the suppliers you buy them from. You should know exactly which suppliers are affected. Step 5: Quantify the Opportunity ➡️ Use real market data to calculate what the savings should be based on recent cost declines. For example, if aluminum dropped 15% in the last three quarters and makes up 30% of a product’s cost, that’s meaningful leverage. Step 6: Negotiate with Confidence ➡️ Approach your supplier with the data. Be precise. Be proactive. “We’ve seen a 15% decrease in aluminum prices, which represents X% of your product cost. We’d like to see that reflected in pricing.” This is how you fight inflation without guesswork. 📌 Bonus: Platforms like Kloopify make this process faster, scalable, easier, and defensible. We embed real-time commodity, tariff, and cost intelligence at the SKU level, location, and supplier level, so you’re never negotiating blind. Procurement isn’t just reacting anymore. We’re leading with data. Let’s make sure our suppliers know it. What did I miss? Or what would you add? Let me know!

Many companies suffer from this missed opportunity... Did you know that ~70% of a product’s cost is already defined before SOP (Start of Production)? Let that sink in. By the time you reach SOP, most of your cost structure is already locked in: Design decisions No. of components Material selection Supplier strategy Manufacturing concept Automation level Quality requirements However, many companies miss this important opportunity.  Many crucial activities are carried out in isolation, leaving only the attempt to improve margins after the SOP – when flexibility is low and changes are costly. The real leverage sits in the product and process development phase. Companies that consistently outperform on margins understand this. And more importantly — they act on it. What are the real levers? Cross-functional collaboration from day one! When R&D, Industrial Engineering, Purchasing, Finance, Quality, and Operations work in silos, cost gets “designed in.” When they collaborate early: Design-to-cost becomes real, not theoretical Manufacturing constraints shape smarter product designs Supplier input improves feasibility and competitiveness Finance brings transparency on lifecycle impact Quality prevents costly late changes Cost is not reduced later — it is designed correctly upfront. And what about CAPEX? CAPEX decisions during development are often underestimated. Tooling concepts Automation levels Equipment flexibility Scalability of lines These decisions determine: Unit cost Break-even volume Cash flow impact Risk exposure Too much CAPEX too early kills agility. Too little CAPEX can inflate variable cost long term. The sweet spot requires technical insight, financial modeling, and operational realism — together. The bottom line Margins are not only won in production. They are mainly won in development. If you want better profitability: Invest less in late firefighting Invest more in early cross-functional alignment Because once SOP arrives, you’re mostly managing decisions you already made. What’s your experience — do your teams truly collaborate early enough?

Most architecture conversations start in the wrong place. They start with technology. They should start with the business. Architecture design is always driven by business goals. That means ROI, financial constraints, and measurable outcomes must guide every technical decision. Before you design anything, ask: • Does the allocated budget actually enable us to meet our goals?   • Where does the application really spend money across build and operations?   • What are the true priority areas?   • How do we maximize investment - better utilization or smart reduction?  Here’s the hard truth: A cost-optimized workload is not the same thing as a low-cost workload. There are real tradeoffs. Tactical cost cutting is reactive. It might lower spend this quarter.   It rarely builds long-term financial responsibility. Sustainable optimization requires: • Clear prioritization   • Continuous monitoring   • Repeatable processes   • Alignment between business intent and technical execution  Start with recommended design principles.   Justify every architectural decision against business requirements.   Then operationalize it using a Cost Optimization checklist. And expect change. As business priorities shift, cost allocation will shift.   Optimizing cost often creates tension with security, scalability, resilience, and operability. If those tradeoffs are not handled intentionally, teams often choose the cheaper option instead of the right option. That decision may save money today.   It can cost reputation tomorrow. Optimize with intent.   Design for the business. #CloudArchitecture #Azure #WellArchitected #CostOptimization #CloudStrategy #Leadership

