Cost Cutting - The Way Forward

3/2/2009

N.BALAJHI

COST CUTTING – THE WAY FORWARD

Cost is meant t o be incurr ed t o creat e / add value b ut of t en bus iness es incur cost t hat ad ds no or lit t le va lue. I dent if y opt io nal a nd unw ant e d cost s and at t ack t hem head- on

N.Balajhi - Independent Business Consultant

Cost Cutting – The way forward Co st i s som et hi ng t hat a bu si ne ss m ust i ncur t o cr eat e an d d el iv er v al ue f or it s cust om er s. Ho wev er i t i s f ar f rom t he real i ty. Busi ne sse s d o i ncur co st s t hat do n ot creat e v al ue or cost s t hat add l i t t l e v al ue to i t s cust om ers. 'So what ' s t he bi g f uss? Just rem ov e cost s t hat add no v al ue and your j ob i s ov er'. wel l i t 's not as si m pl e and ea sy a s t h at . Each c o st , rat her each ex pen se i t em t hat f i gures i n t he f i nanci al st at em ent s of a com pany c once al s bot h ' wa nt ed' and 'u n want e d' co st s. C haf f shoul d be caref ul l y separat e d f rom wheat a s ot h er wi se wheat coul d b e m i st akenl y t hrown out . O perat i onal i ssue s an d pro bl em s (O I Ps), a busi ne ss v i rus, cause un wa nt ed co st s an d t o war d of f agai nst t hi s v i rus a com pany need s t o t ake a sy st em at i c approach t hat m ay requi re cha nge s at v ari ous l ev el s and t hi ngs, i n -dept h t rai ni ng and a ch ang e i n at t i t ude. O I Ps and guar di ng agai n st t hem i s a bi g t opi c and coul d f i ll m any bl og post s. But f or t he m om ent we wi l l f ocus on a f ram ework t o i dent i f y a nd reduce ' un wa nt ed cost '. If you are on a co st cut t i ng m i ssi on t he n I woul d r ecom m end you t o co n si der t h e f ol l owi ng appr oach t o co st red uct i on. Red u ci n g co st W e can cl assi f y cost s ( not i n t he co st account i ng cat egori e s

way) v i z. ,

i nt o

f our

ess ent i al ,

di f f erent nece ssary,

opt i onal and un want e d co st s. Essen ti al

co st s

ar e

t h o se

t h at

ar e

i ncurred t o cre at e a nd d el iv er v al ue f or cust om er s. I f by any chance t h e se co st s are re duce d t hen a com pany wi l l be com promi si ng on t he v al ue t hat i t of f ers. T o di st i ngui sh e sse nt i al f rom t he rest , ask t h e que st i on wh at if t hi s cost i s rem ov ed or reduc ed? I f t he an swer ca st s a sh ado w o n q ual i t y, cust om er sat i sf act i on, or sal e s t he n st ay cl ear of i t . Nece ssa ry co sts are t ho se i ncurred t o keep t he busi ne ss ru nni ng. Cert ai n em p l oyee rel at ed ex pen se s, st at ut ory co st s a nd t h e l i ke do not a dd m uch v al ue t o t he cu st om er

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N.Balajhi - Independent Business Consultant

but are nec e ssary. I t 's h ard t o re duce t he se cost s but t hey ca n at be st be m oni t ored and kept a s t i ght a s po ssi bl e wi t h som e rul es and t i nkeri ng. W hen a com pany can af f ord l ux ury i t i ncurs o p ti on al co sts . T hey al so hel p boo st t h e im age of t he com pany am ong em pl oyee s, cu st om ers, i nd u st ry, anal y st s an d t he l ot . I t m ay not be po ssi bl e f or a com pany t o ent i rel y root out opt i onal co st s a s som e of it , when red uced, can dam a ge t he i m age of t he com pany. But wi t h ef f ect iv e PR and comm uni cat i on m ost of it can be av oi ded du ri ng t im es of st rif e. F or each ex pendi t ure f al li ng under opt i onal co st a sk, what wo ul d h appe n i f t hi s i s rem ov ed? If t he answer i s not dam agi ng or af f ordabl e t hen go a hea d an d at t ack i t . If t here i s o ne co st t hat dom i nat es t he n i t 's got t o b e u n w an ted co st s. T hi s i s

Wastage

one of t he rea son s why ef f ect iv e si x si gm a

and

i nt erv ent i ons

l ea n hel p

m anagem ent

com pani e s

ac hi ev e

Nonadhernce

si gni f i cant cost re duct i on s. T her e ar e

Unwanted cost

case st udi e s t hat cl aim 40 - 60% cost sav i ngs. But on e t hi ng can be sai d wi t h conf i dence t hat operat i on al i ssue s an d probl em s

(O I Ps)

pre se nt

Delay

Poor maintena nce

hug e

opport u ni t y f or com pani es t o ac hi ev e great er a nd recurri n g co st sav i ngs.

Rework Redunde nt activities

T he pi ct ure giv en al ong si de capt ur e s som e of t he f act ors t hat cont ri but e t o un want e d cost . T hey re si de i n ev ery process a nd act i v it y ri ght f rom t he t op t o bot t om . Many a t im es t hey m ay not be obv i ous and woul d requi re l ot of quest i oni ng t o i dent i f y. T o i dent if y and at t ack un want e d co st , scan e ach pro c e ss, rai se qu e st i on s. scr ut i ni se deci si on s a nd act i on s. A pi ct ure wi l l em erge out of t hi s ex erci se and t hat act as t h e ba si s f or el imi nat i ng unwant ed co st . F i n al w o rd s F orm a t eam t o handl e t he whol e co st red u ct i on ex erci se. St art f rom underst a ndi ng what i s e ssent i al , nece sssary an d opt i onal f rom com pani es' p oi nt of v i ew. I t woul d al so be a goo d i de a t o ex pl ore pe opl e' s mi nd on what t he se coul d be. O nc e t hi s pi ct ure cl ear t hen st rai ght a way at t ack opt i onal cost s by qu e st i oni ng eac h i t em under t hat . F orm a separ at e t eam wi t h a cl ear m andat e t o at t ack un wa nt ed co st . + ++ End of docum ent+ ++

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