Our recent conversations with business leaders clearly show that the disruption of COVID-19 and changing market conditions have left them thinking about costs in a different light. The "new normal" has forced them to shift from simple cost reduction to cost transformation.
The tricky part is that for an actual cost transformation, organizations must adopt optimal cost behaviors that last over time. Unfortunately, it is almost impossible to analyze the effectiveness of business processes and gain insight into opportunities to reduce or reallocate spending using spreadsheets and email.
The good news is that implementing a digital business management system to structure and measure business process improvements can result in significant cost savings and a more strategic use of resources.
What is Cost?
This might seem like a strange question, but many conversations about cost reduction are far too limited in scope. Sure, costs include discrete things that you might write a check for, but the expense is also added to the bottom line through various forms of waste:
- Producing more products than are needed by the customer
- Storing more inventory than is immediately required
- Transporting goods or people when it could be avoided
- Producing defective products or those that require rework
- Including features that customers don't want or need
- Production slowdowns due to broken or poorly maintained equipment
- Process interruption due to lack of materials or work-in-progress
In addition to these process-related costs, there is a customer element to consider. If you acquire a dissatisfied customer, you've wasted the cost of attracting them and the potential for additional business. If customers write negative reviews, the cost of gaining new customers increases. If customers require excess support, costs go up as well.
The following leadership behaviors can help create the conditions for profitability and growth.
Connect Culture and Cost
There are many tactical actions businesses can take to reduce costs. They can renegotiate vendor contracts, reduce the labor force, or adopt a smaller real estate footprint, to name a few. While these actions may have short-term budget benefits, they might also increase costs over time.
Short-term cost reduction efforts do not represent a fundamental shift in how individuals make decisions that impact the bottom line. To achieve that, leaders must embrace a culture in which the actions of each team member are aligned with the strategic objectives and the customer's best interests.
Engaged leadership is the most significant determinant of success in creating a culture of optimization and improvement. Organizations with leaders who dedicate attention to employee engagement invest in enabling technology and consistently apply a structured improvement methodology to succeed at cost reduction.
It is a mistake to think that cost reduction is the responsibility of the finance team or executive leadership alone. Every person in the organization has a role to play in reducing costs in ways that aren't counterproductive to other goals, like quality.
Your front-line employees may be in the best position to identify and minimize wasteful spending. They know which tasks add time and cost without adding any meaningful benefit (a.k.a. waste). By partnering with every team member and making it easy for them to engage in improvement, you set the stage for a sustainable approach to resource optimization.
Remove Waste From the Value Stream
In an ideal world, every penny spent producing a product or delivering a service would give the customer direct value. Leaders must understand how value flows through the organization to create optimal value and waste (cost) reduction. That flow of value is called the value stream. It represents the actions and resources it takes to turn a customer's need into a completed project, product, or service.
In some organizations, a simple value stream represents all value creation, making it easy to identify and map. In most organizations, there are multiple value streams that rely on shared processes, information, systems, and tools to deliver value. In that case, it is necessary to visualize the flow of value to identify resources and activities that represent waste. Mapping the current state can help leaders identify cost-adding waste such as:
- Duplicate data entry
- Unnecessary transportation of equipment or people
- Features or packaging that the customer does not need
Implement Standard Work
The ability to predict process results is essential to understanding and controlling costs. It is impossible to forecast the cost of goods if processes are performed differently at different times by different people. The idea of standard work is to document the current best practice for repeated processes. Each role follows the standard until an identified improvement is implemented by following the scientific method. In addition to allowing for predictability, standard work helps:
- Reduce defects and rework that increase cost
- Accurately price products and services
- Eliminate hidden human resource costs by streamlining employee onboarding
Apply Root-Cause Solutions
When a problem pops up, it is tempting to jump to a solution to keep the process moving. Unfortunately, the outcome may be a series of workarounds that add unnecessary time and expenses to operations. Getting to the root of the problem, rather than applying a quick fix, may result in significant cost savings.
One common method for finding the root cause of an issue is called an Ishikawa or Fishbone Diagram. The visual approach to problem-solving breaks potential root causes into several categories:
- Methods (Standard Work)
- Machines (Equipment)
- Materials (Raw Goods)
- Measurements (Data)
- Human Error
By analyzing each potential category, team members can isolate the root cause of the issue and address it at its source.
Invest in Business Management Technology
Adopting a solution to help manage and measure improvement work and cost-cutting initiatives puts leaders in the best position to understand and implement opportunities for improvement. Leaders serious about achieving optimal operations and expenses require real-time insight into the activities driving positive transformation in the business.
One significant advantage of a digital improvement platform is that it is incredibly motivational. When employees see successful change, they are more likely to report additional opportunities for improvement. In addition, by capturing the impact of improvement and cost reduction projects, you better understand the impact on financial goals, customer satisfaction, time to market, and employee retention.
Almost every organization has a significant opportunity to reduce costs if they think about the subject broadly and engage the entire team. With careful leadership and a thoughtful approach, cost reduction results from business process transformation that brings many other benefits.