Every Company has to manage their Cost in a systematic manner. Ideally there should be no need to cut Costs. But almost every company has this need to drive Cost reduction. The Profits are under pressure continuously and the Competition & Customers always gives you a reason for Cost reduction.
Many a times when the Cost reduction is taken up the Teams take up an approach of ‘Somehow’ reducing the Costs. If you are approaching serious Cost reduction after a few years in your company, then very good chance is that you would do well and achieve a good amount of Cost reduction. Usually the Top Management are happy with that and Serious Cost Reduction is set aside for next few years.
But I feel there is a need for Continuous Cost Reduction in a Company. The Cost should always be looked at and we should continuously find more economical way of doing things. This has to become a continuous focus of every organisation.
To ensure this happens, we need to put a Cost Reduction System in place. The system would have following components.
01. Cost Data: The first step in ensuring a good Cost Focus is to ensure the Cost data is available in the Organisation. I have seen many instances where the data is not available on the Costs and the Management does not get awakened to the need for Cost reduction. The Cost data should have at least two sides. The Internal data giving the various components of the data and second aspect is Benchmarks with external data. It is ideal if we can get Cost Data Benchmarks with the Competition. But we may not get it every time. We can also look at the Cost on Zero basis.
The Cost data should be available in every area. It is worthwhile to have a small team to analyse the data and bring out the important components.
I have seen several companies that do not know the Cost data for their Products. So much so that they do not know whether they are making money on all their products or not. This is not a good situation to be in.
02. Cost Reduction Target: There should be a Target for reducing Cost just in every Function / Department. The Target should be a reasonably tough. The CEO should have a target at the Company level. This is very important as there are some Cost escalations that happen despite our best efforts. Most of the time, we do not have any control on the escalations. We need to have something to fight back with. Only this will ensure that we achieve our Profitability target for each year.
Cost Reduction target has to be taken to every Function / Department.
03. KPIs: Every employee should have a KPI that is about Cost Reduction. This KPI should have a reasonable weightage. This will ensure that the employee gives a good priority for the Cost reduction.
04. Process for Cost Reduction: Every Company needs to have a good Process for Cost Reduction.
a. War room: There should be a War room for Cost reduction in every company. The war room will have the Cut samples of Products, the Products that are broken down to parts, Competition product Samples and so on. It will also have the Target Vs Actual displays of various teams that are working on Cost reduction.
b. Daily Meeting of Teams: If you want your teams to deliver on Cost reduction, they should spend time EVERY DAY on Cost reduction. Every team should meet for at least 45 minutes in this room The War room should have the schedule for the meetings of various teams.
c. Brain Storming Sessions: Cross functional Teams should meet in the War Room for Brain Storming Sessions. There should be a schedule for Brain Storming sessions. The number of Brain Storming sessions will depend on how much progress you have to make in that particular area. If there is a big target and you are very much behind, then you should meet more often.
Every Brain Storming session should be held with a good Procedure. The team should prepare for the Session. The target for the session in terms of a Value for which you should find ideas should be given ahead of the meeting. The specific topics for the Brain storming session should be announced in advance.
d. Invite SMEs: Subject Matter Experts (SMEs) should be invited for the Brain Storming sessions. These SMEs may be in the Company or they may be Suppliers, or they may be Professors at IIT and so on. You can get different thinking into the Company by inviting the SMEs from outside.
e. Full Time team: Every company needs to have a full time team as needed for implementation of the Cost Reduction ideas. Sometimes it would be very beneficial to have a Task force (Full time team) for implementation of the Cost reduction ideas.
I have seen this Process give wonderful results in Companies. Every Company would require some home-grown processes to ensure effectiveness. But the above standard practices work everywhere.
05. Techniques: Every team needs to learn some formal Cost reduction Techniques like VA / VE, Total Cost of Operation and so on. The teams need to be taught the techniques that work best for the Company. Every company should define these Techniques specifically for each Team and teach them these techniques with the help of E-Learning Courses.
