Organizations attack “costs” when profit dips, or the economy plummets or even when a new CEO joins- with a vengeance. Travel is cut, advertising is cut and the dreaded ‘bell curve’ is brought back and people are cut. As soon as things brighten up, travel (often unnecessary) resumes, new people are hired at higher salaries, advertising spend soars to make up for lost time- and of course, cost merrily rises, all till the next profit dip!
“Biggest Losers” is a US reality show program, where winners are those who lose maximum weight in a given period. An interesting research conducted on past winners showed that a majority gain back the ‘lost’ weight very soon! This is because, on losing weight drastically, the body’s defense mechanism works overtime to restore status quo. The body metabolism (rate of calories burnt in steady state) slows down, burning less calories and depositing the rest of the intake as fat. Cost in organizations is like fat is to the body and drastic cost reduction initiatives often meet the same fate as fat. Costs spring back – again with a vengeance.
Why does this happen? Just as in the body, there is an ‘organization metabolism’ at work. This is the rate of cash burn in a steady state. This is a function of the companies ‘processes’, or the way of doing things. These are the drivers of cost. Unless we change the metabolism, the cost will spring back.
Let us look at some of the large cost heads in a typical firm – Salaries, Inventory, Repairs & Maintenance, Power, Rework & Wastes. In each of these cases, costs vary between companies (even in the same industry) because of different processes followed.
To take an example of ‘Inventory’ – Buying practices determine the Raw Material (RM) inventory – single source policy, ‘just in time’ inventory practices, pull based manufacturing, ‘single piece flow’ will all collectively reduce inventory. Drastic ‘inventory’ reduction drives without changing the basic ‘process’ that builds the cost, never work. Similar is the case with all others costs. Repairs & Maintenance costs are a direct result of poor preventive maintenance practices. High salary cost cannot be addressed by ‘cutting’ people, but by ‘cutting’ bureaucratic processes, reducing inter process ‘handoffs’, improving information flow processes and reducing hierarchies. Even power costs are a function of a company’s manufacturing , planning and operations processes.
Cost reduction is a process management challenge. The current way of running the business creates a cost structure. Cost is the output measure of this ‘way of work’ – its metabolism. Change that way and cost automatically adjusts to the new ‘way’. There is no surer way of cost reduction.
Change the way you work – your costs will come down