cost reduction case study

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7 mini case studies: successful supply chain cost-reduction and management

Rob O'Byrne

Group Managing Director - Logistics Bureau

If you were to tell me that your company had never looked at its supply chain costs and sought to deliver reductions, I would be mightily surprised. On the other hand, if you told me your company hasn’t been able to sustain any progress in supply chain cost reduction, I wouldn’t be surprised at all.

Most companies begin with the best intentions to achieve successful and sustainable supply chain cost management, but somehow seem to lose momentum, only to see costs increase again in short order.

The following seven mini case studies explore a few high-profile companies that have managed to sustain their supply chain cost-reduction efforts and keep expenses under control. The challenges faced by these organisations and the steps they took, may provide some inspiration for successful long-term cost management within your organisation.

1. Deere & Company

Deere & Company (brand name John Deere) is famed for the manufacture and supply of machinery used in agriculture, construction, and forestry, as well as diesel engines and lawn care equipment. In 2014, Deere & Company was listed 80th in the Fortune 500 America’s ranking and was 307th in the 2013 Fortune Global 500 ranking.

Supply Chain Cost Reduction Challenges: Deere and Company has a diverse product range, which includes a mix of heavy machinery for the consumer market, and industrial equipment, which is made to order. Retail activity is extremely seasonal, with the majority of sales occurring between March and July.

The company was replenishing dealers’ inventory weekly, using direct shipment and cross-docking operations from source warehouses located near Deere & Company’s manufacturing facilities. This operation was proving too costly and too slow, so the company launched an initiative to achieve a 10% supply chain cost reduction within four years.

The Path to Cost Reduction: The company undertook a supply chain network-redesign program, resulting in the commissioning of intermediate “merge centers” and optimization of cross-dock terminal locations.

Deere & Company also began consolidating shipments and using break-bulk terminals during the seasonal peak. The company also increased its use of third-party logistics providers and effectively created a network that could be optimized tactically at any given point in time.

Supply Chain Cost Management Results: Deere & Company’s supply chain cost-management achievements included an inventory decrease of $1 billion, a significant reduction in customer delivery lead times (from ten days to five or less) and annual transportation cost savings of around 5%.

One of the world’s largest manufacturers of computer chips, Intel needs little introduction. However, the company needed to reduce supply chain expenditure significantly after bringing its low-cost “Atom” chip to market. Supply chain costs of around $5.50 per chip were bearable for units selling for $100, but the price of the new chip was a fraction of that, at about $20.

The Supply Chain Cost Reduction Challenge: Somehow, Intel had to reduce the supply chain costs for the Atom chip, but had only one area of leverage—inventory.

The chip had to work, so Intel could make no service trade-offs. With each Atom product being a single component, there was also no way to reduce duty payments. Intel had already whittled packaging down to a minimum, and with a high value-to-weight ratio, the chips’ distribution costs could not be pared down any further.

The only option was to try to reduce levels of inventory, which, up to that point, had been kept very high to support a nine-week order cycle. The only way Intel could find to make supply chain cost reductions was to bring this cycle time down and therefore reduce inventory.

The Path to Cost Reduction: Intel decided to try what was considered an unlikely supply chain strategy for the semiconductor industry: make to order . The company began with a pilot operation using a manufacturer in Malaysia. Through a process of iteration, they gradually sought out and eliminated supply chain inefficiencies to reduce order cycle time incrementally. Further improvement initiatives included:

Cutting the chip assembly test window from a five-day schedule, to a bi-weekly, 2-day-long process
Introducing a formal S&OP planning process
Moving to a vendor-managed inventory model wherever it was possible to do so

Supply Chain Cost Management Results: Through its incremental approach to cycle time improvement, Intel eventually drove the order cycle time for the Atom chip down from nine weeks to just two. As a result, the company achieved a supply chain cost reduction of more than $4 per unit for the $20 Atom chip—a far more palatable rate than the original figure of $5.50.

3. Starbucks

Like Intel, Starbucks is pretty much a household name, but like many of the most successful worldwide brands, the coffee-shop giant has been through its periods of supply chain pain. In fact, during 2007 and 2008, Starbucks leadership began to have severe doubts about the company’s ability to supply its 16,700 outlets. As in most commercial sectors at that time, sales were falling. At the same time, though, supply chain costs rose by more than $75 million.

Supply Chain Cost Reduction Challenges: When the supply chain executive team began investigating the rising costs and supply chain performance issues, they found that service was indeed falling short of expectations. Findings included the following problems

Fewer than 50% of outlet deliveries were arriving on time
Several poor outsourcing decisions had led to excessive 3PL expenses
The supply chain had, (like those of many global organisations) evolved, rather than grown by design, and had hence become unnecessarily complex

The Path to Cost Reduction: Starbucks’ leadership had three main objectives in mind to achieve improved performance and supply chain cost reduction. These were to:

Reorganize the supply chain
Reduce cost to serve
Lay the groundwork for future capability in the supply chain

To meet these objectives, Starbucks divided all its supply chain functions into three main groups, known as “plan” “make” and “deliver”. It also opened a new production facility, bringing the total number of U.S. plants to four.

Next, the company set about terminating partnerships with all but its most effective 3PLs . It then began managing the remaining partners via a weekly scorecard system, aligned with renewed service level agreements.

Supply Chain Cost Management Results: By the time Starbucks had completed its transformation program, it had saved more than $500 million over the course of 2009 and 2010, of which a large proportion came out of the supply chain, according to Peter Gibbons, then Executive Vice President of Global Supply Chain Operations.

Like Deere & Company, AGCO is a leading global force in the manufacture and supply of agricultural machinery. The company grew substantially over the course of two decades, achieving a considerable portion of that growth by way of acquisitions.

As commonly happens when enterprises grow in this way, AGCO experienced increasing degrees of supply chain complexity, along with associated increases in cost, but for many years, did little to address the issue directly, primarily due to the decentralized and fragmented nature of its global network.

In 2012, AGCO’s leaders recognised that this state of affairs could not continue and decided to establish a long-term program of strategic optimisation.

Supply Chain Cost Reduction Challenges: With five separate brands under its umbrella, AGCO’s product portfolio is vast. At the point when optimisation planning began, sourcing and inbound logistics were managed by teams in various countries, each with different levels of SCM maturity, and using different tools and systems.

As a result of the decentralised environment, in which inbound logistics and transport management were separate operational fields, there was insufficient transparency in the supply chain. The enterprise as a whole was not taking advantage of synergies and economies of scale (and the benefits of the same). These issues existed against a backdrop of a volatile, seasonal market.

The Path to Cost Reduction: Following a SCOR supply chain benchmarking exercise, AGCO decided to approach its cost reduction and efficiency goals by blending new technology—in the form of a globally integrated transport management system (TMS)—with a commitment to form a partnership with a suitably capable 3PL provider.

As North and South American divisions of the company were already working with a recently implemented TMS, leaders decided to introduce the blended approach in Europe, with commitments to replicate the model, if successful, in its other operating regions.

With the technology and partnership in place, a logistics control tower was developed, which integrates and coordinates all daily inbound supply activities within Europe, from the negotiation of carrier freight rates, through inbound shipment scheduling and transport plan optimisation to self-billing for carrier payment.

Supply Chain Cost Management Results: Within a year and a half of their European logistics solution’s go-live, AGCO achieved freight cost reductions of some 18%, and has continued to save between three and five percent on freight expenditure, year-on-year, ever since. Having since rolled the new operating model out in China and North America, the company has reduced inbound logistics costs by 28%, increased network performance by 25% and cut inventory levels by a quarter.

Headquartered in Westport Connecticut, Terex Corporation may not be such a well-known name, but if your company has ever rented an aerial working platform (a scissor-lift or similar), there is a good chance it was manufactured by Terex and dispatched to the rental company from its transfer center in North Bend, Washington.

The North Bend facility is always full of lifting equipment. The company makes most pieces to order and customizes them to meet customers’ unique preferences. Terex maintained a manual system for yard management at the transfer centre, which generated excessive costs for what should have been a relatively simple process of locating customers’ units to prepare them for delivery.

The Supply Chain Cost Reduction Challenge: A wallboard and sticker system was a low-tech solution for identifying equipment items in the yard at Terex. While inexpensive in itself, the solution cost around six minutes every time an employee had to locate a unit in the yard. It also required a considerable number of hours to be spent each month taking physical inventories and updating the company’s ERP platform.

The Path to Cost Reduction: Terex decided to replace the outdated manual yard management process with a new, digital solution using RFID tracking. Terex decided to replace the outdated manual yard management process with a new, digital solution using RFID tracking. Decision-makers chose a yard management software (YMS) product, and then had the transfer centre surveyed before initiating a pilot project covering a small portion of the yard.

After a successful pilot, the company approved the solution for full-scale implementation, replacing stickers, yard maps, and wallboard with electronic tracking and digital inventory management. As of December 2017, Terex was planning to integrate the yard management solution with its ERP platform to enable even greater functionality.

Supply Chain Cost Management Results: While the YMS cannot reconcile inventory automatically with the Terex ERP application, it does at least provide a daily inventory count via its business intelligence module. That alone has saved the labour costs previously incurred in carrying out manual counts.

More importantly, though, the RFID-based unit identification and location processes have saved the company around 70 weeks per year in labour costs, by cutting the process-time down from six minutes, to a mere 30 seconds per unit.

Avaya is a global force in business collaboration and communications technology, and not so many years ago, was operating what, by its own executives’ admission, was a worst-in-class supply chain. That situation arose as the result of multiple corporate acquisitions over a short space of time. The company was suffering from a range of supply chain maladies, including a long cash-to-cash cycle, an imbalance in supplier terms and conditions, excess inventory, and supply chain processes that were inefficient and wholly manual.

The Supply Chain Cost Reduction Challenge: After Avaya purchased Nortel Enterprise Solutions in 2009, the freshly merged company found itself but loosely in control of an unstable and ineffective supply chain operation. Aside from having too many disparate and redundant processes, the company had multiple IT solutions, none of which provided a holistic view of the supply chain or supported focused analysis.

The Path to Cost Reduction: Avaya’s senior management team realized that its technology solutions, which varied from being inadequate to inappropriate, were causing many of its problems. The various acquisitions and mergers had transformed Avaya into a different kind of enterprise, and what it needed, rather than a replacement for all the discrete systems, was one solution to tie them all together.

To that end, the company put its trust in cloud technology, which was relatively immature at the time, and migrated all processes onto one platform, which was designed to automate non-value-added activities and integrate those critical to proactive supply chain management, namely:

Point of sale analysis
Procurement analysis
Supplier communication
Supply and demand planning
Inventory planning
Inbound and outbound logistics planning

Of course, the technology was merely an enabler, and to transform its supply chain operation, Avaya embarked on a long-term, phased program to standardize processes, initiate a culture change, invest in top talent, and implement a system of rigorous benchmarking and KPI tracking .

Supply Chain Cost Management Results: Avaya’s program of transformation took place over a period of three to four years, between 2010 and 2014. The path to cost reduction was a long one, but ultimately successful.

By making a conscious effort to lead the enterprise into a new way of thinking, change business culture, and unify technology under a single platform, Avaya has improved inventory turns by more than 200%, reduced cash tied-up in stock by 94%, and cut its overall supply chain expenditure in half.

This dramatic turnaround also required the company to switch from a preoccupation with improving what it was doing, to a process of questioning what it was doing and why.

7. Sunsweet Growers

This final mini-case study in our collection, highlights how sometimes, excess supply chain costs are not about warehousing and transportation, but can be attributable to inefficiencies in manufacturing or production and—often at the root of it all—forecasting and planning.

Sunsweet Growers is the world’s biggest producer of dried fruits and a little over a decade ago, found that while it was managing distribution operations well, high production costs were inflating end-to-end supply chain expenditure.

The Supply Chain Cost Reduction Challenge: When the leadership at Sunsweet looked into the company’s production cost issues, recognition soon dawned that the distribution network was at least partly behind the problems. As a result, the company looked at how it could redesign the network to take out some of the production costs.

Later, it became apparent that although a redesign would yield some benefits, one of the most significant issues was in the approach to demand forecasting. Sunsweet was using a manual forecasting approach, with spreadsheets being the only technology involved.

The inefficiencies of this approach proved not only to hamper effective forecasting and production planning, but the knock-effect was an excess of warehouses in the network—so forecasting proved to be both a driver of production cost, and a key to improving the distribution network.

The Path to Cost Reduction: As in a number of the studies we’ve explored here, technology played a large part in solving Sunsweet’s problems. After evaluating some 30 different software solutions, the company finally settled on a supply chain planning suite, and planned its improvement program to make use of each of the solution’s modules in sequence, allowing ROI to be realized in phases as each module was implemented and leveraged.

At the same time, Sunsweet implemented a sales and operations planning program (S&OP) that once established, enabled plant resource requirements to be anticipated months—rather than weeks—in advance. As the overall improvement plan passed through its five phases, positive results accumulated and as hoped, software ROI reached 100% even before the company completed its full implementation.

Supply Chain Cost Management Results: Of course, the objective of Sunsweet’s improvement program was not merely to achieve a 100% return on investment in its supply chain planning platform. The aim was to reduce production costs, and although the company hasn’t published hard figures to quantify the total financial gain, it has claimed the following wins:

A 15 to 20% increase in forecasting accuracy
A reduction in overtime from 25% to 8% in production facilities
A 30% reduction in finished-goods spoilage
Number of warehouses in the United States cut from 28 to just eight
A transportation cost-per-unit that remained static for two years despite increased utilization of costly refrigerated transport and rising fuel costs

From the achievements documented above, and highlighted in several industry publications and articles, you don’t need to be too much of a mathematician to deduce that cost savings would have been considerable.

Making Supply Chain Cost Reductions Stick

Of course, the above case studies are merely summaries of the changes these high-profile brands made to their supply chains. What can be seen from these brief accounts, though, is that for an enterprise to make significant and sustainable cost improvements, substantial change must take place.

Deere & Company had to overhaul its network completely.
Intel had to shift an entire supply chain to a new and previously unheard of strategy in its sector.
Starbucks had to shake up its third-party relationships and increase production capacity.
AGCO had to invest in technology and collaborative partnerships with external service providers.
Terex had to implement costly (but effective) RFID tracking capabilities.
Sunsweet Growers needed a best-of-breed software solution, and an S&OP program to improve forecasting and planning.
Avaya needed to change company culture, implement cloud technology, rethink processes completely, and invest in the best supply chain talent it could find.

At the same time, none of the changes took place overnight. Each of the companies tackled issues in phases, effectively learning more as they went along.

You Won’t Find Savings in the Comfort Zone

When it comes to making supply chain cost reductions that stick, you should explore every avenue. However, at the root of high costs, there will usually be one major factor requiring innovation, whether it’s the network, inventory strategy, the working relationships with supply chain partners, or some other element of your operation.

Seldom do companies make decent savings by whittling away piecemeal at what seem, on the face of it, to be the most pressing issues of the day (such as direct transportation costs or supplier pricing).

If you want to see sustainable cost reductions, your company will need to view the big picture from a new angle or two, and be prepared to step outside of the comfort zone to which it will have become accustomed.

Rob O’Byrne is a supply chain consultant, coach and author with 40+ years experience in Supply Chain management. He is the expert making the blog called Logistics Bureau .

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How to Cut Costs More Strategically

Vinay Couto
Paul Leinwand

Across-the-board cuts often backfire.

When companies cut costs, they often make across-the-board cuts that are unconnected to their strategy, and fail to make the cuts sustainable. Most organizations also wait to act until they have a problem – at which point they don’t have the time to make the right trade offs for the long term. In order to cut costs effectively, companies must connect costs to their strategy. To do this, management teams must figure out which costs fuel their distinct advantage, and which don’t. For example, former CEO of Frito-Lay, Roger Enrico, had to make a major investment in product quality to stay competitive. He resolved to start by cutting 40% in general and administrative costs, which freed up money to invest in assets such as direct store delivery, product and manufacturing innovation, and consumer marketing. To manage cost the right way, connect costs and strategy; think of costs in terms of capabilities; use a “zero-based” budgeting approach; make your cut sustainable; and be proactive.

We’ve all been through it — the looming cost project. And for many of us, it’s not a fond memory.

Vinay Couto is a vice-chair of Strategy&, PwC’s strategy consulting business. He is a coauthor of Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal .
Paul Leinwand is a principal at PwC U.S., a global managing director at Strategy&, and an adjunct professor at Northwestern’s Kellogg School. He is a coauthor, with Mahadeva Matt Mani, of Beyond Digital: How Great Leaders Transform Their Organizations and Shape the Future (HBR Press, 2022).

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Global professional services firm reduces G&A costs by 33% within 9 months

Fueled by acquisitions and geographic and service expansion, a global professional services organization’s G&A costs had outpaced revenue and exceeded peer benchmarks. Prior restructuring efforts had failed to reduce costs due to a lack of appreciation of complexity and the strategies required to address it. To unlock step-change cost savings and bring its G&A in line with peers, they sought Wilson Perumal & Company’s expertise on complexity.

Prior management’s focus on top-line growth had caused its finance, accounting, and tax operations to expand to satisfy requirements from new acquisitions, service offerings, and bespoke client requirements. This short-term focus and a fragmented governance structure allowed non-standard processes & roles to proliferate.

Management struggled to have a clear view on how its processes delivered services, which contributed to a poor ERP implementation. The poor technology implementation further hampered the finance department’s ability to provide efficient and effective service.

WP&C’s hypothesis-driven approach enabled our team to conduct a quick, targeted assessment of people, process, and technology within the finance, accounting, and tax operations. The assessment identified the sources of complexity and informed quick-win cost improvements and a path forward to reduce and maintain costs by:

Developing a baseline by inventorying activities & roles through targeted SME interviews and time studies to identify focus areas that consume time & resources
How time consuming is the process?
What are the drivers of process variation and performance?
How manual is the process?
What is the risk in not doing the process right?
Leveraging our subject matter experts that had led multiple, large re-structuring and offshoring transformations
Developing fit for-purpose recommendations that reflected each process’s attributes and whether offshoring, ERP enhancements, process automation, and/or process standardization is appropriate

WP&C determined that offshoring and restructuring would enable the organization to realize value faster and provide flexibility & predictability going forward versus large-scale process automation. To capture the value, the WP&C team developed a transition plan and partnered with the team to re-design processes, roles, the Org by developing future state enablers, including:

Procedures : Through workshops and interviews with leadership and frontline service delivery, WP&C identified best practices throughout the organization, re-designed & standardized processes, developed training content and work instructions for on-shore and off-shore personnel to document the future state procedures and ensure a smooth future state transition.
Org Redesign : By leveraging extensive organization re-design experience and external experts, roles were re-designed to reflect future state on-shore and off-shore processes. This reassignment of roles shifted the Finance organization from a generalist to specialist model. The overall Finance organization was re-structured to be more efficient, effective, and scalable.
Technology : WP&C partnered with the client to develop and deploy workflow solutions to better utilize technology/tools and enable future state processes.
Metrics : Governance model was developed in close partnership with Finance leadership to enable the successful transition and change management, including a new set of leading & lagging metrics to monitor the performance of the future state processes.
Change & Communication Plan : Stakeholder impact analyses were conducted to evaluate the level of impact and guide and inform the transition plan. The analysis and plans were essential in limiting unplanned attrition and enabling a successful transformation.

