Delivering Real Value Through Cost Reductions
Need we rehash the economy’s recent performance (or lack thereof)? Who among
us has not been unnerved by prolonged market degradation and an unpredictable
future? In a unique time of world unity, even our global markets are responding by
reducing costs. But does the necessity for cost reduction mean we must add to the
more than one million layoffs announced between January and September of 2001?1
Resist the propensity for knee-jerk reaction. If yours is like many organizations,
simple measures like policy changes and travel restrictions have already been
implemented. However, as revenues continue to stagnate or even decline, more
strategic measures may become necessary. And, although reductions in workforce
and arbitrary expenses may appear to be the best immediate solution, tactics
that generate long-term value and entrench strategic positioning should be
considered as a move to preempt such radical measures.
A Rational Look at Cost Reduction
A one-time hit to selling, general and administrative (SG&A) expenses may result in
a 7 percent decline in operating expense that lasts as few as three months. Is this
what we are really pursuing? A one-time savings is likely not the result any
company intends to achieve, yet many of us consider tactics that purport to yield
such temporary results. Considering the fact that 54 percent of companies that
downsize do not achieve desired results in reducing expenses and 68 percent do not
achieve the desired increase in profits, results are far from guaranteed.2 In addition,
cutting workforce and operating costs and/or centralizing capabilities may have
serious implications for market positioning and meeting strategic objectives.
Let us propose that potential cost reduction actions should meet the following
three requirements:
1. Deliver reliable short-term results
2. Deliver sustainable long-term efficiencies
3. Support – or at least avoid compromising – strategic positioning
What would you say to a reduction in cost of goods sold that starts at 3 percent
in month two and then increases to 10 percent into perpetuity and leads to more
demand-centered production? These kinds of results are exactly why the supply
chain should be at the forefront of every cost reduction strategy. Perhaps supply
chain productivity should be the first line of defense when it comes to realizing
sustainable cost reduction.