Taming the Cost Dragon
[Also posted on LinkedIn]
(Sustainable Cost Reduction in good times and bad times)
In his book, “The Goal,” Shigeo Shingo emphasized cost reduction as one of the three primary goals of the firm. The other two are increasing throughput or sales and improving cash flow. As economic times become increasingly challenging, however, reducing cost is no longer just a goal but a necessity. Even as many firms continually post revenue growth, just as many are getting saddled with increasing costs that pull down profit margins and frustrate desired returns in investment.
Cost can be likened to a mythical dragon. It may seem invincible and impossible to defeat. Firms that employ brute-force solutions do not succeed in the long run. For instance, factory managers can crank up production to spread the expense over a larger volume, thus decreasing unit cost or the cost of every manufactured item. Factories, however, can’t keep production on high-gear forever without compromising inventories. Executives may resort to hiring freezes, downsizing, and/or outsourcing to reduce costs of labour-intensive operations. But labour costs continue to grow and any loss of talent from downsizing eventually bites the firm back in the long run. The dragon eventually returns with a fiery vengeance that burns the bottom line.
Any cost reduction effort thus has to be systematic and sustainable in order for it to succeed. Reducing cost therefore needs to be built into a firm’s strategic plan. Majority of executives would assert that they have been doing just that for years but yet a good number of managers would complain that they couldn’t keep costs from going up as they would cite uncontrollable factors such as inflation, government-mandated wage increases, spiralling prices of commodities, and added electricity and water charges.
Management strategy formulation towards cost reduction requires careful assessment and deliberate innovative change management even as external uncontrollable cost factors may seem formidable. A strategy that incorporates assessment and deliberate innovative change would manifest itself via the following:
Mr. Jovy Jader is a Supply Chain Advisor and Regional Speaker on Supply Chain Management. He has directed and implemented Business Improvement projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and customer service levels. Mr. Jader is the author of the book Speed Kills … your Competition: Driving Growth Through Supply Chain Excellence – a book on Supply Chain Insights and Best Practices. Should you have questions or comments, please e-mail them to firstname.lastname@example.org.