The structured approach allowed the client to exceed the original benefit case and realize a reduction in run-rate expenditures by 33% within 9 months. In doing so, the client’s G&A expenses achieved parity with peers. These results were achieved through close collaboration that enabled the organization to transform its finance, accounting, and tax functions and implement measurements to monitor the performance of the future state process.

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How industrial companies can cut their indirect costs—fast

Profitability in the automotive and other industrial sectors has been strong in recent years, but global economic growth has fallen from 3.1 percent in 2017 to an estimated 2.6 percent in 2019, and 2020—due to the coronavirus pandemic—will most likely see a global recession. Maintaining profits and growth is going to be very difficult. However, regardless of the larger economic environment, companies can take actions that can help. Specifically, many companies are seeing the share of general and administrative (G&A) costs increase. From 2008 to 2015, G&A expenses grew more slowly than revenues (41.8 percent versus 61 percent). Since then, the trend has reversed, with G&A expenses rising faster—15.4 percent compared with 6.0 percent revenue growth. Traditional cost-optimization approaches are yielding diminishing returns; if revenues begin to fall, then, so will profits.

Drawing on the latest McKinsey research and a series of interviews with experts and industry leaders, we believe there is a way to do better, faster: tech-enabled rapid reduction of indirect costs. By indirect costs, we mean those separate from the direct process of manufacturing goods or offering services. Instead, they are shared across the company and are largely fixed. Examples include finance, procurement, HR, marketing, and IT. Context is important. For a telecommunications company, fuel is allocated as an indirect cost; for an airline, it would be direct.

The tech-enabled cost-reduction approach uses automation, artificial intelligence (AI), and other technologies to find new opportunities in such areas as capacity reallocation, spending effectiveness, and accounts receivable (Exhibit 1). Based on our experiences with 24 industrial companies, we found that it can cut indirect costs by as much as 15 to 20 percent in 12 to 18 months.

How to get started

Stage 1: Identify areas of improvement

To create momentum, it helps to assess the value at stake early on. Benchmarks can help identify areas of improvement and assess the cost-saving potential quickly. For instance, our experience suggests that in finance, about 75 percent of revenue-management processes are fully automatable; in financial planning and analysis, only 10 percent are. A library of use cases makes it easier to prioritize actions and select appropriate ways to cut costs.

Stage 2: Automate processes

Automating processes to reduce repetitive and manual workload immediately shows results, in both productivity and employee satisfaction. That helps to build acceptance for further rounds of tech-enabled cost reduction. Good pilot programs—for example, start-to-finish creation of fully functioning robotic process automatization—can be done in four to six weeks. Such pilots demonstrate how development costs are quickly amortized—often in less than a year—and reveal the roadblocks that need to be removed in order to scale up automation.

Stage 3: Work smarter

Most companies struggle to choose from the many tools and technologies available. A full-scale diagnostic and design of a target picture before launching a transformation can help. This review includes quantifying opportunities by business function and cost category, identifying digitization opportunities, creating a transformation road map with milestones, and instituting a pragmatic governance structure that ensures implementation is both speedy and effective.

Stage 4: Capture impact

To successfully implement a full-scale tech-enabled cost-reduction transformation, companies must track the progress of their work. Web-based software solutions can be set up in less than a month to track impact and ensure value delivery.

Often, companies struggle to go from one-day walkthroughs and successful pilots to a full transformation. To bridge the gap, several factors matter: strong senior-executive ownership, a vision that is aligned with the strategy, discipline, and a focus on internal capability building. Most important of all is to see the effort as an integrated business–IT program, not a one-off technology project.

The approach is comprehensive, covering everything from spotting opportunities to measuring impact, and it is also integrated into company operations (see sidebar, “How to get started”). In this article, we explain the four stages of a rapid tech-enabled indirect-cost-reduction effort. Then we present seven cases where these techniques were applied. Finally, we discuss what companies need to do to prepare for such a transformation.

The four stages of the tech-enabled cost-reduction approach

While no two such programs are alike, four stages are common.

Far too often, companies lack transparency on their own costs and processes. The first challenge, then, is to ensure that all relevant information is available. Big data, AI, advanced analytics, data visualization, and process-mining tools can help to identify cost-reduction opportunities in finance, procurement, HR, and production management. For example, procurement categories such as temporary labor and business travel typically have large data sets. This allows companies to test a number of options—such as consolidating providers or changing travel policies—and if the results are good, to implement them. The use of analytics can help HR see if a department’s spans of control are too big or if there are salary imbalances among employee groups.

The automation of production is hardly news; this has been happening for decades. What is surprising is the extent to which industrial companies have not done the same with their administrative processes, where indirect costs cluster. The premise of our approach is that many of these can and should be automated. The immediate focus should be on technologies that can work quickly, such as robotic process automation (RPA), smart workflows, or data-visualization tools.

The greater computing power of AI, machine learning, and data visualization can be used to (semi-) automate decision making and to analyze data in ways that have not previously been possible. This creates a better fact base and should improve the quality and efficiency of decision making. For instance, AI and machine learning can automate and improve sales forecasting by analyzing historic and real-time transaction information. These technologies can systematically consider and correlate external effects and then use them to build a simulation model. They can also take into account a range of data, be it weather, economic projections, CO2 emissions, or competitor activities.

Tracking optimization initiatives is not easy, but there are ways to use technology to follow them from conception to completion. For example, impact-management software can track plans and follow up on initiatives; by connecting with company data, it is possible to track if targets are being met. Establishing a “center of competence” inside the company (more on this later in the article) that has specific responsibility for doing so can help.

The use of use cases

Industrial companies know they need to get a grip on indirect costs. The business area and which of the four stages it is in gives an indication whether to use AI, smart workflows, RPA, data visualization, or something else.

In the seven real-world examples that follow, we explain what was done and how, and estimate the results. Each case addresses an essential business area such as finance, procurement, or production management. Each comes from a specific industry or application, but the general logic will remain the same.

Example 1: A spending ‘X-ray’ helps cut indirect spending Business area: Procurement Technology used: Data visualization, AI Stage 1: Identify areas of improvement Indirect costs addressed: Third-party spending

Each business unit of a medical-technology company had information on its own expenses, but the company lacked a comprehensive view of its indirect spending, and could not analyze its expenses by category. In addition, its IT system was fragmented and the supplier data riddled with mistakes.

The company chose to implement an advanced spending intelligence tool. The system used data engineering and machine-learning methods to address the problem of dispersed data in the IT system. These tools extracted data from each business unit’s enterprise-resource-planning (ERP) system and combined it into a single model. With the data harmonized, the company was able to deploy a cloud-based visualization engine to quickly identify areas where there might be savings, down to the line-item level. The use of machine-learning algorithms made it possible to compare prices and specifications and to identify price variances and savings opportunities between interchangeable items and services. As a result, the company was in a better position to negotiate with its vendors, achieving savings of 5 to 10 percent, depending on the category.

Example 2: Process mining reduces overhead in finance and order processing Business area: Finance Technologies used: Process mining, data visualization Stage 1: Identify areas of improvement Indirect costs addressed: Corporate overhead; financing costs for working capital; order processing

An international company wanted to expand into new regions. Unfortunately, slow payments from customers strained cash flows and made it difficult to invest in growth. To locate the problems in the ordering process, it used a process-mining tool to analyze and visualize all orders.

The company found that there were multiple billing models for maintenance and service, and that the average time needed to issue the first invoice was 26 days. On top of that, many orders were cancelled or rejected due to failed credit checks and inventory issues. To solve these problems, the company standardized its billing and implemented automated processing; the average invoicing time fell to ten days. It also updated its ordering and inventory systems, minimizing the cash-flow problems related to out-of-stock orders. Staff time was freed up to deal with more value-adding tasks; cancellation and rejection rates fell.

Example 3: Analytics finds hidden savings Business area: Procurement Technology used: Data analytics Stage 1: Identify areas of improvement Indirect costs addressed: Indirect procurement; spending on maintenance, repair, and operations (MRO)

A large energy company that had optimized its direct spending wanted to do the same with its indirect spending, which it believed had been undermanaged. By examining transactions related to raw materials, parts, and MRO services, it identified a number of ways to cut costs significantly.

When analysts loaded the spending data into an analytics solution, they found that in some cases different plants were paying up to 20 percent more for the same parts. Just making sure everyone paid the lowest price scored a quick win. Using a cloud-based platform, the tool also automatically computed the potential effects of different scenarios. This provided insight into price categories that previously had limited transparency. Costs fell by 5 to 15 percent.

Example 4: Reporting processes bring better information at lower cost Business area: Production management Technology used: Data visualization Stages 2 and 3: Automate processes and work smarter Indirect costs addressed: Personnel costs associated with technical planning and reporting

Due to multiple, inaccessible, complex, and inconsistent data sources, a major carmaker could not understand why its production-planning and ramp-up costs had increased. Because the organization was also characterized by silos (chassis, powertrain, assembly, paint, and so on), each with their own systems, tailored to specific needs, it also lacked effective ways to analyze and solve problems related to overall project development. To a great extent, it relied on manual, outdated reports.

To address these problems, the company adopted a three-phase approach. First, it developed a “click prototype”—an interactive visualization of future workflow that managers could use to monitor and plan production.

Second, using data visualization, it developed and iterated a minimum viable product (MVP), meaning one that is developed quickly to satisfy the most important needs. In this case, the MVP took the form of a digital control tower that showed managers at every level progress all along the production line. It also automated and digitized reports. The MVP created a single, consistent, and uncontested data pool that everyone could use. Important features included the customized display of relevant key performance indicators (KPIs) and links into other existing IT systems.

Finally, the company compiled user feedback to develop and test additional functionality, such as a risk matrix that assessed supplier risk and managed it by agreeing and tracking countermeasures. Within six months, the use of the most important technologies had become routine. When the system was implemented in full, the company estimated it had cut employee planning and reporting time by 30 percent.

Example 5: Automation through robotics cuts errors Business area: Multiple Technologies used: RPA, smart workflow Stage 2: Automate processes Indirect costs addressed: Technical planning

A medium-size specialty steel maker wanted to reduce its general and administrative expenses. Its production management was fragmented and manual and its systems were not integrated. By automating repetitive tasks, such as producing a weekly production report and inputting master data for products into the ERP systems, the company hoped to improve production without increasing staff. But it had no experience with RPA. Working with the relevant business experts, the team selected a third-party RPA software platform and developed a plan for further process automation. It also built capabilities to support future projects, including a project methodology to deliver RPA use cases, and defined the roles of the RPA creator as well as of the IT and business experts.

In the first month, four reporting processes were automated—the shipment overview, the production overview, and the trademark overview, plus its update. The automation of repetitive processes reduced errors and saved staff and cycle time. In addition, management believed the successful deployment of the RPA infrastructure would prove to be a useful role model for other departments, such as finance and HR, as they, too, considered the possibilities of automation.

Example 6: Fully automated data transfer speeds up forecasting Business area: Production planning Technology used: RPA, machine learning Stages 2 and 3: Automate processes and work smarter Indirect costs addressed: Technical planning

While the automation of many processes is feasible and desirable, too often, it simply isn’t done. For example, one automotive company found that connecting the department-specific technical-planning tool with the company-wide procurement tool via back-end integration was not feasible due to high costs and scarce resources. The company found that many repetitive manual tasks were not a big deal individually, taking relatively little time; on that basis, automation did not justify big investment. Data therefore had to be manually copied into a planning tool; this hampered reporting and data analysis and caused a bottleneck in the forecasting process. To solve the problem, the company installed rapid automation technology. This could deal with small repetitive tasks at low cost because no new IT infrastructure needed to be built. There were three phases.

Diagnosis: The company prioritized potential automation and AI use cases, estimated their impact and feasibility, and started to implement the one with the highest priority in about three weeks.

Pilot : The company automated data transfer in its prioritized use cases. RPA was used for automation and a simple machine-learning algorithm was installed to map the data fields. The pilot was ready for deployment in six weeks.

Expansion: By improving the pilot, eventually 90 percent of data transfers were automated. In parallel, the company began to implement its other priorities.

The process paid for itself in a year, while increasing the reliability of data transfer.

An impact management and tracking tool can help clarify what to do first, and measure what benefits are captured.

Example 7: Managing accounts-receivable better generates cash Business area: Finance Technology used: Artificial intelligence Stage 3: Work smarter Indirect cost addressed: Accounts receivable, cost of collection

A global technology company wanted to lower its accounts-receivable (AR) balance while reducing the cost of collection. After analyzing two years of collection data, it concluded that the solution was to speed up collection and to understand which outstanding receivables were likely to be most problematic. On that basis, it deployed a predictive model that used machine learning and advanced analytics to create a better collections process. In effect, the company shifted from a strategy of collecting by segment and country to a bottom-up invoice-level strategy. Costs fell 15 percent and the AR balance 7 percent, while yields rose.

Building the organizational foundations for tech-enabled cost reductions

To manage change of this magnitude, organizations must change, too. There are four important elements.

Create an agile transformation road map: To reach the full potential of indirect cost optimization while also managing risk, it is helpful to chart a plan that can be adapted as circumstances change. Doing a complete transformation in one fell swoop is just too difficult—it requires too many capabilities and can also provoke resistance. It’s better to proceed methodically, starting with select use cases to create momentum and to demonstrate that the process works. Moreover, the savings from the first steps can be used to finance future ones.

While the end-to-end indirect cost optimization of multiple functions and cost categories takes at least six months, not every organization needs to go that far. It is also possible to focus on a set of simple and pragmatic actions.

Use an impact management and tracking tool: Large-scale transformations can fall short when organizations are not sure what they want to achieve or how they want to go about it. An impact management and tracking tool can help clarify what to do first, and measure what benefits are captured. Any such tool should include the following features.

Metrics: Track the performance of initiatives against relevant business goals, budget, and time frames. The tool should be home to all the latest numbers, so there is no arguing over the facts.
Automated reporting: No need to manually aggregate the latest numbers from multiple spreadsheets.
Timely decisions and full transparency: It should be possible to see at a glance all initiatives and whether they require leadership attention.
Fast, secure deployment: Setup and support should be possible in a month.

Build a center of competence (COC): Getting impact management and agile transformation right requires overcoming real and perceived barriers. Bundling all related activities in a COC can help (Exhibit 2). Managed by the transformation leader, and sponsored by the board, a COC should include project managers, as well as technical and change-management experts. Its job is to implement the agile transformation plan. It should also play a leading role in identifying and implementing use cases; coordinate IT activities; and serve as a community-building platform.

Drive the automation program as an agile transformation: To overcome real and perceived barriers, realize impact, and change the organization sustainably, some companies have led their automation programs according to agile-enterprise principles. To do so, they are forming agile teams that deliver automation and efficiency use cases from their prioritized backlog in a focused and iterative manner. They are also combining subject-matter experts from different areas of the line organization, such as automation and AI consultants, business analysts, and agile coaches. The latter are often organized in chapters, where methodologies, knowledge, and people are developed per expert group. Sponsorship by the board is a key success factor. Other elements of an agile operating model, such as setting 90- and 14-day priorities and ensuring resources for each team, are important.

Achieving rapid indirect cost optimization has never been more promising, thanks to advancements in such technologies as automation, smart workflows, AI, and data visualization. And perhaps never has it been more urgent. Getting started does not require long preparation or costly investments. All that is needed is imagination and a willingness to change.

Philipp Espel is a senior partner in McKinsey’s Hamburg office, where Frederic Rupprecht is a consultant; Michael Herbener is an associate partner in the Düsseldorf office; and Christian Schröpfer is a senior expert in Berlin, where Andreas Venus is a partner.

The authors wish to thank Angelo Boutalikakis, Nicolas Deuß, and Dominik Renz for their contributions to this article.

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Cost Reduction Case Interview: How to Ace This Type of Case

Last Updated: May, 2024

Consultants help clients navigate their toughest business problems, and cutting costs is one of the most perennial and complex challenges that companies face. Because cost cutting is so important, the cost reduction case interview is one of the most typical cases you’ll encounter in a consulting interview.

In this article, we’ll discuss:

What to expect from a cost reduction case interview
Real-world examples of cost reduction consulting cases
Key frameworks to use in cost reduction cases
Strategies to solve a cost reduction case interview
3 tips to ace your cost reduction case interview

Let’s get started!

What is a Cost Reduction Case Interview?

Keeping costs low is vital for the success of any business. Since “profit = revenue – cost,” the equation is simple: alongside growing revenues, reducing costs is one of 2 ways companies can increase profits.

As a result, companies are always looking to reduce their cost base. In good economic times, doing so enables them to free up more cash to invest in out-marketing competitors, growing geographically, or launching new products. In bad economic times, revenues are often down, and cutting costs can be the most effective way to keep the company profitable.

In a cost reduction case interview, you will face a client looking to cut costs. Perhaps they have an issue with spiraling costs, and they need you to figure out the root cause before developing solutions. Or perhaps they are performing well, but have set ambitious cost reduction targets. Either way, it is your job to comprehensively understand their current cost position, before figuring out the most pertinent ways to reduce the amount of money the client spends.

Examples of Cost Reduction Case Studies

Because cost-cutting is so important, consultants are asked to help with cost reduction questions across every industry, including retail, banking, oil & gas, and many more. Let’s look at some real client examples:

Volkswagen’s Ambitious Plans to Cut Costs

In early 2023, German car manufacturer Volkswagen faced dwindling profit margins. They had lost market share in the vitally important Chinese market and faced growing costs associated with the transition to electric vehicles. As a result, their profit margin had shrunk to 3%.

In response to the situation, Volkswagen announced ambitious plans to cut costs, with a goal of boosting profitability to 6%. They targeted $10.8 billion in cost reductions through 3 initiatives:

Simplifying their product range, discontinuing some poorly-performing car models
Improving their manufacturing process across their biggest plants
Reducing headcount in certain functions , such as in admin and HR

Walmart Cements its Dominance

In 2010, Walmart was already the leading retailer in the world, but they weren’t content to sit back. Instead, the grocery giant announced a cost-cutting initiative that would help them increase profits by $12 billion over the next 5 years, knowing that you must stay ambitious to stay ahead.

