Reducing Costs Effectively

Jovy Jader // Uncategorized

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May 1, 2015  

Eliyahu Goldratt in his book “The Goal” stated the three main goals of an enterprise: Increase Throughput, Reduce Operating Cost, and, Reduce Inventory. Any other effort not impacting on these three would be a waste of time.

Majority of enterprises have placed great emphasis on increasing throughput or sales. Sales, after all, is the lifeblood of any organization. Without sales, the enterprise will not have sustainable resources to operate.

But as the enterprise matures and sees its profits decline despite higher revenues,it becomes imperative that it starts focusing on reducing costs.

Cost reduction programs are common in many companies. The success of a cost reduction program, however, is not in reducing the cost per se, but in reducing costs without unduly sacrificing the organization’s capability to offer a competitive level of product or service quality.

Most cost reduction program failures stem from management’s inability to avoid that negative effect in service or product quality. Take the case of some service companies who scrimp on wages by reducing head counts. Their customers would complain about phone calls that go unanswered because budgets for staff assigned to talk to them have been cut. Even if these firms use automated pre-recorded messaging systems, customers may still become frustrated especially if their requests are unique and could not be readily addressed.

Some firms, however, may insist on the merits of cost reduction programs notwithstanding the trade-offs in service or quality. These firms may argue that any resulting customer negativity would have insignificant impact especially if the firms have a captured market. Financial institutions, passenger transport companies, and electricity and water utility firms, for example, have limited competition in their markets and customers would not easily find alternative firms that would offer better services.

History has shown that firms that follow this thinking eventually will feel the ire of their unsatisfied customers. Customers unhappy with dominant local firms would find ways to source better quality products and services. One can see this through some customers opting for imported products or even travelling to other countries to experience better services.

The challenge for executives and managers, therefore, is to come up with a cost reduction program that will in effect not compromise quality and service and not result to short-lived benefits that would backfire in terms of greater customer dissatisfaction.

An effective cost reduction program has to at least possess the following attributes:

100% involvement. From top management to the lowest grass-roots employee, everyone has to get involved in any comprehensive cost reduction effort. And not only employees, but also contractors, vendors, and even the customers should be enrolled. Cost is an area where every person inside and outside the firm has an influence. Tapping every person’s influence, however small, can go a long way in bringing down costs effectively.

Relevant education and training. With enrolment comes the need for awareness and insight, and this requires every one becoming familiar with the rationale of any cost reduction effort (Education) and becoming adept in the tools and techniques to make it work (Training).

Information Sharing. Many cost reduction programs fail in this regard. While managers may be willing to educate and train the organization, they may be unwilling to share information that would otherwise be helpful for stakeholders. A firm’s management needs to realize that employees, contractors, and vendors need information to understand where they are with respect to a particular cost area such that they can develop solutions that would positively contribute to the firm's finances.

Visible Results. Any program which does not provide performance feedback is doomed to fail. How a cost reduction program is performing must be visible to the stakeholders. The results may not be good in the beginning but if any adjustment is to be made, the feedback is the first step to make it happen.

Rewards and Recognition. When good results do arrive, there should be proper recognition to those who led it and those who influenced it. Any program needs the continuing motivation of stakeholders in order to be sustainable. Rewards are important and monetary prizes can be effective.

Cost is a major area of concern for many businesses. A comprehensive program to address cost is a basic requisite for firms to survive and flourish. It will take a committed management team to involve every stakeholder and provide support via training, feedback, and recognition. The results would then speak for themselves.

About the Author

Mr. Jovy Jader is a Management Consultant and Regional Speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and service levels. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers.

Jovy Jader

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