Many companies think they have a good handle on their business costs. However, when we ask a few simple questions about their costs, they are oftentimes surprised at what they have been missing. They soon realize that they have significant opportunity to improve their company profits by more effectively managing their costs. Having a comprehensive cost reduction program in place for your business can lead to a 10% to 20% increase in company profits.
Current Situation
In order to improve your company’s cost performance, you first have to understand where the company is today. This means having a good accounting and financial reporting system in place that will provide you with this information. This system should be able to tell you the major drivers of your costs such as: materials, labor, external services, insurance, marketing etc. It should also be able to tell you how these costs have changed over time. Have they been increasing or decreasing each month. What percentage of revenue do they represent? What categories together drive greater than 80% of your costs?
Competitive Benchmarks
Knowing the company’s current situation is a good start. However, knowing how your cost structure compares to your industry, puts things in an even better prospective. How does your company compare to the industry average? Are you better or worse. How does your company compare to “best in class”. If you are not “best in class” for your industry, what is your competition doing that you are not? Knowing what makes your competitor “best in class” for your industry may give you ideas for improving your company performance. It will also help you to establish reasonable cost reduction goals for your company.
Clear Goals and Actions
Setting the appropriate cost reduction goals for your company and identifying the actions you will take to achieve those goals are key to reducing costs. The goals must be clearly defined and measurable, they must also have a due date and owner. These goals must also be realistic. If they are not realistic, your cost reduction team will not be motivated to aggressively pursue them. Involving employees in the goal setting process will help give employees a greater sense of ownership of and commitment to the goals. It will also allow management to identify an even greater number of cost reduction actions that can be taken to achieve the goals, as oftentimes it is the employees that are closer to the day to day business activities. Once clearly defined goals have been established, the cost reduction team should work to establish and execute on a prioritized list of cost reduction projects or actions that will be completed to achieve the goals.
Management Participation and Review
A good cost reduction program requires active participation by management and staff. Management must work with its employees to establish appropriate cost reduction goals and objectives. Management should also work with its employees to periodically review progress toward these goals (i.e. weekly or monthly). Additionally, they should work to create an environment that promotes creative cost reduction ideas and rewards employees for taking educated risks in this area. Cost reduction must also be made a priority to the company. Management should be committed to the cost reduction program and employee performance reviews should incorporate evaluation in this area. Employees should be rewarded for achieving results in cost reduction just like they would be rewarded for achieving results in other areas of the business such as product development, sales, etc.
Having a comprehensive cost reduction program in place for your business can lead to a 10% to 20% increase in company profits. If you would like to learn more about cost reduction programs for your business please give us a call! We can be reached at (480) 980-3977.