06. Learning from the past: Finally, the Company needs to learn from the Cost reduction Projects / ideas to improve their Products / Processes. A Company need to become better and better at Cost Management and their experience in Cost Reduction can help in a big way towards this objective.
07. Cost Council: It would be good to formulate a Cost Council headed by the Finance Head to monitor the Cost reduction efforts. This Council would be responsible to manage the Cost reduction efforts across the Company. The Council should work out ways and means of encouraging the Employees and motivating them towards the Cost reduction Goals.
08. Total Employee participation: Company should encourage participation from Employees as well as Vendor Community. For this it would be useful to have standard Schemes that will help the Company to encourage the employees and Vendors to participate in the Cost reduction actively. The Employees and Vendors would be rewarded suitably for the Cost Reduction efforts.
A continuous focus on Cost Reduction would definitely help the Company in managing their Profitability much better.
In the past 6-9 months, most of the Industries across India have started complaining about their Businesses slowing down. May be this problem very much exists in other countries too. But, let me focus on Indian Companies. The Slow down panic is there in many industries and everyone has his/her own theory about how bad it is, why it is happening and how long it will last.
In this article, I would like to just focus on ‘What a Company can do during the Slow down’.
Every Company would have expanded their capacities with some expectation of Sales every month. When that Sales is not happening consistently for a few months, they would start panicking. Usually, you would see following happening in Companies where the Sales is not happening as per plan and it started dipping below the last year and last few months average.
- Sales Team looks help-less. They are not achieving the Targets consistently and Sales numbers are falling steadily. The Sales team keeps reporting bad numbers. After a few months, the Management may start accepting that there is nothing that can be done, and Sales team is trying their best!
- Employees get fired. The Contract employees are the first to be fired. As the Sales Dip continues, the firing will extend to other types of Trainees, Junior Staff, in Some companies’ Senior people will be fired as it gives better bang per firing. These same Employers talk about the need for Employees to work as owners in good times and when things go wrong, they fire the employees (Rajiv Bajaj put this wonderfully in his interview with CNBC).
- Inefficiencies increase in Factories. The Factories start idling and the Production efficiencies increase. Again, this keeps getting accepted as okay as the Volumes are down.
- New Product activity reduces. Most of the Companies will see their New Product activity reducing as they do not want to take more expense and more risk during the slow down.
- Mad rush to reduce Fixed Costs. The Semi Variable / Fixed Costs get cut ruthlessly. Maybe it is right to do that. But even the essential ones will get cut.
- Negativity all around. There will be a mourning environment and the energies are down. Senior Management pet topic is about how to cut Costs (Again nothing wrong with this approach. But that can’t be the only chant.)
- Company starts going into a shell. You can almost see the company getting into a shell withdrawing all signs of life! It is almost like closing your eyes hoping the storm will just pass and it won’t affect you if you close your eyes!
- Everyone starts asking for Government help. Last but not least, everyone starts looking to Government to rescue them. Government can help Companies to enter in to new markets across Globe by passing on some subsidies to them. This is done by many Governments across the world. China is a wonderful example of supporting their Industries selectively so that they can penetrate the Global market. But, you can’t expect Government to come to your aid whenever there is sluggish demand or more serious slow down.
What else we can do?
I would argue that most of the Indian Manufacturing Companies have huge possibilities for improving themselves. The inefficiencies that are there in the Companies are huge. The Slowdown that is happening can be used to rediscover themselves in many areas of Business. We can look to becoming a stronger Company that can withstand these Slow times! I am not talking about throwing lot of money at problems. I am talking about fundamentally restructuring your P&L in such a manner that you can withstand these Slowdowns.
Let me highlight a few ways below. We will deal with each of these areas in detail in articles that will come in subsequent weeks.