Walmart set about cutting costs in 2 ways:

Procuring products directly from manufacturers: Previously, Walmart had bought 80% of its products from third-party suppliers. By cutting out the middlemen, they could reduce costs by 15%.
Consolidating suppliers globally: Before 2010, Walmart had made purchases on a country-by-country basis. By consolidating procurement, they could leverage greater economies of scale to cut costs.

Nail the case & fit interview with strategies from former MBB Interviewers that have helped 89.6% of our clients pass the case interview.

Key Cost Reduction Case Frameworks

In a cost reduction case, you start by comprehensively understanding your client’s cost base. This is always the first step, whether they have a specific problem that they want you to figure out or are simply looking to improve.

To gain a granular and comprehensive understanding of your client’s situation, you should break out the client’s cost base into its constituent parts. There are several ways to do this. You could separate costs into “fixed costs” and “variable costs,” or you could categorize costs based on the different stages of the “value chain.”

There is no single right way to lay out your framework. The key to success is ensuring that your framework is customized to the case, and laid out in a MECE (mutually exclusive and collectively exhaustive) way. If you are unfamiliar with this concept, read our article on MECE .

“Fixed” and “Variable” Costs

A “fixed cost” is a cost that doesn’t go up as the client’s company produces more products or services, while a “variable cost” is a cost that increases as volume goes up. There is nuance for each industry, but generally, rent, maintenance, salaries, and overheads (like HR and finance) are “fixed costs.” Materials, distribution, and utilities are “variable costs.”

For example, for a company making luxury watches, the rent they pay on their store in downtown New York is a “fixed cost” since it is always the same. Conversely, the cost of the metals that make the watches is a “variable cost,” the more watches they make, the greater the cost.

The graphic below illustrates the difference between these 2 broad cost types:

“Value Chain”

Another way of categorizing costs is based on the “value chain.” A “value chain” groups all of the activities a company completes to serve its customers into broad steps, from inbound logistics like the procurement of parts to after-sales services.

Each of these activities has associated costs, so the “value chain” can also be useful for categorizing costs, especially in cases with a strong operational element.

Digging Deeper: Benchmarking Against Competitors and Prior Years’ Performance

Once you have broken client’s costs into clear and MECE categories, you can use “benchmarking” to help you identify trends in client performance and opportunities for improvement.

“Benchmarking” is comparing the client’s performance to other companies in the same industry or their own historical performance. By benchmarking, you can identify areas where the client is doing worse than their peers or their own past performance.

Having rigorously analyzed costs, you will be ready to propose options your client can pursue to hit their cost reduction targets.

How to Solve a Cost Reduction Case Interview

Similar to other types of consulting cases, there are 4 key steps to solving a cost reduction case.

The Opening: This is when you gain a clear sense of the client’s situation and objectives.
The Structure: This is where you lay out a clear approach to conducting the analysis and cracking the case.
The Analysis: This is when you dive into the details and figure out how best to help your client.
The Recommendation: This is when you present your findings back to the client with clarity.

Let’s take a look at an example.

Cost Reduction Case Study Example: Defense Contractor

The client is a defense contractor based in the US who makes helicopters and fighter jets for the Air Force. They have experienced growing costs and have asked for help to solve the issue.

In the opening, it’s your job to ask follow-up questions so that you clearly understand the client’s context and goals. In this situation, you discover that the client has been experiencing this issue for the last 2 years and that they have a target to cut costs by $200 million in the first year.

In the structure, the aim is to lay out a clear plan of attack for the analysis that you will later conduct. In this case, you might lay out a structure that asks 3 main questions, with sub-questions that further clarify what you need to get to grips with.

The structure could be:

What part of the client’s cost base is performing poorly?
Fixed costs: what are the client’s current fixed costs?
Variable costs: what are the client’s current variable costs?
Benchmarking against competitors: how is the client performing in these areas versus their competitors? What part of the client’s cost base is performing poorly?
Benchmarking against historical performance: how is the client performing compared to previous years?

2. What is the root cause of this poor performance?

Internal changes: what has the client changed operationally or organizationally, causing increased costs
External changes: what has changed in the market that is affecting the client’s cost position?

3. What solutions will help the client resolve the issue?

By following this framework, you’ll be able to identify what aspects of cost have increased, and then determine the reasons for that increase. This will allow you to start thinking about tailored solutions that will reduce the client’s costs and boost profits.

Once you have laid out your approach, you are told that the client has an overall cost base of $5 billion per year, with avionics, which are high-tech radar and electronics systems for jets and helicopters, making up almost a third of the overall costs. Furthermore, the avionics category has seen increased spending in the last 2 years.

The client then presents you with the following chart:

Take a moment to review the information in this chart before reading on. What conclusions can you draw from it?

An analysis of the chart identifies that the client’s procurement of avionics equipment is fragmented. There are 3 separate avionics suppliers, each providing several different types of systems for each of 4 different projects. The client pays higher prices for the same equipment when the projects are smaller.

You crunch the numbers and figure out that if they bought in bulk and paid the lowest prices across the board, they could save $85 million. Since this data only pertains to one of 3 suppliers, you extrapolate from there. If the same savings are available in the other supplier relationships, you can help the client cut costs by $255 million, reaching their targets.

Recommendation

During the recommendation, you synthesize your findings for the client. You make a recommendation, saying that they should cut costs by focusing on avionics, and provide reasoning that draws from the analysis you have conducted.

This case was adapted from one in the Michigan Ross Casebook.

3 Tips on Preparing for a Cost Reduction Case Interview

1. ensure you are mece in your cost categories.

Make sure that you aren’t reiterating any components of cost across different branches of your diagnostic framework. The best advice is to stick to one framework for cost categorization (fixed vs. variable or value chain) to avoid any confusion.

2. Familiarize Yourself with Cost Components by Industry

Get to know the different aspects of cost for various industries. You will set yourself apart if you understand that research and development is a huge cost driver in the pharma industry, and know the difference between upstream and downstream activity in the oil & gas industry. (Upstream activity involves getting fossil fuels out of the ground and to the refinery. Downstream activity involves getting refined fuels to the retail gas stations or oil companies who sell them to consumers.)

3. Understand Cost Reduction Trends

Familiarize yourself with trends in cost reduction. Know how automation and AI are used to disrupt industries and reduce headcount and how the gig economy has reclassified labor as a variable cost. This will help you to generate creative and insightful solutions for your clients.

– – – – – – –

In this article, we’ve covered:

What to expect in a cost reduction case interview
Examples of cost reduction case studies
Key frameworks that will help you solve a cost reduction case
How to work through the sections of a cost reduction case interview
3 tips on how to prepare for this type of case

Still have questions?

If you have more questions about the cost reduction case interview, leave them in the comments below. One of My Consulting Offer’s case coach will answer them.

Other people prepping for case interviews found the following pages helpful:

Our Ultimate Guide to Case Interview Prep
Case Interview Math
Common Types of Case Interviews
Case Interview Frameworks
The Profitability Framework
The Market Entry Framework
The Business Situation Framework

Help with Case Study Interview Prep

Thanks for turning to My Consulting Offer for advice on cost reduction case interviews. My Consulting Offer has helped 89.6% of the people we’ve worked with to get a job in management consulting. We want you to be successful in your consulting interviews too. For example, here is how Katrina was able to get her offer from Buckingham.

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The following mini case studies explore a few high-profile companies that have managed to sustain their supply chain cost-reduction efforts and keep expenses under control. The challenges faced by these organisations and the steps they took, may provide some inspiration for successful long-term cost management within your organisation.

Point of sale analysis
Procurement analysis
Supplier communication
Supply and demand planning
Inventory planning
Inbound and outbound logistics planning

This dramatic turnaround also required the company to switch from a preoccupation with improving what it was doing, to a process of questioning what it was doing and why.

Related: 3 Steps You Need for Strategic Supply Chain Planning

Sunsweet Growers

A 15 to 20% increase in forecasting accuracy
A reduction in overtime from 25% to 8% in production facilities
A 30% reduction in finished-goods spoilage
Number of warehouses in the United States cut from 28 to just eight
A transportation cost-per-unit that remained static for two years despite increased utilization of costly refrigerated transport and rising fuel costs

Making Supply Chain Cost Reductions Stick

Terex had to implement costly (but effective) RFID tracking capabilities.
Sunsweet Growers needed a best-of-breed software solution, and an S&OP program to improve forecasting and planning.
Avaya needed to change company culture, implement cloud technology, rethink processes completely, and invest in the best supply chain talent it could find.

At the same time, none of the changes took place overnight. Each of the companies tackled issues in phases, effectively learning more as they went along.

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Gagnon Associates

Management & Organizational Consulting

Case Study: Cost-Reduction/Productivity Improvement

The following Case Study shows how Gagnon Associates’ approach to Change Management and Business Process Improvement reduced costs and improved productivity for this global client:

The Company

A 700MM+ worldwide maker of large-scale mining machinery and equipment.

The Problem

Caught between low demand growth for original equipment and emerging new competition, the Company struggles with legacy issues of high costs and underutilization while lagging industry counterparts on key measures such as profitability, inventory turns, quality, etc. New CEO seeks to improve the Company’s standing and financial position by launching a global change process focused on cost-effectiveness and productivity improvement in all aspects of the business.

The Approach

Every 90 days for over a year, the Company assembles and charters four global teams, each focused on some aspect of a critical productivity issue: inventory turns, product build/rebuild cycle times, product quality, etc. During intensive three-day problem-solving sessions, designed and facilitated by Gagnon Associates consultants , teams analyze and develop recommendations for addressing these issues. At session close, all teams present recommendations to the Company’s Executive Committee who must evaluate and render decisions on the spot. Implementation begins immediately and progress is checked for each team at 30 and 60 days. Project completion and evaluation takes place at the 90-day checkpoint. Teams are disbanded as soon as their work is completed.

The Results

Over slightly more than a year, four “waves” of teams are chartered and fielded. Results highlights include: doubled inventory turns in one key product area; reductions of from 30% to 60% in “build,” “rebuild” and “repair” cycle-times for key machinery sub-assemblies and motors; and reduction in slow-moving parts inventory equivalent to 6.2 million dollars.

Given its success, the Company makes the commitment to continue the so-called “30/60/90 Process” and make it an ongoing part of its working culture. “Real-time” training of client participants by Gagnon Associates during year one has built the nucleus of an internal capability to conduct “30/60/90” sessions. Company appoints internal, worldwide “30/60/90” Program Manager and takes over management of the change process for year two and beyond.

Cost reduction strategy example: start by analyzing your processes

7- Planning

To adopt any of these business cost reduction strategy examples, making a plan is paramount.

Stipulate monthly, half-yearly, yearly goals or the period that best fits your situation, but avoid acting without having done a lot of analysis and research on your business and the goals you want to achieve.

No strategy should be put into practice before going through strategic planning tools.

8- Hiring and termination of employees

The two processes generate costs for the company: expenses with training, onboarding the new employee and labor rights to consider for dismissals.

So only hire someone if the position is really essential at the moment. And, if the role does not match a routine business activity, hiring outsourced employees may be a better option.

In cases of dismissal, it’s very important to do a detailed analysis in each case. Define whether the costs involved in terminating contracts are really worth it.

Also, consider the time a new employee will take to be trained or how you will reconfigure the team in the absence of an employee.

9- Reduce logistics and freight costs

When comparing suppliers, do not only account for the value of the goods. Study the expenses related to logistics and freight, which may increase the price that seemed attractive at first.

10- Team help

Finally, if your company needs to reduce costs, let your team know about this need. Together, employees can put into practice various ways to save money, either by switching off unused devices, digitizing documents, etc.

The important thing is to inform them so that goals are shared and become easier to achieve.

If you need to reduce costs in your company, Corporate Performance Management software like STRATWs One can be of great help, including engaging your employees in lowering operating costs.

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Cost Reduction: How to Go About It Effectively

Companies can maximise their profits by either raising their product’s sale price or by reducing its cost per unit. Since raising prices may not be an ideal option for some SMEs, given the competitive landscape they function in and the cash flow they need to be aware of , cost reduction is a more appropriate choice of action.

Cost reduction: Meaning

Cost reduction refers to the process of permanently reducing the expenses involved in manufacturing products or rendering services. It comes about without unduly impairing the end use or quality of the product or service.

All reductions that are a result of a temporary fall in raw material costs or are in response to a change in government policy do not fall under the ambit of cost reduction. Thus, cost reduction involves the following:

A fall in expenditure with the same production volume.
An increase in production with the same level of production.

Cost reduction: Examples

Some common cost reduction examples are:

Reducing labour costs by automating routine tasks or by outsourcing non-core business functions.
Bringing down office expenses, such as electricity bills, by opting for energy-saving technologies or scaling down on office space by offering remote working options.
Negotiating better terms with suppliers to source material at lower costs or be offered higher trade discounts.

Cost reduction: Process

A cost reduction process varies significantly based on the achievable targets and corresponding strategies. However, it commonly entails the steps outlined below.

Determine the scope for cost reduction : A cost reduction process starts by analysing the existing cost structure of your firm. These costs are then compared against pre-established benchmarks or industry standards to identify areas for cost reduction. In the case of multiple opportunities, it is best to undertake a spending analysis and prioritise those yielding the greatest benefit.
Create a cost reduction programme : After ascertaining problem areas, firms must carry out a detailed analysis by employing various quantitative and qualitative techniques. The aim is to decide on the most suitable cost reduction techniques and their possible impact. Some preliminary testing of these techniques may also be carried out at this stage.
Plan for implementation : After designing a cost reduction programme, it’s time to bring all business executives, key management personnel, contractors, and employees on board to create the plan of action. This is to ensure there is a clear demarcation and delineation of roles, and that everyone remains on top of the details to minimise any lapses.
Put the programme into action : Finally, deploy the cost reduction programme by establishing a governance structure and control deadlines. Continuously monitor the progress and optimise the strategies further based on the results.

Cost reduction framework

A typical cost reduction framework involves the identification of wasteful expenses and the implementation of cost reduction strategies and techniques.

Types of cost reduction

Some of the types of cost reduction are as follows:

Product design cost : When designing a new product or reworking an old design, companies can rework the following costs. 1) Material cost : Whether a change in design can reduce costs by allowing for the substitution of a cheaper raw material or utilising a lower material quantity. Economic Order Quantity (EOQ) is a useful cost reduction technique at this stage. 2) Labour cost : A design change may reduce operational time or time devoted to after-sale services, minimising labour costs.
Organisation or factory layout costs : Companies may see the potential for cost reduction in using under-utilised machines, spaces, and manpower.
Administrative costs : A cost reduction analysis can be carried out to determine if the company is incurring any unnecessary routine expenses. Some expenses worth reviewing are telephone expenses, travel costs, office stationery, and postage charges.
Management costs : Some SMEs may be needlessly incurring expenses due to poor communication. Framing a proper delegation and accountability framework with well-defined responsibilities can go a long way in reducing firm costs.
Marketing costs : Firms must evaluate the impact of marketing on enhancing their sales. If the marketing system is ineffective, costs allocated to advertisement, warehousing, and distribution can be streamlined. ABC analysis is a handy cost reduction strategy for determining the appropriate allocation of marketing budgets to different customers.
Financing costs : Financial management is another cost reduction area. Here, you must consider whether there are any over-investments or if the cost of capital is too high. You can also track issues with working capital, like any inventory hold-ups.

Cost reduction techniques

Firms can bring about cost reduction in myriad ways. Some of the popular cost reduction techniques include

Budgetary control : Companies can compare their actual costs incurred against the budgeted numbers and take remedial actions in case of discrepancies and unnecessary costs, achieving better cost efficiency.
Simplification : The role of efficiency and cost reduction comes into play when firms reduce the diversity of their product offerings and scale the remaining products. It helps streamline business operations, raise cost efficiency, and reduce costs.
Standard costing : In this cost reduction technique, enterprises carry out a variance analysis to bring out the differences between standard estimated costs and actual costs. Consequently, they can track the areas exhibiting high-cost variances and the possible reasons for them.
Value analysis : Also called value engineering, a value analysis entails a systematic review of product design and production processes with an emphasis on reducing total production costs without compromising product quality or functionality.
Design improvement : By improving product designs, companies can improve production processes, enhance product performance, and generate cost savings.

This list is by no means exhaustive. Techniques like contribution analysis, job evaluation, material control, market research, finance control, cost-benefit analysis, and labour and overhead control can also be utilised for cost reduction.

Key Takeaways on Cost Reduction

Cost reduction is the process of identifying and eliminating excessive expenditures that reduce a company’s production efficiency and profitability. Firms can implement several cost reduction strategies and techniques, including value analysis, budgetary control , and design improvement, to streamline their operations and cash flows.

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Cost reduction - which framework to use.

Hi all! I have a question regarding structuring answers for cost reduction cases.

I usually use a basic cost breakdown of the different business units of the company, as a way to investigate potential for cost optimization and associated risks. The solution suggested for one of the case* I just did encompasses a much wider scope, including financial reports, company structure, competitors, business unit strategy, market trends and other industry factors.

Generally, when asked for cost reduction potential, should the first framework be more of a "business situation framework", or is a "cost breakdown" presented as an investigation of reduction lever an acceptable approach ?

Thank you very much for your insights, Best Marie-Eve PS: if the prompt may be decisive in which framework to chose, what specific indicators to look for? Here is the prompt of the case I refered to, in case there is something in the prompt, or the initial question that would help determing why opting for a business situation framework is better than a sheer cost analysis, I am interested in understanding it :)

* "Your client is the CEO of a leading diversified healthcare products and pharmaceuticals company - HealthCareCo. The company’s principal business is the discovery, development, manufacture and sale of a broad and diversified line of healthcare products. Thinking ahead for the next 5 years, the CEO of HealthCareCo wants to consider cost optimization as one of the important elements of his strategy. He has engaged McKinsey to help him with this effort. What would be the key factors that you would consider in preparation of your first meeting with the CEO and his team?"

Overview of answers

Date ascending
Date descending

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut
Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on the real consulting projects.

Thank you very much Vlad, this is of great great help!

Hi Vlad, may I know how you go around asking the interviewer regarding the cost segmentation? for example, "May I know what is the cost trend of the company? Like, what kind of main costs are involved. Also, do you have any data or change for each respective cost?"

