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Avoid the Cost Reduction ‘Crash Diet’

Thursday, November 8th, 2007

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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