Manufacturers face intense pressure to reduce costs, and many have launched major restructuring programs over the past several years to remove management layers, automate processes, and shrink the workforce. These steps might be necessary, but they are typically not sufficient. Given the current economic environment, leadership teams need to maintain a disciplined focus on costs for the foreseeable future. In particular, they need to proactively reduce their cost of goods sold (COGS).

The So What

A BCG survey of global business leaders found that cost management is the top priority for executives, particularly supply chain and manufacturing costs (cited as very important by 65% of respondents, versus 52% for labor and nonlabor overhead). Yet while companies can successfully meet their cost-savings targets, many struggle to sustain those savings (35%) and limit the negative impacts that cutting costs can have on growth (27%).

One reason is that companies sometimes focus disproportionately on sales, general, and administrative (SG&A) costs, which is understandable. It is also potentially shortsighted. At most manufacturers, COGS is about five times larger than SG&A, measured as a percentage of revenue, making it a bigger target for cost-reduction efforts.

Dive Deeper

To design a COGS program that delivers sustainable savings, manufacturers should focus on five areas.

Procurement. AI (including GenAI) is transforming procurement by automating processes like contracting and negotiation and helping companies manage time-consuming, long-tail suppliers. Using AI-powered tools, manufacturers can work more efficiently and reduce manpower costs, generate more accurate insights into supplier performance, and optimize purchasing across the entire network of suppliers. One global automotive OEM used AI and other tools to improve procurement processes, realizing gains in just one quarter and a potential savings of more than $500 million per year.

Design to value. Companies naturally add features and options to their products over time. While the incremental revenue of these additions can be clearly attributed, the costs are often dispersed and hard to quantify. It’s tough to attack this problem with one-off cost programs. Taking an integrated approach to step back and simplify your product portfolio, features, and options can reduce unnecessary complexity and costs. Leveraging modular design can deliver similar impact. Leading organizations start with detailed customer insights to identify willingness to pay and use these insights to trim excessive features and unnecessary design attributes, reducing costs and even improving the customer experience.

Manufacturing. Companies often find that the benefits from traditional continuous-improvement tactics ultimately plateau. Integrating digital capabilities such as AI, digital twins, and advanced automation into a traditional production system can unlock an incremental 10% to 25% savings on conversion costs. For example, manufacturers can use digital twins to identify bottlenecks and risks, model potential scenarios, and gauge the impact from process changes before implementation. To realize these gains, companies need to invest in a portfolio of solutions instead of one-off pilots, bring together IT and operations-technology teams, and emphasize change management from the beginning.

Footprint. Production overcapacity not only leads to higher costs but also incentivizes companies to take on lower-margin business to use up otherwise idle capacity. Manufacturers need to rightsize their networks to meet demand, optimize production locations, and build flexibility to respond to shifts in customer needs and geopolitical challenges. Tariff and trade uncertainty, in particular, complicates footprint decisions. For example, one manufacturer redesigned its manufacturing network, consolidating subscale factories, and selectively investing in new sites in attractive geographies. The result? 20% operating expense savings.

Supply chain planning. Given COVID-era challenges, the supply chain is increasingly becoming a source of competitive advantage and should be treated as such. Additionally, AI is unlocking a whole new set of opportunities to better forecast demand, proactively monitor for disruptions, and rapidly test scenarios. One chemicals manufacturer launched a supply chain modernization program centered on demand forecasting, as well as sales and integration operations planning at the network level. It simultaneously invested in new production planning and inventory-logistics optimization. As a result, the company saw a 50% improvement in forecast accuracy, 12% reduction in unnecessary inventory, and 25% reduction in transportation costs.

Now What

Across all five, manufacturers need to put the right governance in place.

• Define. Harmonize definitions, metrics, and cost-reduction targets for COGS across the entire enterprise so that business units and functions all have a consistent way to gauge performance. Getting to a common language and fact base is a key first step.
• Assess. Leverage internal and external industry benchmarks to rapidly look at each of the areas of COGS improvement to prioritize where bold investments could unlock the most value quickly. Use t-shirt sizing—small, medium, large, and extra-large—to prioritize the areas with the most “bang for the buck.”
• Improve. Empower a team to drive improvements with a clear project charter, deliverables, budget, and KPIs to define success. Create a governance structure of senior leaders both from operations and business leadership to remove barriers and create accountability.
• Monitor. Put automated tracking systems in place that capture and aggregate cost data. Analyze results over time in regular meetings so that all stakeholders have an accurate, objective view of the company’s progress against cost-reduction targets.