Hi Marie-Eve,

I agree with Vlad; in general you can proceed clarifying the goal, understanding where the problem is and identifying a solution for the issue. Adding a couple of more details to Vlad’s approach:

Step 1 : Clarify the goal. Ask which is the absolute amount you should reach and which time frame you have to do so

Step 2: Identify the problem. You can proceed through the following steps:

Segment by profitability/revenue channels. Ask the interviewer how many business units they have – or any other segmentation that may be present. In your case, it may be done via the different healthcare products
Identify which channel is the priority. Ask for absolute amount in cost and/or any recent increase for each channel. Then start from the one with the biggest absolute amount in costs or that had the biggest increase in costs, according to what you found before.
Identify the cost components in the selected channel. You may brainstorm costs using fix or variable costs, or dividing via the value chain
Identify the component that is underperforming. You can do so comparing the client performance with its past performance, or benchmarking competitors on that area.
(Optional) Identify the reason for the cost increase. In case you are dealing with a cost increase case, you could analyse why cost went up. Here you may go through a partial business situation framework . Usual areas to consider are:
Supplier issues (eg increasing prices)
Competitors issues (eg lobbying strikes/ regulations against us)
Client issues (eg wrong process development/budgeting)

Step 3: Propose a solution. In general, there are two main things you can do to cut costs for the specific cost component you have identified:

Decrease quality of units bought
Negotiate with suppliers
Find another supplier
Increase efficiency of units
Substitute input units with other units

For both the elements of step 3, as potential risks, you should also take into account possible negative effects on revenues and try to avoid them.

Hope this helps, Francesco

Thank you very much for these further insights!

Hello do you have an example with a scheme that could help us to map it for the brain :))

This could be very usefull and simpler to visualise it

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How to Answer Cost Reduction Case Questions in Management Consulting Interviews?

Learn how to ace cost reduction case questions in management consulting interviews with our comprehensive guide.

Posted May 11, 2023

Featuring Karthik R.

Ask Me Anything: Management Consulting

Starting sunday, august 18.

4:00 PM UTC · 30 minutes

Management consulting is a highly prestigious and competitive field, and securing employment in this industry requires exceptional problem-solving capabilities. Cost reduction cases are a common type of case question in consulting interviews. These types of questions assess your ability to identify and solve cost reduction challenges for businesses. Therefore, it is essential to prepare adequately for cost reduction case interviews. In this article, we will provide you with in-depth insights on how to effectively answer cost reduction case questions in consulting interviews.

Understanding the Basics of Cost Reduction Case Questions

Cost reduction case questions require individuals to analyze business situations where expenses need to be reduced, revenue increased, or both. The fundamental objective is to minimize costs while maintaining or improving the quality of services or products provided. This type of case question is commonly found in business consulting interviews, and the interviewer assesses your ability to analyze data, identify patterns, and construct effective solutions to implement cost-cutting measures.

It is important to note that cost reduction measures should not compromise the quality of the products or services provided. In fact, effective cost reduction strategies often involve finding ways to improve efficiency and productivity, which can lead to better quality outcomes. Additionally, it is important to consider the long-term impact of cost-cutting measures, as short-term solutions may not be sustainable in the long run. Therefore, it is crucial to approach cost reduction case questions with a strategic mindset and consider all possible solutions before making recommendations.

Common Types of Cost Reduction Case Questions

It is crucial to understand the various types of cost reduction case questions that could be asked during an interview. This knowledge will help you prepare beforehand to solve the specific type of case question. The common types of cost reduction case questions include:

Process Improvement Case Questions: these questions assess an individual's ability to identify and assess inefficiencies in business processes and suggest methods of reducing costs and improving efficiency through process optimization.
Supply Chain Optimization Case Questions: these questions assess an individual's ability to analyze supply chains and identify areas for cost reduction and optimization.
Product/Service Design Case Questions: these questions assess an individual's ability to innovate and develop cost-efficient solutions that maintain the quality of goods or services provided by the business.

It is important to note that cost reduction case questions are not limited to these three types. Other types of cost reduction case questions may include analyzing financial statements to identify areas of cost reduction, evaluating pricing strategies, and identifying opportunities for outsourcing. It is essential to be well-versed in all types of cost reduction case questions to be fully prepared for any interview.

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Preparing for a Cost Reduction Case Interview

Preparing for a cost reduction case interview can be overwhelming. However, with the right approach, you can prepare effectively and build confidence. The following tips will help you prepare:

Study business frameworks: Business frameworks are analytical tools that provide a structured approach to analyzing business problems and asking pertinent questions.
Practice case questions: Practice answering case questions to boost your confidence, enhance your analytical skills, and improve your ability to structure a convincing answer.
Research the company and industry: Research the company and the industry in which it operates to help you understand the business's operations, market environment, and competitors.

Another important aspect of preparing for a cost reduction case interview is to understand the client's objectives. You should be able to identify the client's goals and priorities, and tailor your approach accordingly. This will help you to provide relevant and effective solutions to the client's problems.

It is also essential to practice effective communication skills. You should be able to articulate your thoughts clearly and concisely, and be able to explain complex ideas in a simple and understandable manner. This will help you to build rapport with the interviewer and demonstrate your ability to work effectively with clients.

The Importance of Data Analysis in Solving Cost Reduction Cases

Data analysis is a critical component of solving cost reduction cases. You need to analyze data to identify trends, patterns, and opportunities for cost reduction. Consider using software such as Excel, R, and Python to analyze data. Ensure that you are familiar and proficient with the software tools you use to analyze data effectively.

One of the benefits of data analysis is that it helps you to make informed decisions. By analyzing data, you can identify areas where costs can be reduced without negatively impacting the quality of your products or services. This can help you to make strategic decisions that will benefit your business in the long run.

Another advantage of data analysis is that it can help you to identify inefficiencies in your business processes. By analyzing data, you can identify areas where processes can be streamlined or automated, which can lead to significant cost savings. This can also help to improve the overall efficiency of your business, which can lead to increased productivity and profitability.

How to Structure Your Answer to a Cost Reduction Case Question

Structuring your answer is essential to communicating your thought process effectively. The following structure can assist you in developing a coherent answer:

Understanding the problem: summarizing the problem the interviewer presented and identifying the key issues.
Breaking down the problem: breaking down the critical issues into smaller components and analyzing them systematically.
Developing a hypothesis: developing an idea or hypothesis to solve the problem.
Test hypothesis: testing the hypothesis by providing compelling reasoning and supporting data.
Providing a recommendation: providing a recommendation based on the reasoning and data presented.

It is important to note that when structuring your answer, you should also consider the potential risks and limitations of your proposed solution. This will demonstrate to the interviewer that you have thought critically about the problem and have considered all possible outcomes.

Additionally, it is helpful to use real-life examples or case studies to support your reasoning and recommendation. This will not only strengthen your argument but also show the interviewer that you have a good understanding of the industry and can apply your knowledge to real-world situations.

Tips for Effective Communication During a Cost Reduction Case Interview

Effective communication is critical during a case interview. The following tips can help you communicate your ideas effectively:

Be clear and concise
Show your work
Ask questions
Clarify terms and data

However, there are additional strategies that can help you communicate even more effectively during a cost reduction case interview. One such strategy is to use visual aids, such as graphs or charts, to help illustrate your points. This can make it easier for the interviewer to understand your thought process and follow along with your analysis.

Another important tip is to actively listen to the interviewer and respond to their feedback. This shows that you are engaged in the conversation and willing to adapt your approach based on their input. It also helps to build rapport and establish a collaborative working relationship with the interviewer.

Pitfalls to Avoid When Answering Cost Reduction Case Questions in Consulting Interviews

Avoiding common pitfalls can increase your chances of success during the interview. The following are examples of common pitfalls:

Making assumptions without enough data
Jumping to conclusions
Overlooking details
Changing your answer without a logical reason

Another common pitfall to avoid when answering cost reduction case questions is failing to communicate your thought process clearly. It is important to explain your reasoning and show how you arrived at your answer. This helps the interviewer understand your approach and can also help you catch any errors or oversights in your analysis.

Additionally, it is important to consider the broader implications of your proposed cost reduction strategy. For example, if your solution involves laying off employees, you should also consider the impact on company culture and morale. Failing to consider these factors can make your solution less effective or even counterproductive in the long run.

Examples of Successful Cost Reduction Case Interview Answers

Looking at examples of successful cost reduction case interview answers is an excellent way to learn how to structure and articulate your idea. The following are examples of successful cost reduction case interview answers:

Decreasing supply-chain costs by optimizing supplier selection
Improving manufacturing efficiency through automation
Reducing staff costs through outsourcing services

How to Incorporate Industry-Specific Knowledge into Your Answer

Incorporating industry-specific knowledge into your answer can differentiate you from other candidates and demonstrate your understanding of the business environment. The following steps can help you integrate industry-specific knowledge into your answer:

Understanding the industry's competitive landscape
Knowing industry-specific constraints and regulations
Examining market trends and developments
Analyzing industry-specific metrics

Techniques for Brainstorming Creative Solutions to Cost Reduction Challenges

Brainstorming creative solutions can help you develop innovative, unique, and practical ideas. The following techniques can help you brainstorm effectively:

Brainwriting: Each participant creates a list of ideas, and then the lists are circulated for group discussion and elaboration.
SWOT Analysis: Identifying strengths, weaknesses, opportunities, and threats of a market can foster creative thinking and stimulate innovative solutions to challenges.
Reversal technique: Looking at a problem from another perspective or reversing assumptions during problem-solving can help generate creative solutions.

The Role of Teamwork and Collaboration in Solving Cost Reduction Cases

Teamwork and collaboration are essential in solving cost reduction cases. The following tips can help you work effectively in a team:

Assign roles and responsibilities
Consider each team member's skills and experiences
Set realistic deadlines
Communicate clearly and often
Provide constructive criticism

How to Showcase Your Problem-Solving Skills During a Cost Reduction Case Interview

Showcasing your problem-solving skills is essential in a cost reduction case interview. The following techniques can help you demonstrate your capabilities:

Be prepared: Practice answering case questions and develop a structured approach to analyzing problems.
Show your work: Provide methodological reasoning, data analysis, and supporting information for your solution.
Ask questions: Clarify terms, data, and assumptions made by the interviewer or business.

Strategies for Staying Calm and Focused During the Interview Process

Staying calm and focused is crucial in an interview environment. The following strategies may assist in keeping you calm and focused:

Practice: Practice answering case questions to build confidence and familiarity.
Breathing techniques: Breathing techniques such as deep breathing can help calm your nerves and improve your focus.
Maintaining eye contact: Maintaining eye contact demonstrates confidence and can help you stay focused.

Practice Exercises to Improve Your Performance on Cost Reduction Cases

Practice exercises can enhance your knowledge, skills, and confidence in solving cost reduction cases. We recommend using online resources and case interview books to practice cost reduction case exercises. Additionally, consider trying mock interviews with colleagues or seeking consultation services with career centers to receive feedback and improve your performance.

By applying the tips, techniques, and strategies we have shared, you can enhance your performance in cost reduction case interviews and secure your place in the competitive consulting industry. Remember that preparing and gaining a deep understanding of the business environment and industry-specific knowledge, analyzing data, and effectively communicating your ideas will be essential in answering cost reduction case questions during consulting interviews.

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ORIGINAL RESEARCH article

Cost reduction for upscaling voluntary sustainability standards: the case of independent oil palm smallholders in central kalimantan, indonesia.

$\r\nSilvia Irawan$

1 Kaleka, Denpasar, Bali, Indonesia
2 Climate Economics and Risk Management Section, Division for Climate and Energy Policy, Department of Technology, Management and Economics, Danmarks Tekniske Universitet, Kongens Lyngby, Denmark
3 Moore Center for Science, Conservation International, Arlington, VA, United States

Upscaling Voluntary Sustainability Standards (VSS) can generate ecological and social benefits at a scale that is meaningful to address pressing environmental issues such as climate change and biodiversity losses. Lack of resources and risks of implementation gaps may, however, hinder the success of upscaling VSS. This paper aims to fill the gap in the literature regarding options to reduce certification costs to upscale VSS amid the limited financial resources available for certification. The paper presents the result of action research involving 3,507 independent oil palm farmers who are members of six farmer groups in two districts in Central Kalimantan to achieve Roundtable on Sustainable Palm Oil (RSPO) certification. The research found that achieving economies of scale by increasing the total number of certified farmers can reduce the certification costs per farmer. By establishing a district-level entity, the costs related to audits, RSPO membership fees, and the establishment of farmer groups, such as developing standard operating procedures (SOPs), can be lowered. Implementation gaps were not found with the increase of farmers joining the project based on the training frequency and the external audit findings reports on farmers' compliance with RSPO principles and criteria. The findings of this study provide a basis for promoting the upscaling of VSS, including through the RSPO jurisdictional approach.

1 Introduction

Voluntary sustainability standards (VSS) aim to ensure that agricultural commodities are produced sustainably without causing the loss of tropical forests, ecosystems, and biodiversity. As market-based instruments, VSS seek to provide higher market prices to producers for producing their commodities using a set of environmental and social standards ( Pirard, 2012 ; Marx et al., 2015 ). Farmers producing certified commodities such as coffee, cacao, oil palm, and timbers can obtain price premiums around 10 percent or higher than the market sales price of the commodities ( Gockowski et al., 2013 ; Lemeilleur et al., 2020 ; Naegele, 2020 ).

VSS seek to change the behavior of commodity producers, including smallholders, to reduce deforestation and protect forests. Coffee certification, such as Fairtrade-Organic certification, can produce substantial environmental benefits, including increasing soil organic carbon; tree diversity, basal area and biomass, and leaf litter and species richness ( Vanderhaegen et al., 2018 ). The certification of oil palm smallholders has the potential to achieve within-plantation biodiversity conservation as farmers' plots are usually situated in landscapes with greater heterogeneity than large-scale plantations ( Azhar et al., 2015 ). The certification can, therefore, encourage smallholders to produce oil palm sustainably instead of being the drivers of deforestation, as reported in the literature ( Gutiérrez-Vélez et al., 2011 ; Austin et al., 2019 ).

In the palm oil sector, VSS such as the Roundtable on Sustainable Palm Oil (RSPO) have led to better environmental and social outcomes, though only in specific circumstances. Studies show that RSPO certification can reduce deforestation despite the fact that the total reduction of deforestation was relatively small ( Carlson et al., 2018 ; Lee et al., 2020 ). Moreover, the social impacts of RSPO certification vary. RSPO certification was linked to poverty reduction in villages with cash-crop livelihoods, however, not in those with subsistence livelihoods ( Santika et al., 2020 ). Another study showed that better educational facilities were further associated with RSPO certification, although no other statistical impacts were observed in other development indicators ( Lee et al., 2020 ).

To fully produce the intended ecological and social impacts, VSS need to be upscaled to cover all actors along the supply chain across sectors and geographies. Otherwise, buyers who continue to buy unsustainable commodities will encourage producers who do not change their practices to continue to produce commodities at the expense of the environment. Upscaling can reduce leakage, in which negative environmental impacts of development activities are not terminated but simply displaced from one area to another ( Lambin et al., 2020 ). Furthermore, mainstreaming Fairtrade in commodities such as coffee, cacao, and tea, for instance, has the promise to lift farmers out of poverty by enhancing payments as a result of competition between firms ( Mook and Overdevest, 2018 ; de Gelder et al., 2021 ).

Efforts to upscale VSS have been seen in major commodities such as coffee ( Dietz et al., 2021 ), cacao ( Krauss and Barrientos, 2021 ), seafood, and cotton ( Lambin et al., 2020 ). Marine Stewardship Council (MSC) certification covered 60 percent of the global whitefish market in 2018 because only a few large players dominated the market. Better Cotton Initiative (BCI) certified 19 percent of global cotton production by 2018. BCI certification came from the initiative of civil society organizations (CSOs), which later encouraged government actors to adopt elements of successful initiatives into legal mandates. BCI principles and criteria have been embedded into national regulations in Mozambique, which aim to produce all cotton in the country sustainably. In 2017, 86% of Mozambique's cotton farmers grew cotton according to the BCI principles and criteria. 1 In the palm oil sector, RSPO has initiated a jurisdictional approach to certification, an approach to ensure oil palm cultivation does not have negative impacts on the environment and society by scaling up the coverage of palm oil certification in administrative areas or jurisdictions ( RSPO, 2021 ). Furthermore, Indonesia and Malaysia, the major producers of palm oil, have made certification compulsory through Indonesian Sustainable Palm Oil (ISPO) and Malaysian Sustainable Palm Oil (MSPO), respectively ( Aziz et al., 2021 ; Kannan et al., 2021 ; Naidu and Moorthy, 2021 ; Pramudya et al., 2022 ).

Upscaling VSS comes with various challenges. Collaboration among public, private, and civil society actors is required to upscale VSS. However, these actors often have different motivations and incentives to make the transition toward sustainability ( Lambin et al., 2020 ). Private actors often face risks in investing financial resources in sustainability initiatives, while governments often have competing priorities to serve their constituents. Although all actors will benefit from partaking in sustainability initiatives in the long run, they have different costs, including transaction costs, and benefits in the short run ( Knorringa et al., 2012 ).

Significant resources will be required to cover certification costs if VSS is to be upscaled. In the coffee sector, for instance, Dietz and Grabs (2022) found that expanding VSS is faced with higher costs of changing current practices to meet the sustainability principles and criteria. They also predicted that financial resources cannot or will not grow in proportion to cover the certification costs in the coffee sector in Honduras. Bilateral donors and philanthropic organizations have supported farmers in getting certified ( Lambin et al., 2020 ; Dietz and Grabs, 2022 ). In the palm oil sector, governments in several countries have been allocating financial resources to support the certification. The Malaysian government, for instance, allocated RM 30 million (~USD 636,377) to fully fund expenses for the MSPO audit, including training for independent oil palm smallholders ( Aziz et al., 2021 ; Kannan et al., 2021 ).

Due to limited financial resources to support certification, options to reduce certification costs take on greater importance as a way to upscale VSS. Affordable certification costs can also increase the willingness of smallholders to participate in certification programs ( Saadun et al., 2018 ). In the palm oil sector, many studies have focused on analyzing the costs of smallholder certification ( Beall, 2012 ; Wangrakdiskul and Yodpijit, 2015 ; Hidayat et al., 2016 ; Hutabarat et al., 2018 ). These studies mainly suggested increasing the price premium to cover the costs. There is a gap in the literature regarding how to reduce the costs of certification to achieve sustainability at scale despite limited financial resources.

