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Avoid the Cost Reduction ‘Crash
Diet’ |
08/11/2007 | |
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Many
businesses are finding their costs are
increasing. If these are not reined in now they
will become cemented into the business and hard
to remove, explains Steve Brown of Partners in
Performance.
Grant Thornton’s International
Business Report for 2007 reveals that 58% of
businesses surveyed are optimistic about their
countries economic outlook, and the mining
sector is experiencing strong growth on the back
of this demand.
However, resources companies
have also faced cost pressures and shortages of
labour. Whilst profits are currently healthy,
the risk is that rising costs become cemented
into the business.
But we know management
attention will inevitably return to costs.
Putting a cost reduction process in place in the
good times will ensure that you’re not in the
hot seat when the cycle turns.
Continuous
Cost Management (CCM) is about having a clear
approach to reducing costs even when the
business is doing well.
Improving on
business costs requires six key elements to be
in place.
1. Knowing where the money is. The
business needs a repeatable method so people can
easily identify where the next highest value
improvements exists. Each opportunity needs to
be categorised on potential value and ease so
that the focus is in the right place.
2. A
single point of accountability for each cost
element is essential. If three people have
access to the refrigerator, it hard to tell who
keeps scoffing all the ice cream until the month
end weigh in – by which time it’s too
late.
3. What’s really happening? An
understanding can be developed on what is really
happening through drilling down into causes of
costs and analysing trends. Simply knowing that
we overspent on ice cream against a budget
doesn’t help. Is the price going up or are we
using more? Has there been more wastage or did
we change to a more expensive brand of ice
cream?
4. How to reduce it? Five broad
approaches to cost reduction can be deployed.
The suitable approach depends on the nature of
the cost lever.
• Strategic sourcing can be
used to improve prices and terms.
• Root
cause analysis can be used to reduce essential
usage.
• Behavioural change approaches can
be used to reduce non-essential usage.
•
Added value analysis can be used to challenge
whether each expenditure is worthwhile.
•
Improving systems, processes and skills can be
used to “hard wire” cost reduction ideas and
drive ongoing improvement.
5. Drive the
process fast. Speed is an important element of
the process. Not just who does what, but who
does what AND by when.
Noticing ice cream
costs are rising through daily measurement and
review allows immediate action, rather than
counting the extra money spent at month end.
Rapid results also provide the necessary
incentive and momentum that sustains effort in
the longer term – not just a ‘crash diet’.
6. And finally, close the loop. A closed
loop means that people remain accountable for
what they said they would do and no one can
‘wriggle’ out of responsibilities.
Cost
management is all about putting the systems,
processes, skills, habits and norms in place so
that cost management becomes part of the
organisation’s DNA – part of ‘the way we do
things around here’.
The markets are
volatile and nobody knows what the future holds.
But one thing you can be sure of is that,
some¬time soon, your boss will ask “What are you
doing about reducing your
costs?”
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08/11/07
