Cost Reduction
Take cost out without taking the business with it. Find the large, addressable lines and leave the ones that carry revenue.
- Fixed
- Rent, land and buildings
- Machinery and equipment
- Base salaries
- Interest, insurance, depreciation
- Variable
- Raw materials
- Processing and packaging
- Transport and storage
- Commissions and after-sales
Watch out: For each cost that grew, ask whether we pay more per unit or use more units; the fixes differ.
On a case
A private hospital's cost per bed-day rose 18% in a year.
- Fixed
- Doctor and nurse salaries
- Building and equipment
- Variable
- Medicines and consumables
- Food and laundry
Illustrative case. Figures and conditions below are assumptions for practice, not market data.
Assume the hospital spends Rs 100 lakh on 10,000 occupied bed-days: Rs 1,000 per bed-day. Fixed costs are Rs 60 lakh and variable costs Rs 40 lakh. If occupancy falls to 8,000 bed-days at the same Rs 400 variable cost per bed-day, total cost becomes Rs 92 lakh, or Rs 1,150 per bed-day.
That explains a 15 percent unit-cost increase, not the entire reported 18 percent. Ask which input prices, staffing mix or treatment mix explain the remaining gap. Compare like-for-like treatments before blaming waste.
Test procurement and scheduling changes against service quality and clinical capacity. Cutting nurses may reduce a cost line while lowering safe capacity and revenue. Distinguish avoidable costs from allocated fixed costs that remain after a ward closes.
Sources and further reading
- OpenStax: contribution margin
Explains how sales, variable costs and fixed costs connect through contribution margin.