Studies also find that upscaling VSS poses several risks, such as implementation gaps, dilution, and reputational damage. Mainstreaming Fairtrade, for instance, has been widely criticized for its potential to weaken the implementation of the principles and standards ( Doherty et al., 2013 ). Moreover, Dietz and Grabs (2022) studied the effort of upscaling five coffee certification labels using 659 coffee farmers in Honduras. They found certification labels that grew quickly, resulting in implementation gaps. As certification schemes attempted to certify larger numbers of farmers, fewer farmers in a given group were audited for compliance, and producers also had less capacity to fulfill the demands that the standards set ( Dietz and Grabs, 2022 ).

This paper aims to answer two research questions. First, what strategies can reduce the costs of upscaling the certification of independent oil palm farmers? Second, will undertaking these strategies lead to implementation gaps?

To answer both research questions, the paper extracts lessons from the action research of certifying 3,507 independent oil palm smallholders of six farmers groups in Central Kalimantan, Indonesia. The paper first reviews the literature on upscaling VSS and the RSPO certification before presenting the method and the study case. We then present the results of our analysis and discuss the implications before providing recommendations.

2 Literature review

Upscaling of sustainable solutions, such as VSS, is necessary to achieve impacts at a scale that is meaningful to protect natural ecosystems. Lambin et al. (2020) discussed two possible pathways for upscaling VSS. They are: “leveraging a dominant private actor's market power and integrating civil society or private sector initiatives into public policy” ( Lambin et al., 2020 , p. 20). In the first case, major companies consolidate themselves to create market dominance, which makes it easier for them to demand their suppliers meet sustainability standards. This pathway however has disadvantages, such as difficulty in traceability for the case of palm oil and marginalization of smallholders, that can only be addressed by governments through public policies. The second pathway is when the government adopts elements of voluntary sustainability certification initiatives first piloted by civil society organizations or progressive actors into legal mandates. Such policy integration means that these initiatives apply to all actors in a jurisdiction, thereby scaling up the impacts. Mozambique's collaboration with the Better Cotton Initiative and Bolivia's 1996 revision of its forestry law are examples of this pathway. So too is the RSPO's introduction of the jurisdictional approach to certification in 2021 ( RSPO, 2021 ). “ The RSPO Jurisdictional Approach (JA) to Certification is an approach to minimise the negative impact of oil palm cultivation on the environment and on society, at the scale of government administrative areas (Jurisdictions), which involves a stepwise certification of the production and processing of sustainable oil palm products ” ( RSPO, 2021 , p. 10).

The effort to upscale VSS comes with challenges. Dietz and Grabs (2022) studied five coffee certification standards using a dataset of 659 farmers in Honduras, finding that no certification schemes for coffee managed to grow substantially while maintaining strong additionality. The five standards were The Common Code for the Coffee Community (4C), Fairtrade, Fairtrade-Organic, UTZ Certified, and Rainforest Alliance. They found that standards that scaled the fastest, such as UTZ and 4C, faced considerable risk of implementation gaps on the ground as they needed to certify large farm groups with limited financial resources. To lower certification costs, only a small group of participants were audited by a third-party auditor. The standards also had a limited budget available for farmer outreach. The price premium decreased as the marginal compliance costs increased when more producers were added to the certification system. They concluded that there is a high necessity to invest more resources to train and recompense smallholders to guarantee sustainability additionality of VSS. They argued that “successful mainstreaming would require better cost coverage of sustainability improvements by value chain actors” (p. 1).

Small producers face challenges in getting certified, mostly due to limited financial resources and the high cost of certification processes. In the palm oil sector, several studies have researched the cost of achieving independent smallholder certification ( Table 1 ). The largest components of the certification costs are the audit cost, obtaining legal documents required for certification, and training ( Beall, 2012 ; Wangrakdiskul and Yodpijit, 2015 ; Hidayat et al., 2016 ; Hutabarat et al., 2018 ). Several studies have proposed strategies for reducing audit costs, including developing a platform for multiple certification schemes ( Lambin and Thorlakson, 2018 ). Moreover, obtaining legal documents and managing documents is the second-most costly expense ( Hutabarat et al., 2018 ). The government should develop a policy to make the process more efficient ( Watts et al., 2021 ).

Table 1 . Summary of certification cost from previous studies.

Several strategies have been put in place to reduce the cost of certification, particularly for small producers, so that it can cover many smallholders with limited resources. One of the most common strategies is to increase the economies of scale in the certification process. This is why RSPO applied the group certification scheme for independent smallholders ( Nesadurai, 2019 ). In Malaysia, smallholders are consolidated into groups by the government to upscale the certification coverage of MSPO while reducing costs. Sustainable palm oil clusters were established across the country to certify farmers, where one cluster consists of one to two thousand farmers ( Kannan et al., 2021 ; Bok et al., 2022 ). Furthermore, Tey et al. (2021) carried out a comprehensive literature review regarding the financial costs and benefits of RSPO certification for independent oil palm farmers. They argued that increasing farm size in the certification process could also increase the affordability of the certification process, which indicates the importance of economies of scale ( Tey et al., 2021 ).

This study applies an action research method for answering two research questions. First, what strategies can reduce the costs of upscaling the certification of independent oil palm farmers? Second, will undertaking these strategies lead to implementation gaps? Action research is defined as “a participatory process concerned with developing practical knowledge in the pursuit of worthwhile human purposes” ( Reason and Bradbury, 2013 , p. 4). The action research on oil palm smallholder certification was carried out by an Indonesian non-profit research organization in Seruyan and Kotawaringin Barat Districts, Central Kalimantan Province, Indonesia. The stance during the action research process was set by the premise that “one cannot understand a system until one tries to change it” ( Schein, 2008 , p. 273). By implementing the certification process directly, the research aimed to understand smallholders' challenges and ways to reduce the costs for smallholders in obtaining certification. The adopted method is similar to the Clinical Research method with the primary goal of helping while the production of knowledge is a by-product ( Schein, 2008 , p. 266).

The action research started following smallholder mapping and registration activities, in which all stakeholders, including farmer groups, the local government, and private sector actors, mutually agreed to proceed with smallholder certification. The research started with assisting 190 farmers in Pangkalan Tiga village ( Figure 1 ). Additional farmers then joined the certification process in Pangkalan Tiga village, bringing the total number of farmers to 510. After completing the first audit in Pangkalan Tiga, two more farmer groups in two villages were assisted in Kotawaringin Barat, namely Pangkalan Dewa and Lada Mandala Jaya villages. A similar process took place in two villages in the Seruyan district, Suka Maju, and Sukorejo. A total of 1,280 smallholders from five farmer groups participated in the project to support independent smallholders to get RSPO certification between 2017 and 2019 ( Table 2 ).

Figure 1 . The map of villages where the farmer groups participating in the certification program are located.

Table 2 . Certified smallholders in Kotawaringin Barat, Central Kalimantan.

After evaluating the certification process of the first five farmer groups, several measures were put in place to reduce costs. One of the major steps was establishing a jurisdictional entity, a district-wide association that provides services for all farmers in the district. Under the entity, a total of 2,227 farmers obtained RSPO certification in July 2023.

The certification process of oil palm farmers in Pangkalan Tiga village, as the first village assisted in getting RSPO certification in the project, served as the benchmark for the certification process in other villages. In Pangkalan Tiga village, the project decided which items to fund based entirely on farmers' requests. After Pangkalan Tiga village, the certification process for the four other villages was carried out in parallel. Learning from the experience of Pangkalan Tiga, the project deliberately chose not to provide the same level of support to the other two villages. However, this did not reduce the entire cost of certification as it just shifted the cost burden from the project to farmers. Farmers were also more willing to cover the costs as they were motivated by the successful example of Pangkalan Tiga.

The project reduced certification costs by lessening the travel related to the project implementation. To reduce the travel costs related to farmer training, the project sought trainers from surrounding palm oil mills instead of bringing trainers from the provincial or national capital, where they usually resided. Moreover, training and project supervision visits were carried out at around the same time, covering all participating villages to reduce travel-related costs.

The annual expenses decreased as the farmers became more familiar with sustainable farming practices. In the case of Pangkalan Tiga, the farmers were able to manage the surveillance audit process independently during the second surveillance audit, or around 3 years after first being assisted. Farmer groups were expected to be able to pay for the surveillance audit using the profit generated from selling the certificate. Furthermore, the groups also had sufficient funds to invest in small business ventures such as producing organic fertilizers and agritourism.

The certification process was financed by numerous organizations. The funders included the Norwegian Agency for Development Cooperation (Norad) and the German International Climate Initiative (IKI) through sub-grants, the RSPO Smallholder Support Fund (RSSF), and Unilever, a consumer goods company. Throughout the certification process, the non-profit research organization acted as a facilitator that channeled financial support to farmers by: (1) providing technical assistance such as mapping farms, carrying out baseline analyses, and providing on-the-job training for the farmer groups to administer the certification process; (2) paying for expenses related to certification such as travel, meeting and audit costs; and (3) connecting farmers with the district government to expedite the process of obtaining legal documents. The non-profit research organization assisted six farmer groups in Central Kalimantan throughout seven stages of the certification process ( Figure 2 ). Watts et al. (2021) provide a detailed description of the smallholder certification process. Following the certification process, the farmer groups then sold the certificate through PalmTrace , which is a marketplace where RSPO-certified oil palm products can be purchased and sold. They had a prior agreement to sell the credit to a consumer goods company that provided financial support for the certification process.

Figure 2 . Seven stages of the certification process.

Data on costs were obtained from the project's financial reports of the non-profit research organization carrying out the action research to calculate the cost of certification. The financial reports were further audited by third-party auditors. The certification costs were organized based on the certification stages, which are similar to those described in Watts et al. (2021) .

To measure the impact of the cost reduction strategies implemented, the study assessed the effectiveness of training provided for farmers participating in the certification process and the audit findings of non-compliance with RSPO principles and criteria. We analyzed the external and internal audit reports and the farmers' training records.

4.1 Strategies to reduce certification costs

The strategies applied in the project resulted in the overall reduction of cost. Before the cost reduction measures, the upfront costs of certification in the first five farmer groups were between $114 and $303 per farmer or $45 and $165 per hectare ( Table 3 ). As the scale increased, the costs decreased to only $45 per farmer or around $19 per hectare. The upfront costs included all costs related to preparing the farmers to obtain certification, as depicted in Table 3 . The reduction of upfront cost per farmer in the villages indicates that achieving economies of scale during the certification process can reduce the cost ( Figure 3 ). On average, the upfront per-farmer certification cost decreased by at least six cents per each additional farmer added into the certification process. The graph shows that per-unit cost decreased as the number of farmers increased.

Table 3 . The certification costs of six farmer groups in Central Kalimantan.

Figure 3 . Upfront certification cost ($ per farmer). The blue dots are the actual data disclosed in Table 3 . The orange dots are the average, and weighted average of the re-grouped data. The actual data is re-grouped based on the number of farmers certified in each village. The number of farmers is regrouped into three categories to develop the data fitting curve based on the number of certified numbers, under 200, above 200 but below 300, and above 300. The estimated fitting model is established based on the assumption of a linear relationship between the number of farmers and the dollar-per-farmer cost.

The strategy to increase the total number of farmers participating in the certification process within a district-level entity requires a strong capacity within the entity to manage the certification process. An internal control system (ICS) was established to ensure the compliance of all members with RSPO principles and criteria. The daily activities of ICS were collecting all documents required for the certification process, carrying out training, and conducting internal audits. As the number of farmer members increased, the project spent considerable time building the capacity of the district entity's personnel to administer the certification process. The entity is meant to help all farmers obtain certification within the entire district, starting with the first 2,227 farmers. The cost of setting up the entity was relatively high at the beginning compared to the cost of setting up the previous groups. Because no more costs will be required for organizational setup with any additional members joining the group, the cost will eventually be lower in the long run.

With the establishment of the district-level entity, the certification costs were reduced due to the following reasons. First, the most obvious cost reduction is related to the RSPO membership fee, which is paid only for one group instead of for multiple groups. Second, the cost can be reduced as the project only developed one set of standard operating procedures (SOPs) to guide the compliance of farmers to the principles and criteria for all farmers. In contrast, the project needed to develop one set of SOPs for each of the five groups that were assisted previously. Furthermore, for the district-level entity, the project revisited all the previous five SOPs and developed a web-based system based on the SOP so that everyone could have access to it and use the template and documents freely.

The major cost associated with the certification process is the audit cost. The typical activities carried out during external audits are checking organizational documents, interviewing group managers and farmers who are selected as samples, conducting consultations with stakeholders, visiting the farms, and preparing audit reports. The costs of the first audit and correction measures accounted for more than 40 percent of the total certification cost in the first four villages. The result is similar to the findings of Beall (2012) , Levin et al. (2012) , and Wangrakdiskul and Yodpijit (2015) , which found that the major part of certification costs were allocated to the first audit or subsequent surveillance audits. When the number increased to 2,227 farmers, the audit cost was reduced from $61.64 and $140.25 to $15.84 per farmer, or between $22 and $79.84 to $6.98 per hectare. The audit cost made up around 24% of the total costs. The reduction in audit cost was mainly due to fewer days allocated by auditors to audit one entity instead of multiple entities, although the number of sample farmers audited remains the same. The audit cost was also lower compared to the first five groups due to the lower cost of travel to the site.

The annual surveillance audit cost also decreased with the increase in the total number of farmers. After the farmers obtain their certification, they need to maintain the certificate by going through an annual surveillance audit for the years to come. The surveillance audit cost involving around 200 farmers in Pangkalan Dewa and Lada Mandala Jaya was about $64 per farmer ( Table 3 ). The price decreased to $26 per farmer during the surveillance audit in Pangkalan Tiga, when the total number of farmers was 510. The reduction of the surveillance audit cost was because of the increase in the total number of farmers audited, which reduced the audit cost per farmer.

The cost of obtaining legal documents varied depending on the district where the farmers were located. In the Seruyan district, the cost of obtaining legal documents was consistently low due to the government's commitment to jurisdictional certification. In Kotawaringin Barat, the cost associated with obtaining legal documents varied over time, showing that as the new official responsible for issuing the document took office, the cost changed too. The legal documents, which include the land title, the environmental management license, and the farmer registration for cultivating oil palm, are supposed to be issued without charge to farmers as district governments cover the cost as part of the service provided for their constituents. When local governments are not allocated sufficient funds to provide the services due to other pressing needs, other parties should bear the costs, such as the certification project presented in this paper.

The training cost remained stable regardless of the number of farmers participating in the certification process. The training cost ranged between $12.75 and $35.81 per farmer in all groups except for the case of the first farmer group that the project assisted in Pangkalan Tiga village. The reduction of the training cost was mainly due to several strategies put in place to deliver training for the farmers, such as finding trainers from the surrounding areas, such as oil palm mills/estates or government units. Training for several groups around the same schedule can reduce overall training costs.

Certification costs varied depending on the districts where the farmer groups were located. Expenses related to mapping and data collection of farmer members joining the certification process varied depending on the district where they were located and their farms' locations. In the Seruyan district, the cost of mapping was higher due to the locations of farmer plantations that are often harder to reach than the farmers in Kotawaringin Barat. The poorer quality of roads also made it more costly to collect data on farmers' plots than in neighboring districts. Moreover, the cost of obtaining legal documents also varied depending on the districts where the farmers were located. The cost of processing the legal documents is usually high at the beginning. As governments learn how to deliver the service, the cost can eventually be reduced. However, with the change of leadership and staff in the plantation office responsible for issuing the legal document for the certification process, the cost of obtaining the legal document increased again as it took time for new officials to become familiar with the tasks.

4.2 The impact of cost reduction measures on the implementation

The cost reduction strategies did not impact the frequency of training provided to farmers. The lack of effect on the number of training provided for farmers was because RSPO specifically stipulates what and how training should be provided for farmers in the Independent Smallholder Standard. The standard was first issued in 2013 and later revised in 2019. The standard is further interpreted at the national level to consider the specific situation of each country, and several guidelines were provided for the implementation of the standard. The 2019 RSPO independent smallholder standard requires 21 training modules to be provided for farmers going through the certification process. This number of modules increased from just 14 modules required in the previous standard. Furthermore, the number of farmers who should be provided with training also increases with the 2019 standard as compared to the previous one.

Table 4 provides the number of training sessions provided in the certification process and the total number of farmers who attended the sessions, although one training session can cover multiple topics. In some cases, several training sessions were carried out for one training module targeting different target audiences. With the increase of farmers participating in the certification process, numerous training sessions should be held, as typically, one session can be attended by 20–30 farmers. We computed the Spearman rank correlation coefficients to assess the association between the number of farmers participating in the certification process in a farmer group and the number of training sessions and between the number of participating farmers and the mean number of farmers participating in a session. The analysis showed a correlation coefficient of 0.1 between the number of registered farmers and the number of training sessions, a value proximate to zero, suggesting a weak or negligible correlation. The analysis additionally revealed a correlation coefficient of 0.4 between the number of registered farmers and the attendance at training sessions, signifying a high correlation. Nevertheless, it is important to note that this correlation does not necessarily indicate a strong association.

Table 4 . Training sessions provided and the total number of farmers attending the sessions.

The cost reduction strategies did not have any impact on the external audit findings on the non-compliance of farmers to RSPO principles and criteria ( Table 5 ). The external audit of the district entity found two issues that should be corrected, particularly related to the ICS's capacity to manage the certification process. The problems related to the ICS capacity are consistent throughout all farmer groups, together with the issue of obtaining legal documents and traceability, regardless of the scale.

Table 5 . The external audit findings on non-compliance to RSPO principles and criteria.

5 Discussion

Increasing the number of farmers in the group certification reduced the cost per farmer. In the case of the district entity, the certification cost went down from $114–303 per farmer when there were 170–214 farmers during the 1 st year of certification to only around $19.92 per farmer when 2,227 farmers joined the process. The group in Pangkalan Tiga increased the number of farmers to 510 during the first surveillance; however, the upfront cost remained. The average cost per farmer or hectare decreased as the total number of farmers increased in the certification process, which indicates the concept of economies of scale ( de Roest et al., 2018 ). This finding is aligned with the literature on payment for environmental services that economies of scale make some PES programs more effective by eventually reducing transaction costs to make the programs feasible ( Pagiola and Platais, 2006 ; Engel et al., 2008 ; Tacconi, 2012 ; Wunder, 2015 ). It also supports findings from timber certification schemes that larger scales are needed to make farmer group certification cost-effective ( Maraseni et al., 2017 ).

