A number of executives complain that it seems difficult to reduce cost, if not just keep it flat. Managers, on the other hand, say that they need to spend more because of ongoing increases in prices, wages, and utility rates, not to mention that a higher operating expense budget goes hand-in-hand with growing sales.
Cost reduction is a recurring theme within the typical firm. When the economy is booming, the focus is to increase revenue, to take advantage of anticipated demand. Initiatives to reduce cost are often less of a priority. As a firm's sales meet or exceed targets, the volume generated provides for greater utilization of resources, which results in greater economies of scale and lower costs per item sold.
As demand contracts in less-than-favorable times, however, firms see their overhead costs eating into their profits. Executives then scramble to prioritize cost reduction and, more often than not, come out frustrated when managers have difficulty cutting their budgets.
Traditionally, when a firm feels pressured to cut costs, the first thoughts would likely be laying off employees, energy cutbacks, and production line shut-downs. And more than likely, even as costs may be reduced in the short term, the reductions in head count or the shutdowns of lines would have a profoundly negative effect in the long term. It is hard, after all, to replace good talent or revive a production operation without a hefty re-investment.
Cost reduction can be attained without too much pain if one looks at it from several different approaches:
Reviewing Policies & Procedures. A multinational firm reduced excessive staff allowances by re-setting a policy of reimbursement for those who used company vehicles versus those who drove their own cars. Previously, employees who drove their own cars received regular fuel allowances and still would be eligible for travel reimbursements. The new policy eliminated the "double-charging" and saved thousands of dollars in allowances, not to mention did away with complaints that some employees were getting away with more cash benefits than others.
Prevention versus Correction. A high-rise building engineer discovered that most of the building's plumbing had broken valves and worn-out pipes, causing costly leaks and water wastage. The engineer promptly fixed the pipes and valves and instituted a preventive maintenance program, which revealed more problems with the building's cooling tower and electrical systems.
Previous management was reluctant to implement a preventive maintenance program because they feared the costs of maintenance would overrun the building's operating expense budget. The preventive maintenance program, however, saved the building hundred- thousands of pesos in utilities costs, even as the repairs & maintenance budget was exceeded to repair and restore the building's equipment.
Out-of-the-Box Negotiations. Another multinational company was able to reduce its field staff's travel expenses by negotiating more favorable terms in its contracts with hotel chains. To minimize costs, the firm would negotiate a contract with a leading hotel chain to agree on discounted rates for the firm's traveling field staff.
The firm, however, took advantage of its clout as a large customer and insisted that even with a signed contract the firm would have the right to re-negotiate rates or even terminate its contract if a competing hotel chain offered lower rates. Even as such terms are normally unheard of or even unacceptable in legal circles, the firm's partner hotel chain consented to the deal in order to ensure the firm's continued patronage of the hotel. Otherwise, there would have been a large hit to the hotel chain's revenue.
Investment in Savings Projects. A leading pizza parlor chain invested heavily in more efficient air-conditioning equipment in all of its branches. The general manager noticed that air-conditioning in the branches took up a big part of the power costs of the pizza firm, so he promptly replaced inefficient equipment with heavier-duty but more efficient equipment, even if the investment was in the millions of pesos.
He also instituted a strict preventive maintenance policy of cleaning and inspecting the air-conditioning at the branches regularly.
The result: cumulative savings in electrical costs that paid back the multi-million investment within months. The investment also provided a more comfortable environment for branch customers.
These examples illustrate that cost reduction can be attainable even when it seems difficult. It comes from stepping back and reviewing how things are done in one's business and how much one is willing to invest for savings.
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 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 email@example.com.
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