Reducing COGS: Practical Strategies for Small Retailers and Manufacturers

Why focus on reducing COGS?

Lowering COGS increases gross profit, which gives you more room to cover operating expenses, invest in growth, or improve margins. For small businesses, even modest reductions in COGS per unit can meaningfully improve overall profitability.

1. Negotiate better supplier terms

One of the fastest levers is the cost you pay for inventory. Communicate projected volumes, ask for discounts for larger orders, or request longer payment terms to improve cash flow. Consider consolidating suppliers to gain bargaining power, but weigh that against the risks of single-supplier dependence.

2. Buy smarter—optimize order quantities

Ordering too frequently increases freight costs; ordering too much ties up cash and increases storage costs and risk of obsolescence. Use basic inventory metrics like Economic Order Quantity (EOQ) and monitor demand patterns to set smarter reorder points.

3. Reduce waste and shrinkage

Shrinkage from theft, damage, or miscounts inflates COGS because you effectively lose inventory without sale. Implement loss-prevention measures: secure storage, clear processes for receiving and picking, regular cycle counts, and staff training. For perishable goods, better rotation (FIFO) reduces spoilage.

4. Improve production efficiency (manufacturers)

For manufacturers, reducing direct labor hours per unit and lowering scrap rates reduces COGS. Invest in worker training, preventive maintenance for machinery, and production layout improvements to reduce non-productive time.

5. Optimize packaging and freight

Packaging choices affect unit cost and shipping efficiency. Right-size packaging to reduce dimensional weight charges and consider lighter or reusable materials that lower shipping costs. Consolidate shipments where possible and compare freight carriers regularly.

6. Use technology to gain visibility

Inventory and warehouse management systems (WMS) and integrated accounting software help track real-time inventory, reduce errors, and improve forecasting. Accurate data prevents over-ordering and reduces costly stockouts or rush shipments.

7. Re-evaluate product mix and pricing

Some SKUs carry much higher COGS relative to their price. Analyze gross margin by SKU and consider focusing on higher-margin items or adjusting prices where the market allows. Bundling can also increase perceived value without dramatically increasing COGS.

8. Outsource strategically

Contract manufacturing or third-party fulfillment (3PL) can lower costs through scale, expertise, and better freight rates. However, ensure that outsourcing doesn’t increase lead times or reduce quality to the point where costs elsewhere rise.

9. Continuous improvement and process mapping

Map receiving, storage, picking, packing, and shipping processes to identify inefficiencies. Small process tweaks—reducing travel time in a warehouse, improving pick-paths, or standardizing pack materials—add up over time.

10. Monitor the right metrics

Track metrics that reveal COGS drivers: gross margin by product, inventory turnover ratio, days sales of inventory (DSI), scrap rates (manufacturing), and freight cost per order. Regularly reviewing these metrics helps spot trends before they become problems.

Common pitfalls when cutting COGS

• Cutting quality: Lowering COGS at the expense of product quality can hurt sales and brand reputation long-term.
• Ignoring customer experience: Saving on packaging or fulfillment that leads to damaged goods or slow delivery can cost more in returns and lost customers.
• Short-term fixes vs long-term strategy: Deep discounting or one-off supplier bargains might not be sustainable. Aim for systemic improvements.

Real-world example

A small apparel retailer negotiated a reduced per-unit price by committing to higher quarterly volumes and agreed to accept slightly longer lead times. They also optimized packaging dimensions to reduce carrier surcharges. Together these changes lowered their COGS by 8%, which directly lifted gross margin and funded a modest increase in marketing spend.

Implementing changes—where to start

Begin with a simple SKU-level analysis to identify the biggest contributors to COGS and the SKUs with the thinnest margins. Prioritize changes that are low-effort/high-impact: renegotiating freight, correcting inventory inaccuracies, or implementing cycle counts. Measure results and scale the successful tactics.

Summary



Reducing COGS doesn’t require dramatic action. Small, consistent improvements across sourcing, inventory management, production efficiency, and logistics compound into meaningful savings. Balance cost-cutting with quality and customer experience, and use data and technology to guide decisions.