One of the largest costs of certification is related to an audit cost. The project managed to reduce the cost by increasing the scale of certification. The audit cost reflects the supply of and demand for audit services, so increasing the number of auditors would further reduce the costs. By increasing the scale, the time allocated for checking organization documents will be carried out for one group instead of multiple groups. For governments that have made the sustainable certification of palm oil compulsory, such as Indonesian Sustainable Palm Oil or Malaysian Sustainable Palm Oil, setting a standard cost for auditing services may be an option.

The cost of obtaining legal documents in the case of Central Kalimantan ranged between $0.23 to $10.74 per farmer ( Table 3 ). The result of this study can be further compared to the case of the Amanah farmer organization, which is located in Riau Province, Indonesia, as reported by Hutabarat et al. (2018) . The study reported that the costs to obtain certification documents, including the legal documents, were the highest proportion to the total certification costs and the training cost. The costs of obtaining legal documents were around $38.68 per hectare. It is important to note that the items included in the cost calculation of Hutabarat et al. (2018) may be different from the calculation in this study. However, the government structure and political situation were relatively similar in Riau Province to the case reported in this study in Central Kalimantan. The low cost of obtaining legal documents in this study case was mainly due to the support of the district government for the certification process, which also streamlined the legal documentation process. The costs were primarily associated with the time required for farmer organizations to submit documents, follow up with government officials, and collect the documents. Hence, the distance from villages to the government offices is the only determining factor. As the government is also becoming familiar with issuing legal documents for farmers, the processing time is becoming faster.

No implementation gaps were observed in this study as those reported in the literature in the case of the coffee sector. Dietz and Grabs (2022) reported that certification labels in the coffee sector aim to expand faster with limited resources. Limited resources further reduce the incentives provided for farmers and the capacity to carry out outreach or help farmers comply with standards. They also found implementation gaps related to mainstreaming VSS, such as a lower number of audits being carried out to check compliance. None of these issues was found in our study. This is because RSPO has maintained stringent standards, including those for independent smallholder farmers. The certification process was carried out according to the existing standards without any compromise.

The 2019 RSPO Independent Smallholder Standard set a higher training and internal audit requirement than the previous standard issued in 2013. For training, the new standard increased the total modules of training for farmers from 14 modules to 23 modules. The number of farmers that should be trained was also stipulated in the 2019 RSPO Independent Smallholder Standard. Moreover, the 2019 standard also required all farmer members to be assessed in an internal audit before an external audit can be carried out. This requirement is higher than the previous standard, which stipulates that only a few farmers selected through a sampling method are audited. For an external audit, the selection of the sample is still the same as the previous standard, which is based on the number of farmers and the risks. RSPO further provides a scale for auditors to assess the risk to put in the formula. In the case of the district entity, the risk is considered high as the ICS should manage the certification process of farmers located in many villages.

Upscaling requires the participation of many actors at different levels. The involvement of public, civil society, and private actors is the key to upscaling ( Jelsma et al., 2017 ; Lambin et al., 2020 ; de Vos et al., 2023 ). The involvement of various parties in the project results in the reduction of certification costs. The government is involved in issuing legal documents. The oil palm estate companies, together with government units, can provide training for farmers instead of bringing experts from other areas. All these in-kind contributions lead to a lower cost of certification. Furthermore, aligning between public and private certification standards can accelerate palm oil production's transformation ( Apriani et al., 2020 ).

5.1 Recommendations

We offer recommendations for reducing costs further based on the results of the action research carried out. Our study results provide a basis for advocating the RSPO jurisdictional approach to certification that is currently being developed ( RSPO, 2021 ). Under the jurisdictional approach, a certified unit is no longer a farmer group or company but rather an entire jurisdiction such as a district in Indonesia ( Nepstad et al., 2013 ; Seymour et al., 2020 ). This approach can drive subnational governments to take responsibility for the certification process by providing legal documents and other necessary support, such as training. Consequently, the support of local governments in the certification process is critical to reducing certification costs. Furthermore, jurisdictional certification can ensure that the certification process achieves economies of scale, resulting in a cost-efficient and cost-effective process. This can be done by, for instance, organizing all farmers that will be certified into one farmer organization instead of having many organizations for only a limited number of farmers.

The district entity should have sufficient capacity to work with a large number of farmer members. The project invested a significant amount of resources to strengthen the capacity of the district entity, including its personnel, to run day-to-day activities, perform some level of technical skills such as making maps and data analysis, and carry out training and internal audits. The larger upfront investment put into the establishment of the entity will enable it to cater to a large number of farmers' participation in the district in the long run. The issues of capacity are highlighted in other studies as crucial factors for upscaling VSS, including Dietz et al. (2021) in the coffee sector. Furthermore, the district entity also established a smaller internal control system in each village to assist in the implementation of the certification. The study found that several tasks are best handled at the district level, such as information dissemination, identification of high conservation values, managing the RSPO membership, and several trainings that can be delivered through training of trainers methods such as the use of pesticides. Other tasks such as data collection, training related to oil palm cultivation, and regular farmer meetings are best implemented by the village group.

5.2 Study limitations and recommendations for future research

The study results, particularly related to the certification cost per farmer or hectare, should be generalized cautiously to other contexts, especially when the social and political situations are different. In Indonesia, legal documents can be obtained for free by farmers; however, due to the diversity of the districts, not all district governments can provide services for farmers. They often need to learn about the service and, depending on their knowledge, can provide it cost-effectively. Moreover, although this study was carried out in Kotawaringin Barat and Seruyan districts, the district entity that was established to achieve the economies of scale is specifically located in Kotawaringin Barat district. In the Kotawaringin Barat district, many independent smallholders are located in close proximity to each other; hence, finding more than 2000 farmers to join the district entity was feasible. In cases where independent farmers are scattered, such as in the Seruyan district, getting the same number of farmers as in the Kotawaringin Barat district might be more difficult.

The selection of items supported financially in the certification process determined the total costs of certification reported in this study. Other costs that are not financed by the study and not included in the calculation in this study are the cost of establishing farm boundary markers, signage, and other necessary equipment. These costs were borne by the farmers. We also did not include the costs related to staff salaries working on the project. Typically, the project provides support for the salaries of the staff hired by the farmer group to help manage the process, which includes managing files and documents, organizing events, and communicating with external parties. The organization assisting the farmers also allocated staff to train the farmer group staff and assist in communication with RSPO and external auditors.

Future research can contribute to increasing the understanding of how certification costs can be reduced. Assessing the variation between jurisdictions is important to understand how the government and other actors, such as private companies and civil society organizations in the jurisdictions, work together to support farmers in getting certified. The assessment can also reveal who bears which expenses in order to understand whether the overall certification costs can be reduced or if they are simply borne by a different actor. Different studies often include different cost items in the cost analysis, so it will be useful for future research to record the expenses in detail to allow for better comparison or generalization.

6 Conclusion

Our action research involving 3,507 independent oil palm farmers from six farmer groups in two districts in Central Kalimantan shows that increasing the total number of farmers to be certified and achieving economies of scale can reduce the certification cost. The findings of this study also suggest several measures that can be put in place to reduce the costs of certification for independent oil palm farmers. The study did not observe any implementation gaps as the certification cost decreased with the increase of farmers joining the project. The frequency of training provided for farmers was similar throughout the farmer groups assisted, including the district entity. By comparing the external audit findings, no particular impact in terms of compliance with RSPO principles and criteria between farmer groups was observed. The findings of this study provide a basis for promoting the upscaling of VSS through the RSPO jurisdictional approach.

Data availability statement

The raw data supporting the conclusions of this article will be made available by the authors, without undue reservation.

Ethics statement

The studies involving humans were approved by Bernadinus Steni, Chairman, Kaleka. The studies were conducted in accordance with the local legislation and institutional requirements. The participants provided their written informed consent to participate in this study.

Author contributions

SI: Conceptualization, Investigation, Writing – original draft, Writing – review & editing. KP: Formal analysis, Investigation, Methodology, Writing – original draft. JB: Writing – original draft. AD: Data curation, Formal analysis, Writing – original draft. HM: Investigation, Writing – original draft. DR: Data curation, Project administration, Writing – original draft. DF: Data curation, Formal analysis, Writing – original draft. VH: Project administration, Writing – original draft.

The author(s) declare financial support was received for the research, authorship, and/or publication of this article. Unilever partly funded the smallholder certification process and funded the research for this article. The funder was not involved in the study design, collection, analysis, interpretation of data, the writing of this article, or the decision to submit it for publication.

Conflict of interest

The authors declares that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Publisher's note

All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors and the reviewers. Any product that may be evaluated in this article, or claim that may be made by its manufacturer, is not guaranteed or endorsed by the publisher.

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Keywords: voluntary sustainability standards, independent smallholders, cost effectiveness, Central Kalimantan, palm oil

Citation: Irawan S, Pasaribu K, Busch J, Dwiyastuti A, Martanila H, Retnani D, Fajri DM and Hukom V (2024) Cost reduction for upscaling voluntary sustainability standards: the case of independent oil palm smallholders in Central Kalimantan, Indonesia. Front. For. Glob. Change 7:1418782. doi: 10.3389/ffgc.2024.1418782

Received: 17 April 2024; Accepted: 17 June 2024; Published: 06 August 2024.

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Copyright © 2024 Irawan, Pasaribu, Busch, Dwiyastuti, Martanila, Retnani, Fajri and Hukom. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) . The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

*Correspondence: Silvia Irawan, sirawan@kaleka.id

Disclaimer: All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors and the reviewers. Any product that may be evaluated in this article or claim that may be made by its manufacturer is not guaranteed or endorsed by the publisher.

How methods to assess land-use changes influence the resulting global warming potential and cost of optimized diets: a case study on Danish pigs applying life cycle assessment methodology

LCA FOR AGRICULTURE
Open access
Published: 10 August 2024

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Styrmir Gislason ORCID: orcid.org/0000-0002-6154-4277 1 , 3 ,
Thomas Sønderby Bruun 2 ,
Stefan Wirsenius 4 ,
Morten Birkved 3 ,
Chandrakant Singh 4 ,
Finn Udesen 1 &
Alberto Maresca 1

Meeting the demands of a growing and increasingly affluent population necessitates a deeper understanding of the environmental and economic implications of production. This implication is most relevant in key production sectors including agriculture and livestock. This article is intended to provide an understanding of the influence of methods of assessing land-use change (LUC) with respect to minimizing both the global warming potential (GWP) and the monetary costs of pig feed formulation.

Feed mixtures intended for slaughter pigs were generated for minimal cost and GWP impacts by applying four differing LUC assessment methods. The objective function was the Danish slaughter pig feed unit, minimized for cost in Danish crowns (DKK), with GWP impacts constrained in multiple steps. Attributional LCA methodology was applied using the Agri-footprint 6.3 database, with GWP impacts calculated excluding land use changes, including direct land-use changes and including the carbon opportunity cost. Analyses of the functional relationship between the optimal cost and the GWP impact were conducted, followed by a comparative LCA of the cost of comparable feed mixture by applying two sets of functional units: 100 slaughter pig feed units and 1 kg of pig live weight.

Results and discussion

A similar relationship between cost and GWP impact was observed across all methods, although variability of GWP impact magnitude depending on method was observed. Reducing at an equivalent cost, GWP reduction ranged from 5.6 to 27% based on the pig feed functional unit, and 2.4 to 13% based on the pig live weight functional unit. Optimizing feed mixtures for GWP impacts resulted in significantly increased contributions to other impact categories, including a 56% increase in terrestrial ecotoxicity. Despite the increased contributions to other impact categories, all optimized feed mixtures achieved a reduction in endpoint indicators and single score. Endpoint reductions to the feed unit were 2.3–25% for ecosystem damage, 7.4–15% for human health, and 6.0–16% based on a single score value.

Conclusions

The findings emphasize the key importance of addressing LUC when optimizing the GWP of agri-food production. Suggestions are provided for areas of improvement in future optimization studies applying a dietary unit as the objective function, including additional midpoint impact categories and/or extended optimization covering whole areas of protection. The findings suggest that GWP impacts may be reduced at no additional cost if included or embedded in the pig feed formulation procedure.

Feeding efficiency gains can increase the greenhouse gas mitigation potential of the Tanzanian dairy sector

Carbon footprint of milk production in brazil: a comparative case study, application of life cycle assessment to sheep production systems: investigating co-production of wool and meat using case studies from major global producers.

Avoid common mistakes on your manuscript.

1 Introduction

Recent statistics on global dietary patterns suggest that nearly 40% of human protein consumption is sourced from animal proteins originating from livestock, including eggs, dairy, and meat (FAO 2023a ).

Livestock feed, and in particular pig feed, consists primarily of plant-based ingredients like grains and sources of dietary protein, including oilseed “meals” originating from vegetable oil production, and to a lesser extent dietary protein sources of animal origin, including blood plasma, fish meal, and milk protein (Lewis and Southern 2001 , Sauber and Owens 2001 ). Dietary fat sources in pig feed are primarily plant-based, although this energy source may also be of animal origin (Azain 2001 ). Although consumption patterns differ globally, pork (i.e., pig meat) is on average the most highly consumed meat in China and the European Union, providing a substantial share of protein to the global food supply (FAO 2023c ).

Presently, the Danish agricultural sector contributes to about 26.2% of the sectoral anthropogenic GHG emissions, primarily in the form of nitrous oxide (N 2 O), methane (CH 4 ), and carbon dioxide (CO 2 ) (Nielsen et al. 2023 ). These GHG emissions contribute to a rise in global temperatures at different magnitudes referred to as the “global warming potential” (GWP), an impact category expressed in the mass of CO 2 equivalents (CO 2 -eq), usually over a 100-year time horizon (GWP-100). The European Union has set ambitious targets to reduce greenhouse gas (GHG) emissions by 70% (relative to 1990) by the year 2030 (European Commission 2020 ). The Danish government has also set a climate neutrality target for 2050, requiring major changes in national production across all sectors (Energistyrelsen 2020 ). Despite the urgency caused by rising mean global temperatures, multiple other environmental impact categories are highly relevant to the agri-food sector, including eutrophication, acidification, human toxicity, ecotoxicity, and excessive and unsustainable water and land use (Knudsen et al. 2019 ; Gislason et al. 2023 ). The relevance of global land and water use is exemplified by 70% of freshwater extraction and 44% of habitable land occupation directly attributable to the agri-food sector (FAO 2023b ; FAO 2024 ). The application of pesticides to croplands may result in the leaching of toxic substances into groundwater, posing an additional risk to local water supplies (Mateo-Sagasta et al. 2017 ). Application of fertilizers, containing nitrogen, phosphorus, and potassium, is a common practice in conventional crop production, resulting in multiple emission pathways, including air, leaching, and run-off (Hutchings et al. 2023 ). Most GWP impacts attributable to crop cultivation are N 2 O emissions traced to fertilizer applications and emissions attributable to transformations of land cover (Bennetzen et al. 2016 ).

Life cycle assessments (LCAs) enable GWP impacts to be calculated from all production activities, including upstream and downstream activities in the supply chain (Bjørn et al. 2018 ). Additionally, the LCA methodology enables the substance characterization of multiple impact categories (e.g., ecotoxicity and eutrophication), enabling comprehensive environmental impact reporting (Hauschild and Huijbregts 2015 ). The attributional and consequential LCA approaches are the two main assessment classifications in LCA methodology (Weidema 2014 ). The attributional LCA approach is mostly used in environmental accounting, product declarations, and minor systematic decisions, while the consequential approach is intended for large-scale systematic changes and policy decisions (European Commission 2010 ). Land cover transformations are major drivers of GHG emissions and biodiversity loss, and contribute substantially to the agricultural sector’s GWP impact (Rosa et al. 2014 ). The GHG emissions from these transformation activities are often the result of the clearing of forests and the conversion and degradation of land systems, which leads to atmospheric releases of carbon stored in above- and below-ground biomass and soil (Andreson-Teixeira and DeLucia 2011 ). Practitioners of LCA refer to these transformations as land-use changes (LUC), although inclusion in LCA is usually limited to the GHG emissions attributable to a specific transformation activity (BSI 2012 ). The importance of including LUC within agricultural systems has been emphasized in previous LCA studies, most notably in respect of decisions regarding biofuels (Cherubini and Jungmeier 2010 ; Woltjer et al. 2017 ). The importance of LUC in the context of pig feed has also been emphasized, as the inclusion of LUC may increase the GWP impact severalfold (Meul et al. 2012 ; Kebreab et al. 2016 ).

Common LUC classifications methods are the direct (dLUC), indirect (iLUC), and “carbon opportunity cost” (COC) classifications (Persson et al. 2014 ; Searchinger et al. 2018 ). The dLUC assessment methodology enables accounting of past land transformation carbon losses that are attributed to production over a specific time horizon (usually the last 20 years) (BSI 2012 ). The iLUC assessment methodology provides an estimate of GHG emissions as the consequences of production choices in a systematic supply-capacity context relative to static demand imposed by global consumption (Schmidt et al. 2015 ). The COC assessment methodology is based on the opportunity cost principle originating from economics, which provides an estimate of lost carbon sequestration by choosing to continue current production as opposed to abandoning land. The COC method calculates the relative difference in current and natural carbon stocks of soil and vegetation that are attributed to production over a specified time horizon (Searchinger et al. 2018 ). Although land-management practices (e.g., crop rotation and tillage) may result in changes to the carbon stocks of cropland, LCAs generally do not include these stock changes (BSI 2012 ). These LUC assessment methods are all recognized within LCA applications, which are included in the latest draft of the greenhouse gas protocol (GHG Protocol 2022 ). The dLUC assessment method is best suited in attributional LCAs based on the attribution of recent carbon losses to current production (e.g., environmental accounting). A majority of existing dLUC studies and assessment methods statistically attribute carbon losses through deforestation to commodities relying on aggregated LUC data (Carter et al. 2018 ; De Sy et al. 2019 ; Pendrill et al. 2019 ). This approach introduces uncertainties regarding the precise locations of deforestation events and the resulting carbon losses (Bontinck et al. 2020 ). However, the integration of remote-sensing datasets with finer spatio-temporal resolutions significantly enhances the accuracy of the carbon losses attributed to commodity production, offering improvements over traditional statistical methods (Singh and Persson 2024 ). The iLUC assessment method is, on the other hand, best suited for consequential LCAs, providing an estimate of the GWP impacts through the indirect consequences of production choices. The COC assessment method is aligned with the attributional LCA methodology in the context of accounting, although it may also align with consequential LCA methodology in the decision context for climate action (Searchinger et al. 2018 ). These LUC assessment methods are valuable tools within agricultural LCAs, and their inclusion (or exclusion) should be carefully considered based on the specific LCA’s goal and scope.

