We have all heard the statement – you can’t cost cut your way to profitability. Too often in business, CxOs and others forget the spirit of this saying. Cost cutting, or more precisely, cost management, is vital to running your business. In many businesses and their associated supply chains, however, this is achieved in disjointed and siloed departments. This disjointed approach to cost cutting can achieve the basic goal of saving money and therefore “improving” the bottom line. But it falls short of long-term benefits for the businesses. Savvy CxOs need to look at cost through a different lens.
- Determine the way costs impact the holistic picture of your business. Yes, I know that companies have to produce balance sheets, cash flow and income statements. But these exercises are driven on a quarterly and annual basis. What about the daily activity? When it comes to your supply chain, decisions about cost are made at a much more rapid pace. And their impacts need to be understood at the speed of business, not an accountant’s timetable. CxOs need to strive to get visibility into their costs at this level – not the level that is asked for by their accountants.
- Understand how becoming more cost-efficient creates opportunities for new business models. Oftentimes when we speak with customers about some of their cost-cutting efforts, they emphasize the savings achieved. A worthy goal indeed, however, most CxOs do not promote or focus on the next level – what are the new business opportunities these efforts have created? Where can assets and resources be shifted because of efficiencies gained? If you can be more efficient in one area, where can you reinvest in others?
- Change the mentality of cost cutting to waste management. I realize that this might appear to be one and the same. The distinction exists around the notion that waste management is a mentality that distinguishes between bad costs and good costs. It’s similar to when you go to your annual physical, and your doctor looks at both the good and bad cholesterol. Both numbers must be evaluated together, not in isolation. Adding cost is part of doing business but it must be done efficiently – cut waste not just blindly cutting spending.
What does this change in mentality look like? Take for example the work SCA Technologies is doing with one of its customers, a fast-food giant. The Pittsburgh-based supply chain software firm has worked with this client to implement technology that provides a level of understanding of costs previously not achievable. The outputs have been to understand the nuances in the fluctuations of commodity cost – poultry, eggs, beef, and cheese, to name a few. As a result, the fast-food giant gains a full view of the impact these costs have on their final product – throughout the end-to-end supply chain. Margin impacts, in turn, drive decisions around new product introduction, pricing and promotions. In a business where margins are constantly under pressure, this insight has deep impacts on the day-to-day business.
For example, the fast-food giant was looking to introduce a limited-time offer into its menu, but after assessing cost upticks for specific commodities required for that product, it became apparent that shifting to a more favorable time of year for those commodities would improve profitability. This level of insight into cost structures, and more important, how they impact the entire supply chain, enabled a smarter—and more financially sound—decision to be made.
We have seen the same in the consumer electronics business. For example, Apple understands the strategic advantage inherent in looking at the cost of items such as flash drives and taking a forward position. When Apple looks forward to new product introductions, it also looks to buy future production and inventory of key items – this is a massive cost creation. However, the assurance of being able to capture market share by having the right inventory on hand is vital. The issue of absorbing and adding costs is not the concern – identifying a possible business opportunity is the priority. They can do this because they have a holistic view of how near-term cost can impact long-term market share.
The bottom line for CxOs is that cost isn’t bad! Of course incurring costs for employee sushi lunches and paying for all your employees’ cell phone bills might not lead to the greatest business outcomes. Unless you are Google when you use these “perks” to ensure your minions are kept in the mothership as many hours as possible. But focus on those areas where waste management can open up avenues otherwise neglected. Look to cost as the basis for short-term and long-term innovation and laying the groundwork for new product introduction and new business processes.