Part one – Strategic Cost Reduction: What is strategic about cost reduction?
Last year brought in difficult times for everyone. From individuals to small, mid size and large global companies’ echoed one sentiment – reduce costs to survive. We saw large scale layoff’s as knee jerk reactions. Not sure why companies saw their people costs as the first level opportunity to tackle and their only scope for survival. Buyers were beating down their suppliers to get the best price against target goals, 10% per annum over their scope of supply or haggling over the increasing the payment terms, not realizing that the suppliers were also going through the same issues on liquidity crunch. Net result, suppliers went bankrupt and along with them the entire industry started collapsing, e.g. automotive industry.
Things have started turning around now and we felt it was time to take the learning’s from these experiences and reactions to prepare a strategic response approach to the situation. Surely we need not wait for the next recession but get started on a systematic process of quick wins, tactical and strategic initiatives that can keep the organizations going strong at all times.
Having led strategic sourcing programs across industries, I have seen that traditional structured approach of the last 20 years still continues to deliver value. But we are also seeing diminishing returns in areas where these have been successfully applied over time. The sourcing and procurement capabilities have changed with technology developments happening by the day. It was time to revisit / review the approach.
We pulled together our collective strategic sourcing experience and devoured through all possible case studies of cost reduction programs across great companies looking for what was strategic in each. We converged on some of the following “should not be’s” for a strategic cost reduction approach..
- Not a one size fits all approach –A cost reduction program which is tailor made for each product competitive strategy and aligned to organizational goals. Tata’s cannot be applying the same strategic cost reduction approach to all their product portfolio including their high end Jaguar to the world’s cheapest car Nano.
- Not a pure supplier price focused approach - Total cost and value focused encompassing all cost levers including supplier productivity, cost of performance and cost of relationships. Following the iceberg norms, they say 1/9 of the costs are normally seen and 8/9th is the invisible but large opportunity area
- Not look at just the sourcing decision – Ensures benefits and value maximization along the value chain from design to deliver process of the organization. Recent benchmark data from APQC mentions that an improvement in inventory accuracy from 98 to 99% can improve the supplier on time delivery by 7% and thus improving the costs to manufacture and deliver products.
- Not just internal cost goal focused - Relationship based approach, benefits tracked / traced to internal and extended stakeholders including suppliers , partners , customers. Unearth value across the entire extended value chain of the organization and beyond.
- Not one dimension supplier enforcement – but collaborative multidimensional strategy/process /capability improvement approach aligned to category characteristics. The cost reduction approach to a bottleneck category will be different from a non critical one.
- Not just about one time opportunity identification – but a continuous process about realization and sustaining benefits in the long run while maintaining the supplier relationships. I have come across research data which states that upto 60% of the discovered savings are typically lost in realization phase. A good value based comprehensive program management process applied to cost reduction programs can make a big difference. Tracking and tracing value throughout the program against initiatives
- Not just about buying better – but using better and meeting customer needs better
- Not a traditional long drawn cost transformation journey– But an accelerated approach to deliver savings and impact organizations free cash flow in the minimum possible time. As a friend of mine put this , a “ Now and Here” approach of value creation , this could mean structured quick win filters or alternately handing over the set of processes to a specialist who can bring in both the economies of skill and scale in very near term.
Friends, I would appreciate if you could share your experiences in strategic cost reduction programs and highlight any additional considerations we could have missed in this program design. I wish to acknowledge Guruprasad Srinivasan from my team for his dedicated help in researching cost reduction programs across companies.
Do watch out for this space on 100 strategies for procurement managers to reduce the cost of procurement.