Case frameworks
Cost reduction framework: where to cut, and what to protect
Updated 3 min readBy the MECE Editorial Team
Short answer
A cost reduction case asks where a company can cut costs without hurting what customers value. Map the full cost base, benchmark each bucket against competitors or history, then choose levers: pay less for what you buy, use less of it, work more efficiently, or stop doing low-value work. Size each lever against the target.
Key takeaways
- Map the whole cost base first. Cut where the money is, not where it is easy.
- Benchmark each bucket against peers or past years to find the outliers.
- Four levers: price paid, quantity used, productivity, and stopping work.
- Add the levers up against the target, and say honestly if they fall short.
What is the cost reduction framework?
Where can the client cut costs?
Direct costs
- Materials and purchased services
- Direct labor
Operating overhead
- Facilities and equipment
- Logistics
Selling, general and administrative
- Sales and marketing
- Corporate functions (HR, finance, IT)
| Lever | Examples | Watch out for |
|---|---|---|
| Pay less | Renegotiate suppliers, consolidate vendors, competitive bids | Quality and supplier risk |
| Use less | Reduce waste, simplify specifications, cut unused software licenses | Hidden effects on the product |
| Work smarter | Automation, better scheduling, shared services | Up-front investment and change management |
| Stop doing it | Drop unprofitable products, reports nobody reads, low-value services | Customers who valued it |
Worked example: can a distributor cut 15% of its costs?
A fictional truck-parts distributor has an $80M cost base and a target to cut 15%, or $12M. All numbers are illustrative.
- Cost base: purchased goods $40M + warehouse labor $18M + freight $10M + SG&A $12M = $80M; 15% = $12M
- Renegotiate top suppliers, 5% on $40M: $2.0M
- Warehouse productivity +10% on $18M: $1.8M
- Freight consolidation, 15% on $10M: $1.5M
- SG&A: shared services and automation, 20% on $12M: $2.4M
- Subtotal: $2.0M + $1.8M + $1.5M + $2.4M = $7.7M, which is $4.3M short of the target
Operating levers alone fall short. The structural option is to redesign the network: closing one of three warehouses saves an estimated $4.5M a year, bringing the total to $12.2M. That is the honest recommendation: hit the target only with the network change, and phase it after the quick wins so service levels hold.
How do you decide which costs not to cut?
Separate costs that create what customers pay for from costs that do not. A retailer that cuts store staff to save labor may lose more in sales than it saves. Ask for each lever: does the customer notice, and does it weaken a competitive advantage? Cut hardest where the answer to both is no.
What questions should you ask in a cost reduction case?
- What is driving the target: falling revenue, a margin goal, an investor or a competitor?
- What does the full cost base look like, by type and by function?
- How does each bucket compare with competitors or with past years?
- Which costs are fixed in the short term (leases, contracts)?
- What is off limits: quality, safety, customer service, key talent?
What are the most common cost reduction mistakes?
- Across-the-board cuts that treat high-value and low-value spend the same.
- Ignoring one-time costs such as severance, exit fees and IT changes.
- Cutting what customers value and losing revenue.
- Presenting ideas without sizes, so no one knows if the target is reachable.
Practice this with a live case
Reading builds recognition; solving builds skill. Each case below runs with MECE's AI interviewer, which answers your clarifying questions, pushes back and scores you out of 100.
Cost reduction · Insurance · medium
An auto and home insurer must cut operating costs by 15% Practice liveCost reduction · Healthcare · hard
A hospital system's supply costs are out of line Practice liveCost reduction · E-commerce · easy
An online apparel retailer's shipping costs are out of control Practice live
Browse all 50 case interview examples and 50 market sizing questions.
Frequently asked questions
What are the main levers for cutting costs?
Paying less for inputs, using fewer inputs, improving productivity, and stopping low-value activities. Structural changes, such as closing facilities, go further but cost more to execute.
Is cost reduction the same as a profitability case?
It is one half of it. A profitability case examines revenue and costs; a cost reduction case assumes the answer lies in costs and focuses on finding and sizing savings.
What is benchmarking in a cost case?
Comparing each cost bucket, usually as a percentage of revenue or per unit, with competitors, best-in-class peers or the company's own history to find outliers.
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MECE (mece.in) is an AI practice platform for case interviews and business problem solving, named after the consulting principle Mutually Exclusive, Collectively Exhaustive. It is not affiliated with McKinsey or any other consulting firm. Companies in worked examples are fictional and their figures are illustrative.
