Why Cost Management
What Works and What Does Not
In the current business environment, businesses are under increasing pressure from reduced volumes, reduced prices and increasing competition.
Today selling price is determined by market factors – demand & supply. Given the reduction in demand and the increase in supply, it is no wonder businesses find themselves having to drop prices in order to attract customers and compete.
A business must therefore learn to manage its costs effectively to ensure that these are lower than selling price, in order to earn a profit. It goes without saying that the business that can keep its costs down will survive and thrive.
Which Strategies Work
Forward thinking businesses understand that even in the toughest of times, opportunities abound. They rely on their people to find solutions that allow the business to adapt and evolve, and ultimately designing and implementing creative solutions to challenges.
Lets look at some Cost Management Strategies that work well.
This approach is used by most businesses, and is probably the first solution that comes to mind when working at managing costs. Procurement teams invest time and effort in identifying alternative suppliers, negotiate with existing suppliers and in some cases identify alternates and substitutes that ultimately bring costs down.
This is perhaps one of the most impactful options, but possibly one of the most difficult options to implement. Human beings are creatures of habit, and we follow the process set out for us often without questioning it. Waste often creeps in, and is hidden or is overlooked because over time we stop noticing things, even if they are under our noses. The business that can consistently work to identify and eliminate waste in all processes and aspects is one that is likely to succeed and thrive.
Similar to the previous approach, processes often are not reviewed critically, and are followed without question. This often happens even when needs change, technology evolves and/or new wisdom challenges old thinking and conventional wisdom. Taking a step back to review processes, challenging assumptions and finding new and better solutions will allow a business to continue to improve while reducing costs.
Technology comes to the rescue again. At the current rate of development and deployment of new technology, the life cycle of equipment is significantly reduced. Staying flexible and agile will significantly improve the ability of the business to adopt the latest technology in order to reduce costs.
It is surprising how much of an impact good planning can have on managing costs. When we anticipate challenges, design plans to take into account all eventualities and requirements we more often than not get it right the first time, and this allows us to avoid the costs of rework and costly experimentation. Smart businesses invest time and effort in planning, and thereby save considerably in the long run.
Measure and Monitor
Ultimately, considerable success comes from measuring and monitoring. What gets measured gets managed. Furthermore, ongoing monitoring provides us with that so important feedback loop so we can make course corrections as we go along and truly achieve that continuous improvement progress we all want to achieve.
Which Strategies Don’t Work As Well
Knee Jerk Reactions
Making decisions on the fly without due consideration and information is often a recipe for disaster. It is important that decisions of this magnitude receive due consideration and are made based on facts and figures. There does indeed need to be a sense of urgency, but not to the extent that we end up making things worse.
Individual or Central Decisions
Decision making that does not involve key stakeholders, those entrusted with implementing solutions and those on the ground who have the best perspective of reality is prone to error. It is vital that we include these in our identification of issues, deciding on solutions and finally the implementation of the solutions.
Using tried and tested solutions may appear an attractive and easy option, but doing so without a true understanding of whether the solution will truly address the root issues, and whether the conditions and circumstances are identical will often result in failure. Further, as knowledge and technology grow at an ever increasing rate, new solutions are emerging which may be more effective, and new information often challenges conventional wisdom.
Head in the Sand
Pretending that the problem does not exist is a very poor solution, but unfortunately some businesses do find themselves in this predicament. At this this is the result of analysis paralysis, or deferring making the tough decisions because they are awkward and uncomfortable. Postponing decisions or pushing the problem further down the road often makes things worse.
Eliminate the Biggest Costs
An error many businesses make is in assuming that eliminating the biggest costs will result in the biggest savings. Unfortunately, sometimes this diminishes capability and disproportionately impacts results, often resulting in other costs and waste in the system, thus having the opposite effect.
When making decisions on cost management, it is vital that businesses follow a process and employ strategies that work. Getting it wrong can be a painful process often resulting in a downward spiral. Getting it right can be the difference between both short term and long term success and failure.
Leon Mendonsa has close to 3 decades of expertise in establishing, transforming, and leading successful Human Capital functions in a variety of industries in the Asia, MENA and CIS regions.
He is currently Associate Director – People Practice for Daksada, providing comprehensive Human Capital solutions to customers from SMEs to large MNCs and Government organizations.