The majority of environmental impacts in pig production is attributable to the production of feed, the housing of animals, and manure management, with minimal contribution from capital goods (e.g., onsite energy use, machinery, and buildings) (Gislason et al. 2023 ). Although multiple mitigation areas have been discussed in existing LCA literature on pig production, changes in feeding practices are among the most promising mitigation areas (Gislason et al. 2023 ). As the GWP impact of feed mixtures for pigs is mainly influenced by its feed ingredients, including ingredient GWP impacts in the diet formulation may enable cost-effective impact reductions. Feed mixtures for pigs differ in their requirements depending on the developmental stage, which are usually split into three stages for slaughter pig production. The stages are as follows: (1) sow management and nursing of piglets until they reach weaning weight, (2) weaning of piglets from sows until attaining fattening weight, and (3) the fattening of pigs until slaughter weight. In Denmark, after giving birth to a litter of piglets, the sow will typically nurse these piglets for close to 28 days until weaning weight of approximately 7.0 kg. When piglets are weaned, they enter the nursery stage, where they will be housed in temperature-controlled stables until they reach a weight of about 30 kg. Throughout this period, piglets will typically consume two or three different diets that gradually adapt the piglet to consuming vegetable protein and grains. The final stage is the grower-finisher phase, where pigs are fattened from 30 kg to their slaughter weight, which ranges from 110 to 140 kg depending on the system in question. In this period, pigs consume dry feed dispensed in automatic feeders or using a liquid feeding system. The slaughter pig diets primarily consist of plant feed as a mixture of grains (primarily wheat and barley) in addition to the meal by-product of oil-pressing beans or seeds (primarily soybean meal).

Studies that formulate pig’s diet are based on multiple-linear programming, taking into account the individual ingredient cost and nutrient content (van Zanten et al. 2018 ). In multiple-linear programming, an objective function defines the output variable (e.g., the unit of feed), while the decision variables are input variables (e.g., the cost) that are subjected to minimization or maximization (Stark 2012 ). In diet formulation for pigs, the objective function is defined as a feed unit that includes specific nutritional requirements based on constraints, while the decision variable is typically cost.

The nutrient constraints are typically retrieved from nutrient standards at a national level, i.e., the American “Nutrient Requirements of Swine,” the Dutch “Booklet of Feeding Tables for Pigs,” or the Danish Nutrient Standards (National Research Council 2012 ; Tybirk. 2022 ; CVB 2023 ). Formulation of pig feed mixtures require the combined knowledge of nutritional requirements and ideal ingredient compositions in pig feed mixtures, since certain ingredients may only be introduced in minimal quantities without risking digestive issues resulting in reduced growth performance (Landbrug & Fødevarer 2019 ). In modern pig production, the feed conversion ratio and average daily gain and mortality rates are typically monitored to utilize the feed as efficiently as possible. The primary source of non-feed-related GWP impacts consists of emissions of CH 4 , which occur during manure storage and animal housing through enteric (gut) fermentation. Various nitrogen-based emissions (e.g., N 2 O, NH 3 ) originate from pig excretions during housing and manure storage, contributing to multiple environmental impact categories (Sørensen et al. 2023 ). Other emissions of stated significance include non-methane volatile organic compounds (NMVOCs) and particulate matter formation (Amon et al. 2019 ).

This study aims to provide an analysis of the optimal cost and GWP impact of feed mixtures fed to slaughter pigs by applying multiple common LUC assessment methods in calculation of the GWP impact. The analysis results will be used to investigate the potential reduction in the GWP impacts of Danish pig production by means of an LCA comparison of optimized feed mixtures at a cost equal to the average feed mixture used in Denmark.

2 Methodology

This study investigates the optimization of slaughter pig feed mixtures through the minimization of cost and the constraining of GWP impacts based on four separately applied LUC assessment methods. Each LUC assessment method was individually analyzed in terms of changes in cost and ingredient composition based on constraining the GWP impact in multiple steps. Thereafter, cost-equivalent and GWP-minimized feed mixtures were then generated for each applied LUC assessment method and subjected to an LCA comparison with an average feed mixture (baseline) used in Denmark. Two functional units were defined, the first comparing the slaughter pig feed mixtures directly as a slaughter pig feed unit and the second comparing the average Danish pig production system using the optimized feed mixtures. Animal performance and life cycle inventory data were based on published statistics that are representative of Danish production in 2021. Feed ingredients were subjected to sensitivity analyses of the ingredient’s production origins and ingredient constraints applied during feed optimization and formulation. Methodological sensitivity analysis included the addition of iLUC and an investigation of the correlations across the applied LUC assessment methods.

2.1 LCA methodology

All environmental impacts were calculated using attributional LCA methodology, following the ISO 14040 and 14,044 standards (ISO 2006a , b ). Cost-equivalent slaughter pig feed mixtures were compared in two LCAs, the first comparing the slaughter pig feed directly and the second comparing slaughter pig production systems differing only in slaughter pig feed mixtures. The functional unit directly assessing the slaughter pig feed was defined as 100 Danish feed units for slaughter pigs (FU pig ), a comparable unit fulfilling the nutrient requirements of slaughter pigs comparable to 1 kg of barley when completely oxidized (Tybirk et al. 2006 ). The functional unit assessing the slaughter pig production systems is defined as the mass of pig live weight in kilograms (kg*LW) exiting the farm gate, hence excluding all slaughterhouse activities. The system boundary assessing the functional unit of pig live weight does not account for changes in animal performance resulting from the different feed mixtures and is only included to provide a reference of reduction potential towards the entire pig production system. The product system applying the functional unit of FU pig is commonly referred to as “cradle to feed-gate,” including all activities required in the production of a ready-to-eat feed mixture. The product system for assessing slaughter pigs is commonly referred to as “cradle to farm-gate,” including all growth stages and activities from sow to slaughter weight (0–115 kg). The defined baseline slaughter pig feed mixture and the feed mixtures for sows and weaners were based on estimated feed mixtures typically used in Denmark (Tybirk. 2022 ). Feed ingredients are purchased with no crop production as part of the foreground system; therefore, a minimal contribution is expected from capital goods (stable construction, electricity, farming equipment) resulting in the exclusion of these activities from the foreground system. Feed ingredient life cycle inventories were retrieved from the Agri-footprint 6.3 economically allocated database, using Danish market mix processes (Mérieux NutriSciences | Blonk 2024 ). Statistical data on housing types and manure management systems were collected from the Danish national inventory reports for 2022 and 2023, verified by specialists at SEGES Innovation P/S (Nielsen et al. 2022 , Nielsen et al. 2023 ). Productivity data on feed conversion ratios, litter sizes, and growth and mortality rates for Danish pig production in 2021 was retrieved from a SEGES Innovation P/S report (Hansen 2021 ).

Figure 1 illustrates the product systems, including the emissions modelled as part of the foreground system for animal housing and manure storage, all based on IPCC and EMEP calculation models (Amon et al. 2019 ; Gavrilova et al. 2019 ). Sow multifunctionality (culled sows and piglets) is treated by economic allocations based on previous 5-year average prices, while manure is treated as a waste flow (cutoff) in alignment with the Agri-footprint 6.3 methodology (Landbrug & Fødevarer 2024 , Blonk et al. 2022 ). OpenLCA 2.0.3 software was used for inventory modelling and impact assessments using a modified version of the ReCiPe 2016 (H) midpoints and endpoints (Huijbregts et al. 2016 , Green Delta 2023 ). The modification of the ReCiPe 2016 (H) methods included the implementation of multiple GWP impact (sub-)categories for characterizing GWP impacts depending on the LUC assessment method in question. Additionally, as regionalized characterization factors for Danish NH 3 flows were missing for acidification impacts, they were included manually to provide representative acidification impacts. Details of inventory data, emission models, applied emission factors, and the characterization factors applied in modifications to the impact assessment method are available in the supplementary information (Online resource 1 & 2 ).

Illustration of the system boundaries of the two product systems expressed in the functional units of slaughter pig feed unit (FU pig ) and kilograms of pig live weight (kg*LW)

2.2 Methods assessing land-use change

Four LUC assessment methods were defined and included in this study as specified in Table 1 , resulting in four separate feed optimization analyses and LCA results. Feed ingredient inventories were based on Danish market mix processes for the Agri-footprint 6.3 feed database, which provide disaggregated elementary flows (e.g., emissions), including separated dLUC flows. These elementary flows were utilized in addition to newly added LUC flows generated for the additional LUC assessment methods, all expressed as CO 2 emissions. The differences between the LUC assessment methods were only the characterization values applied to the GWP impact for the existing or newly generated LUC flows. The additions of new LUC flows were limited to crop ingredient inventory processes, with no additional LUC flows provided for supplements (minerals and free amino acids). Applying the modifications of ReCiPe 2016 (H) midpoint in the various LUC flows enabled the environmental impacts of all LUC methods for ingredients, feed mixtures, and the entire pig production system to be calculated. The “noLUC” assessment method included no characterization of LUC flows on the GWP impact, while including the standard characterization values of all other elementary flows, including peat-soil drainage emissions. All subsequent LUC assessment methods include the characterization of flows described for “noLUC,” in addition to their unique LUC flows characterized towards the GWP impact. The “dLUC a ” assessment method included characterization of the default land transformation flows provided by the Agri-footprint 6.3 database. The “dLUC b ” assessment method characterized a newly added flow based on a model that combined geospatial datasets with agricultural statistics (i.e., a combination of direct and statistical land attribution approaches) for assessing the carbon losses through land transformation (Singh and Persson 2024 ). To ensure homogeneity and fair comparability of the two dLUC assessment methods, carbon losses attributable to crop land (in hectares) were attributed to individual crop products (in kg) for the dLUC b assessment method using the PAS2050 guideline and FAO statistics data (BSI 2012 ; FAO 2022 ). The LUC assessment method “COC” characterized a newly added flow that was calculated using the LPJmL model to estimate current and native carbon stocks (Searchinger et al. 2018 ). Calculation of COC requires the difference in carbon stock to be attributed over a specific time horizon by discounting or amortization over a period of 80 and 30 years, respectively. Details of the newly added flows and value per kg of ingredient are available in the supplementary information (Online resource 2 )

2.3 Feed optimization

The steps needed to enable feed optimization, including the cost and GWP impacts, are presented visually in Fig. 2 . The first steps were development of the life cycle inventory for ingredients including LUC (Sect. 2.2), and was followed by a calculation of the resulting GWP impacts for all ingredients and LUC assessment methods. Data on the ingredient’s nutrients, cost, and GWP impacts were then uploaded to the software WinOpti (v2023.1.8628.14970), where optimized feed mixtures were generated and analyzed (AgroVision 2024 ). Verification of successful implementation was performed by comparing feed mixture GWP impacts reported by WinOpti to those reported by OpenLCA. After verification that optimization had been successful, analysis was performed and followed by an LCA comparison of cost-equivalent and GWP impact-optimized slaughter pig feed mixtures using the two different functional units. Table 2 displays the feed ingredients used in this study, which consist of 15 crop products as feed ingredients, in addition to five essential free amino acid supplements and three mineral supplements. Free amino acids only balance the amino acid profile of the feed mix, being limited to this purpose within the feed mixture formulation. The analysis and changes were limited to slaughter pig feed to avoid increasing the study’s complexity, but were substantiated by majority of feed-related environmental impacts attributed to slaughter pig feed (Gislason et al. 2023 ). Data sources of ingredient nutrient contents were based on a combination of primary data and proprietary and/or confidential data (AgroVision 2024 ). Data on average feed ingredient prices for 2021 were acquired through correspondence with the Danish feed distributor Vestjyllands Andel A.m.b.a. (Ehmsen 2023 ).

The framework showcasing the steps needed to enable the inclusion of GWP impacts into the feed formulation for optimization

The objective function was defined as 100 slaughter pig feed units (FU pig ), a unit that typically ranges between 1.0 and 1.1 FU pig per kg of total ingredient mass (wet weight). As a technical limitation of WinOpti required constraining the GWP impacts relative to the ingredients’ dry matter (DM) content, an additional constraint was applied at precisely 1.20 FU pig /kg*DM to ensure accuracy. The allowable ingredient limits within the feed mixtures were based on nutritional guidelines published by SEGES innovation P/S and the specialists participating in this study (Online resource 1 ). These include a minimum mass constraint of 15% barley and 1% vegetable oil content, representing local feeding practices (barley) and ensuring that feed pellets can be produced from the feed mixtures (oil). The analysis began by formulating an “economic-optimum” feed mixture, which represents the lowest cost feed mixture that can be achieved while still satisfying all nutritional and ingredient constraints. The economic-optimum feed mixture is identical for all LUC assessment methods since no maximum constraints are placed on GWP impacts. The economic-optimum feed mixtures resulting in a GWP impact were then gradually constrained for each LUC assessment method until arriving at each LUC assessment method’s “GWP-optimum,” representing the lowest GWP impact achievable for a feed mixture while still satisfying all nutritional and ingredient constraints. These two “optimum” feed mixtures provided two key pieces of information about all optimized feed mixtures. The first is the lowest cost achievable and its resulting GWP impact, and the second is the lowest GWP impact achievable and its resulting cost. This means that all possible combinations of optimal feed mixtures are within these GWP impact values, providing valuable information of the relationship of minimal cost and GWP impact. Multiple feed mixtures were generated for each LUC assessment method at GWP impact constraints between the two optimum values, followed by collecting data on feed mixture costs, GWP impacts, and ingredient compositions. The data collected on the feed mixtures were then analyzed to identity relationships, followed by formulation of the cost-equivalent and GWP-minimized slaughter pig feed mixtures used in the LCA comparison.

2.4 Sensitivity analyses

Feed ingredient constraints and production origins were subjected to sensitivity analyses to investigate their influence on the resulting cost and their GWP impacts. An important distinction among ingredient constraints is that they are not defined by the feed unit and therefore do not influence the nutritional requirements, since there are applied specifically to avoid potential digestive issues that result in reduced growth performance. This influence of the ingredient constraints was investigated by repeating the analysis with the complete removal of ingredient constraints, followed by a comparison with the main results. The removal of constraints is aimed at providing insights into the importance of nutritional research, and more specifically to its influence when minimizing the costs and GWP impacts of pig feed mixtures. Although these feed mixtures are currently unusable in practice, their analysis provides insights into the potential that future nutritional research may unlock. Since the individual feed ingredients may differ in production origins and exhibit substantial differences in nutritional composition and GWP impacts, the ingredient production origin was subjected to a sensitivity analysis performed by replacing Danish market mix ingredients with multiple macro-regional ingredient processes at continental scales and resolutions (e.g., European barley, South American maize). These macro-regional processes were modelled for ingredients originating from different regions, included if a specific region supplies a minimum of 1% of a specific ingredient global net supply, as further explained in the supplementary information (Online resource 1 ). Since the influence of LUC assessment methodologies on the results is an area of interest for this research, the iLUC assessment method was included, and a correlation investigation of all LUC assessment methods was performed. The iLUC assessment method was not combined with the consequential LCA methodology (as recommended) and applied the identical attributional system boundary as applied for the other LUC assessment methodologies. The decision to include iLUC for sensitivity analysis with attributional LCA methodology is due to the interest in comparison of results to the other LUC assessment methods through the correlation investigation. The correlation investigation was performed through comparing optimized feed mixtures for each LUC assessment method to the results when applying the other LUC assessment methods. The correlation investigation was performed to investigate the potential correlation between methods, as optimizing for one LUC assessment method may have positive, negative, or alternatively no influence towards another LUC assessment method.

3 Results and discussion

3.1 feed analysis: gwp impacts and costs.

Figure 3 provides a visual representation of the relationship between the cost and GWP impact for each LUC assessment method, based on collected data from the various feed mixtures. To reiterate, the economic-optimum feed mixture is indicated by the lowest cost, while the GWP-optimum feed mixture is indicated by the lowest GWP impact (see Sect. 2.3 for details). The economic-optimum feed mixture is identical across LUC assessment methods and resulted in a cost of 148.4 DKK per 100 FU pig . The noLUC assessment method resulted in the lowest GWP impacts, with respective GWP optima and economic optima at 50.4 and 54.6 kg CO 2 -eq per 100 FU pig , respectively. The dLUC a assessment method exhibited a higher GWP impact of both optima and their range compared to the noLUC assessment method, with the GWP optimum and economic optimum at 55.1 and 77.6 kg CO 2 -eq per 100 FU pig , respectively. The dLUC b assessment method showed somewhat lower GWP impacts compared to its dLUC a counterpart, with the GWP optimum and economic optimum at 53.1 and 56.5 kg CO 2 -eq per 100 FU pig , respectively. The GWP impacts applying the COC assessment method were substantially higher compared to the other LUC assessment methods, with the GWP optimum and economic optimum at 240 and 390 kg CO 2 -eq per 100 FU pig , respectively.

Plotted data collected from optimized feed mixtures, displaying the GWP impact (y-axis) and cost in DKK per 100 FU pig (x-axis). The datapoints represent the optimal diet composition with the lowest cost at differing ranges of maximally constrained GWP impact, with the baseline cost of 152.2 indicated by the dashed line. Note that GWP impact (y-axis) differs in scale between A and B

Figure 4 displays changes in compositions of optimal feed mixtures based on changes in GWP impacts. The economical optimum feed mixture is composed of 40% rye, 39% barley, 10% rapeseed meal, 7.7% soybean meal, 0.7% palm oil, and 0.3% soy oil. All feed mixtures contained precisely 1.0% vegetable oil and approximately 2.0% mineral supplements and roughly 0.5% of free amino acids. Reductions in GWP impacts applying the noLUC assessment method (Fig. 4 A) are first attributed to changing the oil source from palm to soy (not visible on graph), followed by a reduction in barley content and increases in both triticale and soybean meal. Achieving maximum reductions by applying the noLUC assessment method required introducing wheat, broad beans, maize, and sunflower meal into the feed mix. Reductions in GWP impacts applying the dLUC a assessment method (Fig. 4 B) begin with a shift from palm to soy oil and are then followed by replacing barley and soybean meal in exchange for triticale and sunflower meal, and later including broad beans and replacing the soy oil with rapeseed oil. Reductions in GWP impacts applying the dLUC b assessment method (Fig. 4 C) follow a similar pattern to the noLUC assessment method, although including sunflower meal rather than broad beans. This similarity in ingredient changes in noLUC and dLUC b is primarily due to GWP impacts driven by non-LUC-related emissions for both methods. Reductions in GWP impacts applying the COC assessment method (Fig. 4 D) are achieved by replacing rye content with barley, followed by the addition of triticale and wheat, and finally reductions of barley in favor of increased maize and sunflower meal.

