Cost cutting in the automotive industry: how to reduce costs?

The automotive industry is one of the sectors most impacted by the Covid-19 crisis. In 2020, sales in the French car market fell by 25.5%, thus regressing to a level not seen in almost half a century (according to figures from the CCFA – Committee of French Automobile Manufacturers – reported by Les Echos on January 1, 2021). The reason: the closure of dealerships and factories during the first lockdown and the drop in demand due to the economic crisis.

 

This observation forces market players to quickly deploy strong actions to guarantee the survival of their company. The Cost cutting, a cost-cutting operation, is one of the solutions to consider when reacting to this difficult context.

 

 

What is cost cutting?

Cost cutting, also known as cost-killing, is a cost-cutting operation. This approach has been booming in recent years and aims to to protect the company’s cash flow and reduce losses, to respond to a crisis situation and urgency. Developed in large North American groups in the 1990s, this practice is becoming more and more widespread today, particularly in SMEs and large groups. In the current context, cost cutting can therefore represent a very beneficial solution for companies in great difficulty.

 

 

How to reduce costs with cost cutting in the automotive industry?

Here are the main actions to be taken to reduce the costs of a company operating in the automotive sector (car manufacturers, dealerships, automotive suppliers, etc.):

 

Conduct a financial audit

First of all, it is important to carry out a detailed audit of all the company’s expenses: production costs, supply costs, purchases, overheads, operating expenses, etc.

All the costs specific to each department must be rigorously analysed, with the key employees of each department concerned, and ideally with an expert in the financial sector (chartered accountant, CFO, etc.).

The objective of this first stage of cost cutting in the automotive sector is to analyse the cash flows and financial results of the previous years and months, to report on the financial health of the company and highlight the costs that could be optimised, reduced or even eliminated.

 

Carry out a cost reduction action plan

The action plan will make it possible to define precisely at which levels to carry out cost cutting.

What are the sources of waste? What are the non-essential expenses? What operations could lead to real savings? What is the expenditure threshold that must not be exceeded in order to maintain the company’s activity? The aim here is to define, through quantified objectives and performance indicators (KPIs), the actions to be taken to reduce costs.

Cost reduction and optimization can be achieved at many levels: the supply chain (choice of materials, automotive suppliers, equipment manufacturers, carriers and other industrial subcontractors, etc.); the production chain (manufacturing, car manufacturing, assembly, etc.); purchasing and inventory management.

This will include postponing expensive and non-priority operations, eliminating overproduction in vehicle construction, increasing team productivity, speeding up processes, eliminating sources of waste, and prioritizing value-added projects.

It is also interesting to look at other actions that can increase the company’s profitability, for example: ensuring customer satisfaction, setting up closed-circuit recycling of end-of-life cars, adapting one’s management style, using technological innovation (electric vehicles, etc.).

The short-term objective is to limit losses and keep the cash flow in the green, to guarantee the survival of the business. In the long term, a cost-cutting approach will increase the profitability and competitiveness of the company.

 

Carry out regular monitoring and adjust cost cutting

Cost cutting remains a temporary measure, which responds to an immediate emergency. It must therefore be carried out over a period of about a year or two years, after which it will be necessary to reassess it, and to transform it into a real recovery plan.

In particular, it will be necessary to carry out rigorous monitoring, on a monthly basis, the actions carried out, the financial results obtained (using the KPIs defined beforehand). This will then be followed by corrective actions to reassess priorities and adjust the cost cutting strategy.

 

Outsource your cost cutting operation

As explained above, cost cutting is an emergency operation, which is delicate to carry out and which must be deployed wisely. If misdirected, this can have a very detrimental effect and further worsen a company’s financial situation.

To secure your cost cutting strategy and effectively reduce costs in your company, the safest way is to outsource it to an interim manager Specialized in cost reduction operations. Familiar with such emergency situations, these high-ranking leaders have the pragmatism, know-how and audacity necessary to carry out effective and impactful cost cutting, ensure the sustainability of the company, contribute to boosting the business, and improve the performance and financial results of the automotive company.