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How to implement cost
reductions programs?
Cost reductions can come through technology improvement
and process redesign
There comes a time
in every business when you have no other choice but to reduce the
costs once again. This is a reactive approach and not
something that we recommend or approve of. When companies
implement cost cutting initiatives in the reactive mode, they do things that do not always help them in the long
run: layoffs, plant shutdowns, etc. When cost
reduction is an ongoing activity (what the Japanese call as kaizen
or "continuous improvement"), a firm is in control
rather than being pushed around by competitors and market forces.
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How to make cost reduction an integral part
of your operations strategy?
Cost reduction triggers
should be set along three dimensions:
- Internally-driven: Keep improving your
process. Have a good employee suggestions program
that works, that is, all suggestions are carefully
evaluated and those that are implementable are actually
implemented, and if they work out well, the employee is
suitably rewarded.
- Externally-driven: Stay on top of changes
in technology and process. Even when a technology
is not directly targeted at your application/process,
you need to evaluate it to see if you can use it for
cost reduction.
- Competitor-driven: Benchmarking against
your competitors is key here. You must have real
time data on your competitors' cost position. If
you find that your competitor is doing better than you,
immediate action is needed.
Implementing a cost reduction program
- After you have compiled the data from competitors and
other industry benchmarks, set realistic goals first,
though it is perfectly fine to have ultimate goals as
well. Ruthless cost cutting can have negative
consequences.
- Develop a cost reduction program in consultation with
each and every employee who could potentially
contribute. Do not limit the team to managerial
types. In many cases, the floor staff has a better
understanding of what works and doesn't and how to make
the process better.
- Always do a ROI analysis. No cost reduction
program should be undertaken until the ROI justifies
it.
- Explore all options for cost reductions and not just
those related to business process redesign or
technology/equipment upgrades. Some of the other
options that can be considered are outsourcing,
offshoring, etc.
Related articles: Business
process redesign Benchmarking
Competitive
intelligence
GM's
cost cutting is not the solution to its problems
American
automakers fail to cut costs |
Questions,
comments, feedback, and suggestions
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