Nov

24

Cost reduction methods that achieve results.

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Saving costs rarely goes out of fashion. Wasteful and bureaucratic processes which lack appropriate compliancy and controls result in higher cost which in turn results in reduced profit. For many organizations this is sufficient rationale to develop cost reduction strategies. Higher cost is also inextricably linked with agility and efficiency. Inefficient processes more often than not affect competitiveness and as such provide even greater rationale to develop appropriate steps to reduce cost.

Appropriate thought and strategic focus needs to go into developing cost reduction strategies. Cutting cost for the sake of it can be detrimental – unknowingly reducing aspects of the business that actually add value. Savings should be linked to improving. The business still needs to remain agile with sufficient resources to react to customer requirement.

But if your embarking on cost reduction initiatives where should you start? Firstly of key importance is – know your numbers – knowledge about your product – its key cost drivers is vital if your are to focus on areas that will bring about change. Secondly develop the knowledge about the processes that support your production – whether that’s design, manufacture or the processes relating to material flow such as procurement and logistics.

Many businesses when faced with a cost reduction drive carry out a slash and burn technique, reducing staff numbers and pushing suppliers for significant discount (whilst often maintaining existing contractual terms). Far better is to a considered and thought through strategy that focus’s on key cost drivers (and value add to the business) and sets out a scheduled for change. For many organizations this will include the following

Process Optimization

Process optimization is the activity where processes are reconfigured in order to improve a parameter (cost or performance) whilst not enhancing or realizing risk. Optimization can often be facilitated through re-engineered processes, kaizen/six sigma events or in many cases through introducing new tools or software (P2P for example). Cost reduction is a common goal for process optimization and there are dedicated off the shelf tools and methods that can be used to help realize benefits.

Outsourcing

Outsourcing refers to the process of utilizing a third party organization to undertake a service that is currently provided in house usually for either enhanced levels of service or for reduced cost. There are a variety of processes that can be outsourced from procurement, logistics to financial services. Outsourcing has become commonplace but there are still pitfalls. Businesses must be sure of service levels, capabilities and cost when passing work to a third party. Consideration should also be given to the strategic importance of the process being outsourced – outsourcing core capabilities can often dilute the end product or in worst case reduce the competitiveness of the business. However implemented correctly outsourcing offers a simple and effective method of reducing cost.

Improved Sourcing

One of the key opportunities for cost reduction is strategic sourcing. Optimizing the demand signal, the supplier base and your strategic relationships can reap significant reward. For many businesses savings can be realized through tendering processes for key commodities or establishing formal contracts or long term agreements for materials. Many organizations will benefit from simple but effective techniques such as consolidating spend into fewer suppliers or from reviewing the geographical spread of suppliers and incorporating more suppliers in emerging economies.

Design to cost/manufacture

It should not be forgotten that one the principle cost driver within a business is the product. Design to cost or design to manufacture workshops can produce a variety of initiatives – from improving assembly times, through to swapping out components for cheaper alternatives. The success of design to cost depends upon where the product is in its lifecycle, impacts to serviceability and principally whether changes are cost effective to deploy.

Summary

Cost saving initiatives are here to stay – businesses need to develop a strategic approach– slash and burn cost saving techniques rarely work in the long term. A considered approach that reviews key cost drivers and established plans to target these is much more likely to deliver benefits without placing the business at greater levels of risk.

Jul

20

10 Tips To Get Managers Accountable For Cost

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Getting anyone to be accountable for profit or loss (P&L) can be troublesome – all too often meeting the requirements of the customer at all costs can cause significant problems. All companies need to make money and as a result all employers, managers included, should be cost aware.

1. Create a culture where costs are seen as important. This may sound obvious, but you do need to ensure that costs are seen as being the responsibility of everyone, that everyone needs to pull together to try and keep costs down. So get everyone aware of costs.
2. It is also important to make managers aware of what the implications are if they do not become accountable for costs. If there are negative possible implications then tell managers. Paint the whole picture so that they can be fully aware of what will happen if they don’t become accountable.
3. Set out clear results that you want to see achieved. There is no point in telling managers afterwards what you wanted them to achieve. Tell them upfront and set goals that you want to be met. If you want to see costs reduced by 10% over a year, then this is the goal that should be set.
4. However, it is also very important to ensure that you set clear goals that can be achieved. If the goals that you set are unachievable, then you are asking managers to become accountable for the impossible and this is not a good way of treating any employees. So set clear and achievable goals.
5. Now you need to establish a culture that is based on ‘joint accountability’ this means that the manager or any team member cannot be seen to have performed adequately if the team does not achieve its results. Ensure staff are equipped with how to generate teamwork and ensure that departments rather than individuals are working towards budgets and financial targets. So if the 10% reduction is not achieved then the management and all the employees have failed and they need to be aware that this is the culture in which they operate.
6. One way of reinforcing the culture of accountability is to keep reminding managers that they are accountable and check how progress is going with regard to ensuring that costs are being kept manageable and that managers are ‘on track’ with regard to being accountable for costs.
7. Do not indulge in playing the ‘blame game’ because this will simply ensure that you create a culture of fear and this will not be conducive to a positive working environment. Managers who operate within a culture of fear will simply pass this on to their staff and the workplace becomes a difficult place for everyone!
8. Try to provide positive incentives and use the carrot and not a stick to get results. These incentives could take the form of bonuses, an extra day off work and so on. They do not have to be massive, but they can act as an incentive, so that accountability becomes more appealing. However, it is important to bear in mind that you are dealing with managers, so they should have some degree of accountability anyway!
9. Remember that you have to take managers with you. This is different from them just going through the motions. They have to be fully committed to the process of being accountable for costs, so if necessary invest in training for them.
10. Finally keep reviewing progress and identify any areas that are ‘weak’ before they present a significant problem. This will give managers the opportunity to address problems on a regular basis and eventually they will be able to ensure that these problems are eliminated and that costs will be kept down and kept manageable.