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By N.Y. Ho
Director - Business Solutions
Group (http://www.corporatevantage.com)
The World Is Flat
The world is a much flatter place than ever before where cheap
global telecommunications, instantaneous electronic file
transfers, lowering of trade and political barriers have
removed all barriers to international competition. Our “flat
world” has brought competition right to our very doorstep and
the new economy will effectively eliminate the weak and
hesitant, whilst it uplifts the bold and forward looking.
Contrary to some beliefs, we are not in the middle of a global
recession but rather at the very beginning of it. Do not expect
things to get better next week, next month or even in the next
year. Many jobs will be at stake, so too will the survival of
many companies be in question. An economic downturn just simply
hurries it along.
How Should We Respond?
So how exactly should we respond? Do we embark on the usual
series of belt-tightening measures and across-the-board cuts or
do we actively seek out fundamental strategic and structural
improvements for the company?
The answer maybe obvious, yet not many companies know the right
way to go about doing this nor do they have the appetite to
take risks in uncertain times. The likely result is most
companies will tend to follow the age old approach by
deferring expenses, reducing annual budgets, declaring hiring
freezes, reducing training, limiting travel, improving
processes, renegotiating material prices and often times
cutting headcount. We’ve seen it happen all before. As long as
we continue to think we can just save ourselves to prosperity,
we will continue to experience these cyclical upheavals every
so often.
Is Continuous Improvement Good Enough?
The good news is most companies have been paying attention to
cost reduction initiatives by way of lean and six-sigma for
process excellence, etc. The bad news is even with the addition
of these crises-driven cost saving measures, we can only
achieve modest improvements of 5% to 10% at most. Obviously,
these alone will not help us weather the storm.
To understand the journey that we must take, let us begin by
examining the primary cost levers. The potential savings each
of these cost levers brings will vary according to industry
type and company size (see Figure 1).
Think Big To Survive
Continuous improvements with incremental savings may suffice
during good times to keep the shareholders happy, but it is the
‘think-big-get-big’ double-digit cost savings that comes from
rationalizing the company’s infrastructure, improving the
business model and developing a scalable cost structure that
will sustain and keep the company healthy through these
challenging times.
Higher cost savings simply means you get to protect your
margins through lower COGS, beat the competition, expand market
share and position the company for future growth. Moreover, a
scalable cost structure allows the company to respond to market
fluctuations, capitalize on opportunistic acquisitions, as well
as free up resources to develop new advertising, marketing,
products and services that allows the company to stay ahead of
its competitors. Hence, a downturn may not be a bad thing
afterall provided you are fully prepared for it.
6-Step Approach for Radical Cost Reduction
Now that we have your attention to focus beyond incremental
cost savings, here is a recommended basic 6-step approach
towards cost reduction.
1. Start with the end in mind - When embarking
on a cost reduction exercise, it is important first and
foremost to understand the company’s required savings objective
and the amount of time available for it. If a company is doing
well, it has the luxury of time and can start with any of the
cost saving levers. However, for a company caught in an urgent
turnaround situation, they must use every available means to
reduce costs in the shortest amount of time bearing in mind the
savings limitations associated with each of these cost saving
levers.
In both cases, more time and expertise will be required for
strategic and structural cost improvements. This is where the
company will benefit massively from the use of external experts
working closely with internal resources to ensure such
initiatives will be successful. The key is having the right
expertise helping you.
Examples may include outsourcing or offshoring manufacturing
operations to a lower cost country, outsourcing core functions,
engaging in joint ventures for better scalability. Whatever the
decision, once a certain savings target has been established
and a certain route is decided, the leadership in the company
must actively manage change.
2. Target low hanging fruits - These are the
incremental savings that can be achieved in a very short time
without any major impact on daily operations and customer
service. They include focusing on G&A, renegotiating
material prices and discretionary spending like cutting travel
and training, etc. However, be careful not to lose sight of the
larger size of prize in the strategic and structural cost
improvement initiatives to be addressed. Remember the
incremental savings will only yield a 5% to 10% savings level
and you will need much more than this to achieve your
goals.
3. Rising above operational silos - This is
about rising above the operational silos of
departmental/divisional responsibilities and discovering from
the rolled-up picture the significant portion of total spend
that should be addressed.
This is where our financial controller becomes our best friend
to help us realize the opportunities spread right across
manufacturing, supply chain, sales and marketing, etc. not just
in G&A alone. In manufacturing for example, many companies
who have successfully completed this exercise discover they
should have outsourced or offshored earlier. You may also
discover some core support functions like IT, payroll, etc.
could be easily outsourced to achieve greater scalability.
4. Focus on both short and long-term goals -
Having decided to focus on both short and long-term cost
improvement goals, it is important to be able to classify and
manage goals and objectives according to the level of
complexity and time needed to complete them. This will help
create progressive milestones, drive commitment through
responsibilities and accountabilities, as well as manage
expectations all around. Additionally, depending on the crisis
state of the company, some of these longer term goals can be
accelerated towards an earlier completion date by engaging
additional internal resources and the right external expertise
to see it through.
5. Adopting the right business model and cost structure
- The foremost question is whether to adopt a
centralized or decentralized business model. In general, a
centralized business model is able to accomplish greater
economies of scale and its corresponding savings. However, in
high growth companies needing the freedom to innovate and drive
business responsiveness, a decentralized business model may be
essential.
The other important aspect to consider is the ‘cost structure’
of the company. Indeed manufacturing may need to take place in
another part of the world like in Asia or China in order to
compete with companies that are already operating there either
to support their current and future Asian customer base or who
are taking advantage of the low production costs and competing
directly with you at your doorstep. Additionally, after taking
into consideration cost of staff benefits, training,
recruitment, skills availability, including interruptions due
to leaves and attritions, some core functions may be better off
outsourced for on-demand service and improved scalability.
6. Closely manage change - Experience tells us
a major barrier to successful strategic and structural cost
improvements comes from within the company. When there is a
lack of stakeholder support arising from a poor understanding
or suspicions about what the company leadership is trying to
accomplish, especially for large scale cost structure changes
like manufacturing outsourcing and offshoring, it may serve to
frustrate the entire process.
Communication and involvement is critical to getting buy-in at
all levels. The company leadership has to lead the charge
throughout the entire duration of the project and be seen to be
advocating such need for change for the benefit of the company
and employees in the long run.
Sure, it may take a slightly longer time and effort on the part
of senior management, but it will certainly save a lot more
time trying to navigate resistance and possible sabotage
downstream of the process.
The Leadership Imperative
Clearly as business leaders, we are compelled to set our sights
much higher. We must strive for transformational excellence and
get to the right solution as soon as possible no matter how
painful or unpopular some of these decisions may seem. This is
absolutely critical especially when facing a major economic
downturn and there is really no further time to lose. The key
is having the right expertise helping you.
Conclusion
In reality, we do not need an economic crisis to begin focusing
our attention and resources on the important strategic and
structural cost improvements for the company. It should be an
ongoing exercise and as I’ve mentioned earlier, your global
competitors are camping right at your doorstep. If you’ve not
already done something about it, the time is here and now,
whatever may be the size of your company or the industry that
you are in. The company will also be much more robust in
limiting damage caused by cyclical economic downturns and jobs
will be generally safer all around.
N.Y. Ho has leadership
responsbility for Corporate Vantage's business solutions group
which specializes in helping businesses establish a solid and
lean operating presence in Asia which includes Asian
manufacturing outsourcing and offshoring, supply chain
optimization, vendor quality management and business
infrastructure development. He can be reached
at
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