Do you know the real secret to sustainable reductions in operating costs?
All too often, cost reduction measures – even where results look impressive at local level – don’t result in the anticipated benefit to the bottom line or, at best, are short–lived. In extreme cases, total cost can even go up rather than down.
Cost cutting can increase cost!
Typically, there is a short–term focus on ‘cost cutting’ driven by an imperative requiring urgent cost reduction to meet, for example, quarterly or annual budgetary targets. The result is often a ‘knee jerk’ approach that produces a ‘piecemeal’ response that does little to address the true operating cost of the business and often produces a result that is actually detrimental to the business
While such an approach can appear to make sense on the surface, it makes some potentially dangerous assumptions about how well such activity is carried out. It can often lead to shifting cost from one area to another or delaying expenditure rather than reducing it.
For example:
Savings in one area may actually increase costs in another; e.g. selecting a lower cost supplier may lead to higher scrap levels, more in–service failures or more work to manage the new suppliers.
Products or services offered to customers are affected by deletion of features, reductions in customer choice etc that save money but reduce sales.
Headcount reductions, made in the belief that remaining people will find ways to get things done, lead to delays or items missed that create cost downstream. Even worse is the longer-term impact of the loss of knowledge and skill that such reductions bring.
Cuts to ‘wasteful back-office functions’ leave ‘frontline staff’ doing more administrative work they are not so skilled at and reduce the time they have for their intended role, leading to poorer quality products and services.
Arbitrary reductions in inventory lead to shortages in production.
Put simply, approaches that focus on cutting cost more often than not actually increase cost! Even where some gains are made, they are generally ‘one–off’ savings that will, at best, be built into future budgets and, at worst, be eroded by attempts to restore what has been lost this time. There is no foundations for ongoing and increasing benefit.
Even apparently strategic efforts to generate ‘efficiency savings’ are not always well targeted. By looking at efficiency – doing things right – rather than effectiveness – doing the right things, you can miss the opportunity to eliminate whole chunks of unnecessary activity, and waste effort simply doing these things better.
"There is nothing so useless as doing efficiently
that which should not be done at all".Peter Drucker, management guru
What’s needed is a ‘whole system’ approach to strategically reducing operating costs that addresses the real causes of unnecessary cost in a way that impacts the true profitability of the business and is sustainable. Such an approach can produce short–term gains that do not have a detrimental longer–term impact and also build a platform for ongoing improvements.
Lean approaches aim to tackle this by focussing on process improvement to make work more effective, focussing on identifying and removing non–value adding activities. Cost reduction is an almost inevitable result of such activity.
However, all too often, such approaches are applied exclusively to operations. In our experience, this limits their impact as many opportunities to reduce operating costs come from elsewhere – either withing the organisation or outside it. For example:
Sales make promises to customers without understanding the impact on Operations
Product design decisions are made that increase product complexity in ways that do not add value to customers
Products not ‘designed for manufacture’ may be more difficult and costly to make or restrict the choice of supplier
Selection of cheaper supply sources causes quality problems in manufacture and service
Factory layouts cause logistical issues and inconvenience to operators
Only by taking a ‘whole system’ perspective that encourages dialogue between functions – encompassing both internal operations and external elements like supply chain –will the most effective solution to delivering customer requirements be found to deliver significant and sustainable bottom–line reductions in operating cost.
Veracity specialises in helping organisations put in place the culture and systems where all areas identify and act on opportunities to improve, whether that is something under their control or requires action from elsewhere. Collaborative, cross–functional working is enabled for different areas to work together to deliver short and long–term performance improvements and cost reductions that benefit employees, customers and the organisation alike.
Click here to learn more about how to put this into practice
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