In a large company I worked with some months back, budget managers complained that operating expenses were increasing from year to year. Executives therefore mandated aggressive targets in the forthcoming year’s budget. Operations managers were asked to submit action plans to support the challenging budget, and departments would be measured by how well they performed against it.
What resulted was a freeze in hiring, and due to lack of manpower in some operations, supervisors picked up the slack by working overtime without pay. Maintenance managers delayed equipment repairs up to the last minute. Cheaper spare parts were purchased, but their quality was questionable. Managers received less allowances for their cell phones, so they had to spend some of their own money to pay for calls or messages at certain points.
This is an example of how not to implement a cost reduction initiative. It is not something that can be initiated at the drop of a hat. It is also not a strategy that can be fully delegated to employees. Experienced managers know that reducing costs requires careful planning, serious oversight, and down-to-earth leadership. It goes hand-in-hand with the basic management cycle of planning, directing, controlling, and action or PDCA for short.
At the same time, firms need to define the criteria of any cost reduction strategy. Tradeoffs need to be identified, and targets have to be supported by clear action plans. Cost is just one aspect in a firm’s business, and factors such as service and revenue-generation should not be compromised.
In the above case, costs did go down, but so did employee morale and management productivity. The firm did succeed in meeting aggressive targets in the first year, but the following year, the company began to experience delays in critical revenue-generating projects due to postponed maintenance, more frequent equipment breakdowns due to cheap parts, and poor office productivity.
Cost reduction is difficult, but it need not be impossible. The following are some pointers to steer a cost reduction strategy in the right direction.
No Sacred Cows. Any activity or structure is fair game for questioning and justification. I’ve seen managers ask for the same maintenance budget despite the installation of new machinery that requires less repairs. Some managers argue for increased head count, even though there were expected retirements in positions that did not need replacing. How many times have I heard, “no, we cannot change that because we’ve done this all the time”?
Nothing is sacred in business; any cost item should be subject to examination and possible improvement.
Think Simple. Complexity is the enemy of cost reduction. Can a nine-step process be done in four? Can product lines be simpler? For example, Toyota Motor Corp.’s use of a common chassis for its Innova, Fortuner, and Hi-Lux vehicles reduced the number of components needed in its assembly lines and reduced the cost of managing its spare parts.
There is Always a Better Way. Henry Ford revolutionized industry when he introduced the assembly line, which churned cars at higher output for lower costs. Japanese automakers did better via Just-In-Time (JIT) systems that allowed them to reduce inventories while making multiple car models available to consumers at even lower prices than the American competition. Lean Manufacturing has allowed firms to cut non-value added activities from their supply-chain processes.
Managers need to believe that there is always a better way to do things, no matter how impossible it seems.
Avoid Complacency. Successful firms sometimes have the temptation to say that “there is no more to be done; we’ve already reached the top.” Some Philippine export firms probably had this kind of thinking when they assumed that business incentives and a cheap work force meant steady income for the long-term. However, when foreign exchange rates suddenly fluctuated from financial crises locally and abroad, many firms were caught unprepared and found themselves less competitive than those in other Asian countries, who continued to improve productivity even during bad times. Complacency is a trap many managers fall into.
Cost reduction is not a program to be introduced only during hard times. It should be a strategic initiative that must be in sync with a company’s goals. As difficult as it seems, one has to be guided by the principles of constant questioning of “sacred cows,” thinking simple, never giving up on finding a better way, and not falling into the complacency trap.
Jovy Jader is a 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 inventory, total cost, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. Should you have questions or comments e-mail to firstname.lastname@example.org.
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