Lesson 8 of 12
Cost reduction case interview: framework and worked example
Cost reduction cases ask where a company can cut costs without hurting the business. This lesson gives you a framework for mapping costs, finding the ones worth cutting, and fixing the root cause, then walks through a full example with real math.
Part 1 of 9
What is a cost reduction case?
A cost reduction case asks you to find savings. Usually there is a target: cut $50M, reach a 15% margin, or bring costs in line with competitors. Your job is to map where the money goes, find the areas that are out of line, figure out why, and recommend specific fixes.
It is the cost half of a profitability case, taken further. In a profitability case you find that costs are the problem. In a cost reduction case you are told that up front, and the work is in finding exactly where and how to cut.
The skill being tested
Anyone can say "cut costs by 10% across the board." Interviewers want to see you find the few costs that are truly out of line, understand why, and cut them without damaging what customers pay for.
Part 2 of 9
How to spot a cost reduction case
These prompts name costs or a savings target directly. Listen for phrases like these:
- The CEO wants to cut $50M in costs
- Our costs are higher than competitors
- We need to improve margins by 3 points
- Where can we find savings?
- Our overhead has grown too fast
- We need to lower costs before the new competitor arrives
If the company is in crisis and running out of cash, it is a turnaround case, where cost cuts are one part of a bigger plan. Not sure which type a prompt is? The first lesson covers how to identify the case type.
Part 3 of 9
The cost reduction framework
Map the costs first, then pull the right levers. Never cut before you know where the money goes.
- Total costs
- MaterialsInputs and suppliers
- ProductionLabor, plants, equipment
- DistributionWarehousing, shipping
- Sales and marketingSales teams, advertising
- OverheadHeadquarters, IT, admin
For each big cost, ask
- How does it compare to peers?
- Why did it grow?
- Can we cut it without hurting customers?
Map before you cut
Break total costs along the value chain and show each one as a percentage of revenue. Compare each line with competitors or with the company's own history. The biggest gaps, not the biggest costs, are where to look first.
Three kinds of levers
Buy cheaper: renegotiate with suppliers, consolidate purchasing. Use less: reduce waste, automate, simplify. Do it differently: outsource, redesign a process, or close a site. Match the lever to the reason the cost is high.
Fix the cause, not the symptom
High shipping costs might be caused by late production. Cutting the shipping budget will not fix that. Ask why a cost is high before you decide how to cut it.
Want to see how this structure compares to the others? The frameworks guide covers them side by side.
Part 4 of 9
How to solve it, step by step
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Clarify the target
Confirm how much to cut, by when, and whether anything is off limits, like quality, jobs, or customer service.
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Map the costs
Break costs down along the value chain, as dollars and as a percentage of revenue.
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Benchmark to find the gaps
Compare each cost with competitors or past years to find the lines that are out of line.
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Find the root cause
Dig into the biggest gaps and ask why they are high before choosing a fix.
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Recommend specific levers
Pick the fixes that reach the target, size the savings, note one-time costs, and flag risks to customers.
Part 5 of 9
Worked example: Beacon Furniture
Try each question on your own before you reveal the answer. Say it out loud if you can, the way you would in an interview.
Case prompt
Your client is Beacon Furniture, a US furniture manufacturer with $500M in revenue and a 6% operating margin. The CEO wants to cut $20M in annual costs within 18 months without hurting product quality. Where should Beacon look?
Question 1
How would you structure this problem?
A strong answer confirms the target and the constraint first: $20M a year within 18 months, with quality off limits. Then it maps Beacon's costs along its value chain:
- Materials: wood, fabric, and hardware, and the prices Beacon pays suppliers.
- Production: factory labor, plant utilization, and waste.
- Distribution: warehousing and shipping furniture to stores and customers.
- Sales and marketing: sales teams, showrooms, and advertising.
- Overhead: headquarters, IT, and administration.
A good candidate then asks for each cost as a percentage of revenue, compared with competitors, to find where Beacon is out of line.
Question 2
Exhibit 1 compares Beacon's costs with competitors. Where is the biggest opportunity, and how much could Beacon save by matching competitors?
Exhibit 1: Cost benchmark
| Cost (% of revenue) | Beacon | Competitor average |
|---|---|---|
| Materials | 40% | 38% |
| Production labor | 18% | 17% |
| Shipping to customers | 12% | 7% |
| Sales and marketing | 10% | 10% |
| Overhead | 14% | 13% |
| Total costs | 94% | 85% |
Case data is illustrative.