Changes in the composition of optimal feed mixtures relative to changes in GWP impact

The resulting cost of the baseline feed mixture (average in Denmark) was 152.2 DKK per 100 FU pig ; therefore, optimized feed mixtures were generated at this cost for the LCA comparison. Feed mixtures generated for LCA at the baseline price are indicated in Figs. 3 and 4 by the dotted line and detailed in the supplementary data file (Online resource 2 ). In particular, all feed mixtures generated for LCA comparisons included the maximum content of rapeseed meal at 10%, with most preferring soybean oil to satisfy the oil requirements and often including a high rye content. The feed mixture generated by applying the noLUC assessment method included soybean oil and grains of rye, barley, and triticale, including a 21% meal content consisting primarily of rapeseed and soybean meal, in addition to minimal sunflower meal content. The feed mixture generated by applying the dLUC a assessment method consisted of a similar grain profile, although including rapeseed oil to satisfy oil requirements in addition to a 9% broad bean content. Additionally, this contained a 16% meal content consisting primarily of rapeseed and sunflower meal and a minimal soybean meal content. The feed mixture generated applying the dLUC b assessment method had a similar grain profile to noLUC, although including wheat instead of triticale with a 19% meal content that consisted of rapeseed, sunflower, and soybean meals. The feed mixture generated by applying the COC assessment method included a grain profile that differed from the other methods, including the maximum allowable barley content (70%) and a 16% meal content consisting of rapeseed and soybean meal.

3.2 LCA impact results

This section compares the costs of the LCA comparison slaughter pig feed mixtures (152.2 DKK per 100 FU pig ). Impact results applying the ReCiPe 2016 (H) midpoint impact assessment method expressed per 100 FU pig and per 1 kg*LW are presented in Table 3 . The reductions achieved by applying the noLUC and dLUC b assessment methods resulted in the lowest overall GWP impact reductions when compared to the baseline, respectively at 5.6% and 6.2% to the feed unit, and 2.4% and 2.7% to the pig live weight. The dLUC a assessment method resulted in the highest overall reduction to GWP impacts of all LUC assessment methods, at 27% to the feed unit and 13% to the pig live weight when compared to the baseline. The COC assessment method resulted in a GWP impact reduction of 15% by applying the feed unit and 10% by applying the pig live weight compared to the baseline. An interesting finding is that optimizing for one LUC assessment method did not necessarily provide a performance advantage for the GWP impact of another LUC assessment method. Furthermore, while the optimized feed mixtures lowered the GWP impact of a specific LUC assessment method, increases were observed for other impact categories at various magnitudes, notably in the ecotoxicity impact categories. The largest burden shift was observed for the dLUC a optimized feed mixture, where increases of 23%, 26%, and 56% in freshwater, marine, and terrestrial ecotoxicity impact categories were observed when compared to the baseline, respectively. On the other hand, lower impacts were observed in water use, land use, marine eutrophication, terrestrial acidification, and non-carcinogenic human toxicity in the GWP-optimized feed mixtures compared to the baseline. ReCiPe 2016 (H) endpoint indicators and weighted and normalized single scores are presented for 100 FUpig and 1 kg*LW in Table 4 . Endpoint and single score results include the characterization, weighing, and normalization of LUC-induced elementary flows specific to the LUC assessment method. Despite the substantial increase in ecotoxicity impacts, an overall reduction to endpoint and single-score indicators was observable across the optimized feed mixtures, with exception of the resource depletion indicator. Applying the functional unit 100 FU pig resulted in a reduction of 2.8–24% to ecosystem damage, 7.4–15% to human health impact, and 7.4–15% applying the weighed and normalized single score when compared to the baseline. Applying the functional unit of 1 kg*LW resulted in a reduction of 1.4–11% to ecosystem damage, 4.2–8.4% to human health impact, and 4.1–8.5% applying the weighed and normalized single score when compared to the baseline. Figure 5 visualizes the contribution to GWP impacts for the baseline and optimized pig production systems for all LUC assessment methods when applying the functional unit of 1 kg*LW. The largest contributors to GWP impacts applying the noLUC and dLUC b assessment methods were feed production and manure management. Contributions from LUC-related activities were only substantial to GWP impacts when applying the dLUC a and COC assessment methods, contributing 26% of the baseline and 13% of the optimized systems when applying dLUC a , and contributing 74% to the baseline system and 64% to the optimized system when applying COC. Detailed results of the impact assessment are available in the supplementary information (Online resource 2 ).

Contribution analysis of sources to GWP impacts of the pig life cycle, applying all LUC assessment methods. A The contribution of the baseline pig production system for each LUC assessment method. B The pig production system including slaughter pig feed mixtures optimized for the applied LUC method, presented relative to the correspondent baseline scenario. GWP impacts are expressed in kg*CO 2 -eq per kg*LW, and they are provided on top of the bars, for each LUC assessment method, and for both A and B

3.3 Sensitivity analysis

3.3.1 ingredient constraints and the origin of production.

This section investigates the influence of feed ingredient constraints applied during feed formulation, and the influence of the ingredient origin of production by specifying source regions. For assessing the sensitivity of nutritional constraints, feed ingredient constraints were removed from the optimization entirely; therefore, no specific feed ingredients were defined in terms of their minimal or maximum contents. To reiterate, the removal of ingredient constraints only applied to specific feed ingredient minimum and maximum contents and does not influence any nutrients defined by the feed unit, since these constraints are only introduced to avoid potential digestive issues that reduce animal performance. For assessing the sensitivity of feed ingredients’ production origins, the Danish market mix was replaced by macro-regional ingredient processes on a continental scale (see Sect. 2.4, online resource 2 ). Figure 6 provides a visual representation of the resulting cost and GWP impacts of both ingredient changes in a side-by-side comparison of the original results, although at differing scales depending on the LUC assessment method.

Plotted data collected from optimized feed mixtures applying ingredient sensitivity parameters, displaying the GWP impact (y-axis) and cost in DKK per 100 FU pig (x-axis), although at differing scales. The four plots presented ( A , B , C , and D ) use different LUC assessment methods, as indicated by the figures’ titles. The baseline feed mixture cost is indicated by the dashed line crossing the y-axis at 152.2 DKK per 100 FU pig

Removing feed ingredient constraints resulted in an economically optimal feed mixture cost of 143.2 DKK per 100 FU pig , composed of approximately 80% rye and 17% meal content split between rapeseed and soybean meal, with the remaining ~ 3% consisting of mineral supplements and free amino acids. The preference for rye can be attributed to its nutritional content combined with the price data utilized for the optimization. Removal of ingredient constraints resulted in substantial changes to the cost and GWP impact for all applied LUC assessment methods. No feed mixture could be formulated at the baseline cost when applying the dLUC b assessment method, as the cost of the GWP optimal feed mixture was below this point. The economically optimal diet composition exhibited a greatly increased GWP impact when applying the COC assessment method, although a substantial reduction was observed when comparing GWP impacts relative to cost. Differences in feed mixtures were primarily observed through the complete absence of oils as ingredients, combined with rye and rapeseed meal content exceeding the original constraints. The low preference for oils and high preference for meal is likely to be influenced by sensitivities in applying economic allocations for calculation of the different ingredients’ GWP impacts, since prices of oils are considerably higher than the prices of meals. Therefore, applying economical allocation results in a twofold sensitivity depending on the cost ratio of the oil and meal of specific crops, resulting in both optimization objectives (GWP and cost) being determined by cost. This highlights the sensitivity of cost when applying economic allocations in optimization studies minimizing both cost and environmental impacts, since cost influences both optimization objectives that is highly relevant for oil crop ingredients.

Replacing the market mix datasets with macro-regional datasets of feed ingredients resulted in an economically optimal feed mixture cost of 148.6 DKK per 100 FU pig , composed of approximately 40% rye, 39% barley, 10% rapeseed meal, 7.5% soybean meal, and 1% soybean oil satisfying the oil requirement. The rye and soy products originated from Europe and South America, respectively, while the barley and rapeseed meal originated from a mix between North America and Denmark. Applying the noLUC and dLUC b assessment methods resulted in a higher GWP impact at the economic optimum, with relatively lower GWP impacts observed at higher cost ranges when compared to the main results. Applying the dLUC a assessment method resulted in a consistently lower GWP impact relative to cost when compared to the main results, although minimal differences are observed at approximately 155 DKK per 100 FU pig . Applying the COC assessment method provided a consistent reduction in the GWP impact relative to cost, with a 25% reduction to the economical-optimal GWP impact possible with a 1% increase in cost. This indicates that, for certain applied LUC methods, the selection of a feed ingredient’s origin may enable a greater overall reduction in GWP, although possibly at greater cost. Ingredient changes relative to GWP impact changes for both ingredient sensitivity analyses are provided in the supplementary information (Online resource 1 & 2 ).

3.3.2 LUC assessment methods

Inclusion of the iLUC assessment method was performed identically to the other methods (see Sect. 2.2), i.e., by applying iLUC data acquired from the Bonsai database currently in development at Aalborg University (Schmidt et al. 2015 , Aalborg University 2024 ). Figure 7 displays the relationship of cost, GWP impact, and ingredient changes for iLUC. The baseline feed mixture GWP impact was 88.1 kg CO 2 -eq per 100 FU pig , while the optimized impact at the same price point was 85.3 kg CO 2 -eq per 100 FU pig . This results in a 3.2% reduction when compared to the baseline, the lowest reduction achievable for all included LUC assessment methods. The optimized feed mixture at the baseline cost (152.2 DKK) contained 34% rye, 23% wheat, 15% barley, 10% rapeseed meal, 7.4% soybean meal, 6.7% oats, and 1% soybean oil content.

A Potted data collected from the optimized iLUC feed mixtures, displaying the GWP impact (y-axis) and cost in DKK per 100 FU pig (x-axis). The datapoints represent the optimal diet composition with the lowest cost at different ranges of maximally constrained GWP impact. B Changes in the composition of optimal feed mixture for iLUC relative to changes in GWP impact

To investigate potential correlations between methods, we included a second data collection exercise of GWP impacts across LUC assessment methods to investigate potential similarities (e.g., correlations) in results optimization. Figure 8 displays the relative change in GWP impact to the economic optimum (at 0%) and the GWP optimum (at − 100%), where + 100% indicates that the GWP impact has increased equal to the difference between the economic optimum and the GWP optimum. Optimizing for GWP impacts applying the noLUC assessment method resulted in relative GWP impact reductions for dLUC b and iLUC, with increased GWP impacts for dLUC a at high cost ranges. Optimizing for GWP impacts applying the dLUC a assessment method resulted in variable results depending on the method in question, and exhibited a 100% relative increase to iLUC at approximately 153 DKK per 100 FU pig , followed by a 50% relative decrease at 161 DKK per 100 FU pig . Optimizing for GWP impacts applying the dLUC b assessment method resulted in relatively linear reductions of GWP impacts when applying the noLUC and iLUC methods. Additionally, optimizing for dLUC b had no influence on COC and a variable influence on dLUC b depending on cost range. Surprisingly, optimizing for GWP impacts applying COC assessment methods resulted in suboptimal formulations with all other methods, plus a relative increase of GWP impacts to all other methods of approximately 40% at the cost point of 151 DKK per 100 FU pig . Optimizing for GWP impacts applying the iLUC assessment method varied depending on cost, although this method appears to result in a relative reduction compared to all other methods regarding GWP impact, with the exception of dLUC a at high cost range. In some cases, a non-linear relationship was observed through a GWP impact reduction at one point followed by an increase at another, which is likely explained by the introduction of a specific feed ingredient providing a mutual reduction in GWP impacts. The non-linearity may provide some insight into the best performing feed ingredients at specific price points across multiple methods. A prime example of this is the reduction of palm oil in favor of soybean oil, a change that is apparently beneficial across all applied LUC assessment methods.

Change in GWP impact across LUC assessment method optimizations. The title of each sub-figure indicates the chosen LUC assessment method for the calculation of GWP impacts that is subjected to maximization constraining. *The GWP impact of the economic-optimum feed mixture for the LUC assessment method of interest (i.e., that one reported in the titles of each sub-figure) is positioned at 0%, and the maximum reduction achieved indicated by the GWP optimum feed at − 100%

3.4 Implications of results and limitations

This study required handling multiple parameters that exhibit natural variations, many of which could not be investigated, mainly because of a lack of data combined with technical limitations. The feed ingredient cost is a key parameter with a substantial influence on the study’s results that could not be subjected to sensitivity analysis, a parameter well known to be a fluctuating variable. Inclusion of cost variations as a sensitivity scenario would have required the determination of local prices at a given time point and corrections for transport and storage. In practice, different feed mixtures can result in differences in growth rates for pigs (e.g., feed conversion ratios and growth rates), which requires large and expensive trials for performance validations that were not conducted to validate the performance of the hypothetical feed mixtures treated in this study. The LCA results and inventory data used for optimization are limited to average Danish production in 2021, and therefore represent a hypothetical improvement on the past. The results should not be used for any decision-support context, which would otherwise have required a consequential LCA. The findings provide further evidence that changes in pig feed may enable cost-effective reductions of the environmental impacts of pig production, although a key limitation of these results is that no evaluation was performed of the feed mixtures influence towards animal performance metrics (e.g., feed conversion ratios, growth rates). A key finding is the substantial influence of the applied LUC assessment method on the magnitude of reductions of GWP impacts, which are more pronounced when applying methods resulting in high LUC contributions. Applying the dLUC a assessment method resulted in the greatest reductions compared to the baseline of all the methods covered in this study, indicating that feed changes are likely to be a beneficial consideration when considering this assessment method. The achievable reduction may become apparent in future accounting studies through a growing awareness of feed suppliers, resulting in the avoidance of importing soybeans cultivated in recently deforested regions (DAKOFO 2021 ). It is important to consider the result differences between dLUC a and dLUC b should not influence the selection of one dLUC assessment method to another, but rather emphasize the need for further research and consensus of the specific dLUC assessment method to apply in agricultural LCAs. Although applying the COC assessment method resulted in lower-than-expected reductions when compared to the baseline, considering the broad range of the GWP impact for optimized feed mixtures for this LUC assessment method, the broad range of the COC assessment method indicates that greater reductions may be achievable for this method when considering a different baseline for comparison. However, we emphasize that the selection of LUC assessment methods should be aligned with the assessment’s goal and scope, as the inclusion of these methods provides additional answers in relation to a system’s GWP impact.

4 Conclusions

This study has provided an analysis of the environmental impacts of optimizing for cost and the GWP impacts of slaughter pig feed mixtures by applying multiple LUC assessment methods. Analysis of GWP and cost optima revealed that initial reductions of GWP impacts will be very cost-effective for non-optimized or cost-optimized feed mixtures, but costs will increase exponentially when approaching the lowest GWP impact feed mixtures (GWP-optima). The inclusion of GWP impacts in the cost optimizations of slaughter pig feed can provide a substantial GWP impact reduction at no additional cost, and we therefore encourage its inclusion in future feed formulation practices. Two LCAs were conducted for GWP optimized feed mixtures, generated at cost equal to the average feed mixture in Denmark that additionally served at the baseline for LCA comparison. The two LCAs compared the slaughter pig feed directly and the feed included in a pig’s life cycle. Depending on the LUC assessment method in question, GWP impacts ranged from 5.6 to 27% for the feed unit and 2.4 to 13% for the pig’s life cycle when compared to the baseline. Limiting the environmental impact optimization to GWP alone may result in increases in the impacts of other impact categories, demonstrated in this study to be up to 56%. Despite the increase in other impact categories, the optimization of GWP impacts resulted in a reduction in endpoints and single-score environmental indicators. Although the results of this study suggest that GWP impact is a promising decision variable in environmental feed optimization, future feed optimization studies should consider the inclusion of multiple impact categories, or alternatively apply endpoint indicators. In addition to the findings, we emphasize that the choice of LUC assessment method should be defined on the basis of the LCA’s goal and scope, and therefore of the intended use of the results.

Data availability

Additional data can be made available at request to the corresponding author, with exception of confidential data from WinOpti and the developing pig LCA model applied in this study.

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Acknowledgements

The authors wish to express their sincere gratitude to the Innovation Fund Denmark, the Otto Mønsted Fund, and the Augustinus Fund for providing the support and funding that made this project and study a reality. In addition, we want to thank Dr. Robert Parkin for his valuable contribution to improve the written language of this paper.

Open access funding provided by University of Southern Denmark This research is part of an industrial PhD project funded by the SEGES Innovation and Innovation Fund Denmark (grant number: 1044-00035B). The University of Southern Denmark, SEGES Innovation, and Chalmers University of Technology have contributed to the study design, data collection and analysis, the decision to publish, and the preparation of the manuscript in accordance with the author list. Additional funding was obtained from the Otto Mønsted Fund (23–70-2013) and the Augustinus Fund (23–2575) to cover the expenses of the external research trip.

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Styrmir Gislason, Finn Udesen & Alberto Maresca

Livestock, SEGES Innovation P/S, Aarhus, Denmark

Thomas Sønderby Bruun

Department of Green Technology, University of Southern Denmark - SDU Life Cycle Engineering, Odense, Denmark

Styrmir Gislason & Morten Birkved

Physical Resource Theory, Department of Space, Earth and Environment, Chalmers University of Technology, Gothenburg, Sweden

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Contributions

Conceptualization: Styrmir Gislason, Alberto Maresca, Finn Udesen. Methodology: Styrmir Gislason, Alberto Maresca, Stefan Wirsenius, Morten Birkved, Finn Udesen. Data curation and software: Styrmir Gislason, Thomas Sønderby Bruun. Formal analysis and investigation: Styrmir Gislason, Thomas Sønderby Bruun, Stefan Wirsenius, Chandrakant Singh. Writing—original draft preparation: Styrmir Gislason, Alberto Maresca. Writing—review and editing: Alberto Maresca, Morten Birkved, Styrmir Gislason, Stefan Wirsenius, Thomas Sønderby Bruun, Chandrakant Singh, Finn Udesen. Funding acquisition: Styrmir Gislason, Finn Udesen, Morten Birkved, Alberto Maresca. Resources: Stefan Wirsenius, Chandrakant Singh, Thomas Sønderby Bruun, Finn Udesen. Supervision: Alberto Maresca, Stefan Wirsenius, Morten Birkved.

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Gislason, S., Bruun, T.S., Wirsenius, S. et al. How methods to assess land-use changes influence the resulting global warming potential and cost of optimized diets: a case study on Danish pigs applying life cycle assessment methodology. Int J Life Cycle Assess (2024). https://doi.org/10.1007/s11367-024-02356-0

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