01. Skill up your People: A Company is built only by the People that it has. When the Top line dips, Companies should not look at firing its’ People. This is foolish and it is akin to shooting yourself in your foot. When you look at the Shop floor Employees, most of the Companies are living on Contract employees and Trainees whom they can fire immediately! This is no great Leadership! You can show great Leadership by:
a) Re-engineering the Learning: Defining the Skills required for each of your Employees, Skill them up by using Modern Technology like E-Learning. Use this Slow down to re-engineer the way you focus on Skills.
b) Make Learning Contextual: Define Micro Skills and Micro Learning agenda for employees depending on your Business agenda for this Year. Train them for the Context by using the E-Learning.
c) Bring Skills to the center of the Business: Link Skills to Performance and link Skills to Performance assessment. This will ensure your Employees create a pull for Skilling up.
The Business Goal for this activity should be to Triple the Sales Turnover created by each employee in the Organization over next 2 years. This is very much possible. Leaders need to take up this challenge.
Do not look at firing Employees. Rather, build a Team that is totally committed to your Organization and this will make you win in the Longer run. In the Short term too, only this can create good results. If you fire people and improve your Bottom line, the Investors would see it clearly. You would be harming the Company by doing this.
02. Re-engineer your Business Systems: Most of the Indian Companies do not have a clear way of working. The SOPs are there in ISO files and they get dusted before every re-certification audit. After that no one looks at them and no one follows them. Some of the following can be done:
a) Re-engineer the way you Manufacture. If you have not implemented the Lean Concepts on your Shop floor, this is the time that you should do. Everyone will understand the seriousness of the Situation in a Slowdown.
b) Re-engineer the way work happens in various Functions. The Productivity of every activity can be at least doubled if you have not applied Lean principles to it. I am talking about the activities that your Staff does. Time taken for releasing a P.O, Time taken for accounting a Bill and so on.
c) Define the way of working in every Function. You should define your ‘way of working’ in every function. New Product Development System should be defined, Cost reduction System for your company should be defined, Sales Process should be defined, Marketing Process should be defined and so on.
The Objective of this exercise should be to get every activity in the Company done in 50% of the time compared to what it is now.
03. Re-engineer your Costs: The Opportunities for reducing the Cost in a significant manner are there for many companies. In the past decade or so, the Companies are focusing more on Costs. But still there are opportunities to reduce Costs. Some of the activities that can be taken up are:
a) Taking up Big Targets for Cost reduction.
b) Conducting Brain Storming sessions.
c) Involving Subject Matter experts.
d) Bench marking with World Class Products.
The Objective of this exercise again should be to improve the Profitability by 35% or more. A Big target will make your team to think entirely in a different manner. Have trust in your team, they will deliver the results.
04. Re-define the Market Place and the way you approach it: In the current status of the Industry where there is a big change that is coming up in Auto sector in terms of surge in Electric Vehicles and reduction in IC Engine vehicles, many Companies have to have a relook at their focus areas. They may have to redefine their Industry focus. A Foundry / Machine shop that is focused on Auto sector has to realign itself to other Industries.
When a Slowdown happens, it is not that the whole Business has disappeared. You are not growing. But there may be several other Companies that are growing. Indian Economy is growing by 5% right now. You are not aiming to capture the whole Economy. It is just fine for you if you are able to capture a few more new Customers. Every Prospective Customer is looking for new ways to save money and reduce costs in this environment. How can your Team deliver this to these Prospective Customers? If you are skilling up your Team, you can ask them to deliver this result for you. If you are firing them, then there is no one to deliver this result for you!!
If you have been rejecting RFQs that are 20% below your Price expectations, then can you challenge your team to start reducing the Costs and accept more of these RFQs?
05. Re-engineer your Products: Use this time to align with your Customers much more. Every Customer wants the same product at much lesser price. You may be having ideas for reducing the Cost and come out with a new Family of Products. But you would have been postponing it due to the pressure on the Factories and R&D Team. Now, the Factories are not having the Pressure. Focus more on New Product Development, come out with the Family of Products that may be Priced 20% cheaper and most of the functionality.
This is the time to teach ‘Frugal Engineering’ concepts to your New Product Development team and become more attractive to your Customers.
Fill your Company with Positive energy
There may be many more Initiatives that can be taken up. What I am suggesting is that you should use this time of Slow Down to energize your Employees and ask them to take your company to the next level in terms of Competitiveness.
Use this time to create some World Class Benchmarks!