In my Tech company, salaries were our biggest expense. Every month, I would stare at the P&L and think: “If we can optimize this one line…our entire bottom line will improve.” But how do you do that - when salaries only go up, - talent is scarce, - and clients want better outcomes at lower cost? Here’s what we did... (Save this if you’re scaling a services business in 2026) 12 levers to optimize your salary costs: 1. 𝗖𝗹𝗮𝘀𝘀𝗶𝗳𝘆 every role as revenue‑producing, revenue‑enabling, or overhead, and review the mix quarterly. 2. 𝗧𝗿𝗮𝗰𝗸 cost per engineer per month, per billable day, and per key output (story point, feature, project). 3. 𝗠𝗲𝗮𝘀𝘂𝗿𝗲 utilization, blended rate, and gross margin for each team and major client, not just at company level. 4. 𝗗𝗲𝗳𝗶𝗻𝗲 clear salary bands and promotion criteria so raises follow level changes, not tenure. 5. 𝗖𝗮𝗽 % of revenue for non-billable roles, and require a business case to exceed it. 6. 𝗣𝗿𝗶𝗰𝗲 every engagement bottom up (fully loaded cost + target margin) and enforce hard floor. 7. 𝗦𝘁𝗮𝗻𝗱𝗮𝗿𝗱𝗶𝘇𝗲 delivery processes, templates, and technical patterns to juniorize. 8. 𝗥𝗲𝗾𝘂𝗶𝗿𝗲 a hiring / backfill justification that shows impact on revenue, margin, or a specific constraint being relieved. 9. 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗲 the fully loaded cost of attrition (recruiting, ramp, discounts, quality risk) and use it in leadership decisions. 10. 𝗜𝗻𝘃𝗲𝘀𝘁 in a small set of retention levers (growth paths, 1:1s, coaching, sane workload) that are cheaper than constant hiring. 11. 𝗣𝘂𝗯𝗹𝗶𝘀𝗵 a simple monthly cost and margin dashboard to your leadership team and discuss variances and corrective actions. 12. 𝗘𝗱𝘂𝗰𝗮𝘁𝗲 team leads on unit economics and empower them to make local decisions that protect utilization and margins. Cost control is not frugality. It’s financial leadership. The founders who win aren’t the ones who spend less. They’re the ones who spend deliberately. If this resonated, then repost. Someone in your network needs to start controlling costs today. And if you want systems like this every week, subscribe to 𝗖𝗘𝗢 𝗠𝗮𝘀𝘁𝗲𝗿𝘆 𝗻𝗲𝘄𝘀𝗹𝗲𝘁𝘁𝗲𝗿. 2400+ founders already read it. It’s free. 🔗 Click “View my newsletter” above 👆 #CEOMastery #Founders #CostControl

“My buyer says I am 10% costlier than the competitor. A ₹5 Cr order is at risk.” The MD of a ₹70 Cr engineering company asked me this — in panic. Discounting was the easy option. We chose the right one. Instead of cutting price, we re-engineered the value stream. What we fixed 🔧 Design (VA/VE) Eliminated non-value BOM items Replaced some custom parts with standard components 🏭 Operations Reduced cycle time, some steps and wastages Improved first-pass yield 🔗 Supply Chain Identified alternate vendors and materials Same quality. Lower landed cost. 📦 Packaging & Logistics Redesigned packaging Reduced freight cost end to end Result Quote revised Price became competitive ₹5 Cr order WON Followed by a repeat order Lesson for Factory Owners When customers say “You’re expensive”, they’re pointing to your cost structure, not your capability. Don’t just cut price. Re-engineer the business end-to-end. That’s how you win orders and protect margins. Have you ever lost an order because of pricing — and later realised it was a system issue?

