Why it should Always be on the Executive Agenda?
Most markets have increasingly raised expectations for faster service, better products, and cheaper prices. In markets which are considered to be commoditised many companies struggle to find a differentiator in products or service and default to reducing prices. This domino effect forces them to work on cost reduction.
Most cost reduction activities focus on reducing the number of people in the enterprise. This is based upon the false premise of ‘If you take people out, then activities will reduce”. In practice, what happens when you take out the people without re-engineering the process is that service levels fall, error and rework increases, activities grow, and the pressure on the remaining staff becomes enormous. The negative impact of this lack of process change increases if the knowledge of the company systems leaves along with the employees. Unless you have an active, easy to use system, to capture corporate knowledge whilst people are in the business your ‘cost reduction’ project will have some big unintended negative consequences. Some costs can increase!
What will inevitably happen is that ad-hoc processes develop instead of planned and effectively low waste systems.
For all of the cost reduction activities that have occurred and for all of the cries of ‘We have cut to the bone, there is no more’ our experience is that there are still cost reduction opportunities of 30% in companies. This 30%, and the next 30%, and so on, are only accessible by looking at the causes of cost across the entirety of the enterprise. The focus must shift from improving the efficiency of processes to understanding what processes improve the condition of the clients and your market offer. Stop doing all of the ones that don’t improve these two areas and you are off to a good start. (Yes, I understand there are some governance and regulatory requirements, keep them, ditch the rest)
Beyond taking a ‘customer value add’ rather than ‘transaction cost improvement’ perspective we also need to look at the capacity of the business chain. Think of your business as a chain of functions that all link together. These functions all exist to generate revenue for the business and they consume cost in order to do so, some directly, some indirectly.
A chain is only as strong as its weakest link.
If you think of the cash flow of the business as equivalent to the strength of the chain we can see that in the business there is one weakest link that controls the amount of cash the business can generate. Our goal is to increase the overall strength of the chain (cash flow). This weakest link should be the last place you try and reduce cost, it should be the first place you try to increase capacity, possibly using costs and resources you divert from other activities in the chain.
If you focus on eliminating non-value added activities, and have as your overall focus increasing the capacity of your weakest link you can not only make major step change reductions in costs, but also build a more competitive business that generates higher revenues.