Production labor: 1 point x $500M = $5M
Shipping: 5 points x $500M = $25M
Overhead: 1 point x $500M = $5M
Shipping is the standout. Beacon spends 12% of revenue on it versus 7% for competitors, a $25M gap on its own, more than the entire $20M target. Materials is a distant second at $10M. A good candidate says they want to dig into shipping first.
Question 3
Exhibit 2 breaks down Beacon's $60M in shipping costs. Most expedited orders happen because production runs late. If Beacon fixes its production scheduling and moves 75% of expedited orders to standard shipping, how much does it save?
Exhibit 2: Shipping costs
| Shipping type | Orders per year | Cost per order | Total |
|---|---|---|---|
| Standard freight | 150,000 | $160 | $24M |
| Expedited | 100,000 | $360 | $36M |
| Total | 250,000 | $60M |
Case data is illustrative.
Savings per order: $360 - $160 = $200
Annual savings: 75,000 x $200 = $15M
Fixing production scheduling saves $15M a year in shipping, three quarters of the target. Notice where the fix sits: the problem shows up as a shipping cost, but the cause is in the factory. Cutting the shipping budget alone would have meant late deliveries.
The remaining $5M could come from materials. Closing half of the 2-point gap with competitors, through renegotiating with suppliers or consolidating purchases, is worth 1 point x $500M = $5M.
Question 4
The CEO walks into the room. What is your recommendation?
"Beacon can cut $20M a year by fixing two things: expedited shipping and materials purchasing.
Beacon spends 12% of revenue on shipping versus 7% for competitors, and the reason is that 100,000 orders a year are expedited, mostly because production runs late. Fixing production scheduling and moving 75% of those orders to standard freight saves $15M a year. Renegotiating with suppliers to close half of our 2-point materials gap with competitors saves another $5M. Neither touches product quality.
The main risks are that the scheduling fix takes longer than expected and that delivery times slip during the transition. I'd start with a scheduling pilot in our largest plant, track on-time production weekly, and launch the supplier negotiations in parallel since they don't depend on the factory fix."
Why this works: it reaches the exact target with two sized levers, explains the root cause instead of just the symptom, and respects the CEO's constraint on quality.
Part 6 of 9
Common mistakes
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Cutting before mapping
Jumping to "lay off staff" or "cut marketing" without knowing where the money goes.
Instead: map all costs first, then focus on the biggest gaps.
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Cutting across the board
"Everyone cuts 10%" treats efficient and wasteful areas the same.
Instead: target the costs that are out of line with competitors.
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Treating the symptom
In the example, the shipping cost was caused by late production.
Instead: ask why a cost is high before choosing how to cut it.
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Hurting what customers pay for
Cutting quality or service can cost more in lost sales than it saves.
Instead: check each cut against its effect on customers and revenue.
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Forgetting one-time costs
Closing a plant or switching suppliers costs money up front.
Instead: net one-time costs against the savings and note the timing.
Part 7 of 9
Variations you'll see
The same framework handles every version below. What changes is how you find the gaps.
- Hit a savings target
- The classic form, like the Beacon example. Map, benchmark, and fill the target.
- Close a gap with competitors
- "Our margins are 5 points below peers." Benchmark every line to find where the gap comes from.
- Cut one function's costs
- A single area, like IT or customer service. Map that function's costs in more detail.
- Post-merger savings
- Finding the cost synergies after two companies combine. See the M&A lesson.
- Crisis cost cuts
- Fast cuts to protect cash, as part of a turnaround. Speed matters more than precision.
Part 8 of 9
Practice what you learned
Reading a framework is not the same as using it under time pressure. Put this lesson to work:
Try a full case
More ways to practice
Part 9 of 9
Frequently asked questions
What is the cost reduction framework in a case interview?
Map the company's costs along its value chain, from materials and production to distribution, sales and marketing, and overhead. Compare each cost with competitors to find the gaps, find the root cause of the biggest ones, then choose levers: buy cheaper, use less, or do it differently.
How do you structure a cost reduction case?
Clarify the savings target and constraints, map costs along the value chain, benchmark each line to find the gaps, dig into the root cause of the biggest gaps, then recommend specific levers with sized savings and risks.
What are the main cost reduction levers?
There are three kinds. Buy cheaper, like renegotiating with suppliers. Use less, like reducing waste or automating. Do it differently, like outsourcing, redesigning a process, or closing a site.
Should I compare costs in dollars or as a percentage of revenue?
As a percentage of revenue. It lets you compare the company with competitors of different sizes and with its own past years, even if revenue has changed.
How is a cost reduction case different from a profitability case?
A profitability case asks why profit changed, and the answer could be revenue or costs. A cost reduction case already knows costs are the focus and goes deeper into exactly where and how to cut them.
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