Layoffs aren’t the only way to save money. Most companies are sitting on six figures of hidden waste—and they don’t even know it. According to Gartner, companies waste an average of 20% - 30% of their expenses due to inefficiencies, redundant systems, and poorly managed processes. Before you think about cutting people, fix the systems first. Here’s a smarter way to cut costs: Think in 5Cs. 1 - 𝐂𝐚𝐧𝐜𝐞𝐥 Audit all the tools, subscriptions, and services you're barely using. If it doesn't bring clear results, it's time to pull the plug. 2 - 𝐂𝐨𝐧𝐬𝐨𝐥𝐢𝐝𝐚𝐭𝐞 Find overlaps in your tech stack, vendors, and processes. One tool, one platform, one bill—less chaos, lower costs. 3 - 𝐂𝐨𝐧𝐭𝐫𝐨𝐥 Put simple limits in place. Set thresholds for spending approvals and track anything over $500 before it snowballs. 4 - 𝐂𝐨𝐥𝐥𝐚𝐛𝐨𝐫𝐚𝐭𝐞 Bring in fractional experts instead of hiring full-time for specialized needs. Pay for outcomes, not hours. 5 - 𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐈𝐦𝐩𝐫𝐨𝐯𝐞𝐦𝐞𝐧𝐭 Set a quarterly reminder to review expenses, renegotiate contracts, and audit your processes. Cost-cutting isn't a one-time thing—it’s a habit. 𝐐𝐮𝐢𝐜𝐤 𝐰𝐢𝐧𝐬 𝐭𝐨 𝐬𝐭𝐚𝐫𝐭 𝐬𝐚𝐯𝐢𝐧𝐠: → Audit subscription creep → Renegotiate vendor terms → Rethink your office space needs → Streamline your software stack → Review marketing ROI closely → Extend payment deadlines → Automate where you can → Hire a fractional instead of a full-time → Strengthen expense approval rules → Double down on high-impact projects If you optimize systems, you can save big, without losing your best people. Agree? What’s one cost-saving move you think every company should prioritize but often overlooks? ♻️ Share this with a founder who needs to hear it. ➕ Follow Donny Mashiach for more insights on scaling and financial growth.

IT Financial Management Ensuring that IT financial management rewards the right decisions is crucial for aligning IT behaviors and choices with organizational goals.  Here are some key points to consider: Budgeting 1. Central vs. Business-Unit Budgets: Clearly define how budgets are allocated between central IT and individual business units. This ensures transparency and accountability in funding IT work. 2. Run/Grow/Transform Framework: This framework helps in isolating components of IT operations:  o Run: Budget for maintaining current operations. o Grow: Budget for initiatives aimed at growth. o Transform: Budget for transformational projects. This separation helps in managing and prioritizing funds effectively. Chargeback Mechanisms 1. Complete vs. Partial Chargeback: Decide whether to charge back the full cost of IT services to business units or only a portion. This decision impacts how business units perceive and utilize IT services. 2. Cost Structures: Determine whether to charge straightforward costs or include additional margins for refresh and innovation. This can influence the adoption of new technologies and services. 3. Usage-Based Charging: Implement chargeback based on actual usage or high-level metrics. This encourages efficient use of IT resources. 4. Handling Unforecast Demand: Consider charging more for unforecast demand to manage unexpected spikes in resource usage. 5. Development Costs: Decide whether to charge the first business unit for the total cost of new developments and refund them as others use it, or to forecast demand and charge proportionally. Financial Engineering Considerations • Profit and Loss: Beyond basic budgeting, consider any financial engineering strategies that can optimize IT spending and investments. Addressing Scope Inflation • Ongoing Operations Funding: Ensure there is a formal mechanism to finance the ongoing operation of new capabilities developed through project budgets. This prevents scope inflation in the run-the-business IT budget. By focusing on these areas, IT financial management can effectively support strategic decisions and drive the right behaviors within the organization.

Our benchmarks are 80% Gross Margin and 50% EBITDA. How is that possible? Start with Expense Discipline, Not Revenue Growth. Most founders chase top-line growth. The smartest operators I know focus on cost structure first—because profit is the real power. If you’re running a professional services firm, Activity-Based Costing (ABC) isn’t a finance gimmick, it’s your path to the 80% GM and 50% EBITDA benchmarks we discuss in Collective 54. ABC helps you: -Trace every dollar of delivery back to actual activities—not just payroll. -Uncover unprofitable clients, bloated processes, and hidden rework. -Determine what to tech enable, automate, and eliminate. Once you implement ABC, you stop guessing. You start: -Cutting wasteful spending -Pricing based on real cost, not market noise. -Firing “big” clients that drain your margin. -Shifting resources to high-yield delivery work. That’s how you get to 80% gross margin and 50% EBITDA—not by selling more, but by running lean, focused, and informed. There are no silver bullets. Lots of moves make these targets a reality.