In 2009, Dienes Group, a German family-owned industrial firm that exports knife and cutting systems, saw its orders drop by one-third due to the prevailing global financial crisis. The company had to cut costs to survive.
To weather the downturn, employees accepted shorter work weeks and lower pay. When the firm was forced to lay off 32 workers, the executives and the rank-and-file arranged a severance package to help those laid off.
One year later, Dienes saw its business improve. The firm, however, cautiously rehired workers and went on finding ways to improve its operations and ensure high operational efficiency.
The story of Dienes comes from a recent Wall Street Journal (WSJ)article that cites the firm as one example why Germany’s economy remains resilient, despite the European economic crisis of 2011; a medium-sized family-run firm instilled a culture of cost-consciousness and cooperation between managers and employees.
WSJ went on to say that Germany’s economic strength stems from Dienes and the many not-so-big firms like it. Germany, as a result, has seen its economy remain strong and competitive despite recent economic crises.
A cost-conscious culture is attainable. Firms can instill a culture of frugality, which can make a long-term difference to their businesses. Learning from Dienes, a firm can adopt the following approaches:
Share Information. Most cost reduction programs fail, not because they were poorly designed or lacked management support, but because critical cost information was not shared.
Several years ago the owner of a large packaging firm asked me if his firm’s employees are ready for a corporate cost reduction program. My response was, “Are you ready to share your company’s cost performance to the whole organization?”
By making cost data visible, managers can identify “cost champions” and cascade responsibility down the line. Dienes’s owners communicate openly with their employees when times are good or bad. This has allowed both sides to plan their working schedules and wage structures for mutual benefit.
Focus on the Controllable. Costs come with two drivers: controllable and uncontrollable. Electricity rates, commodity prices, and insurance premiums are examples of the “uncontrollable.” Energy usage, material waste, and risk management are examples of the “controllable.”
Firms should logically pursue the controllable to mitigate the uncontrollable. Furthermore, they should identify those controllable cost drivers which have the highest significant impact on their balance sheets. If a firm is energy-intensive, naturally, it should pursue an energy conservation program. If it’s labor-intensive, it should, of course, focus on worker productivity.
Firms can easily rally their organizations to reduce the major controllable forms of costs, once identified. Dienes Group plainly made it known to employees that labor is a major cost item. Hence, focus was placed on productivity, quality, and just as importantly, teamwork and communication. The result is Dienes’s successful reputation as a close-knit company of highly skilled workers who produce high-quality knife-cutting equipment.
Track and Act. Feedback to the organization on cost, or simply on how employees are doing in their contribution to the business, is essential for the firm to sustain any drive toward continuous improvement. Systems must be in place to allow managers and employees to see how well their cost reduction efforts have paid off. The results, in turn, should become the bases of future cost reduction strategies.
Machinists at Dienes proactively suggest improvements regarding their firm’s product designs to their superior-level engineers. The two-way communication between them and engineers have resulted in improvements in product quality and the manufacturing process.
At the same time, management plans to install software for a new accounting and inventory management system to sustain, if not improve, their firm’s operations. In both and all cases, managers and employees alike weigh the benefits versus the investment or expense, before they act. They share a foundation of frugality but at the same time realize the need to invest in systems which would effectively reduce cost or improve efficiency and quality.
Any firm can transform itself into a successful cost-conscious culture similar to that of Dienes. It, however, must come with a decisive willingness to share information, a wherewithal to target the major controllable sides of cost, and an initiative to track its cost reduction effort with a organization-wide seriousness to act from the results. By these approaches, it would only be a matter of time when the firm would adopt a cost-conscious way of life.
Mr. 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 in 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. For questions or comments, e-mail firstname.lastname@example.org.
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