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Sunday, 27 October 2019 00:00

Driving Cost Reduction

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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. 

 

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Description automatically generatedMany 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.     A picture containing clipart

Description automatically generatedWar 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. 

 

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Description automatically generatedTechniques: 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.  A group of people sitting at a table

Description automatically generatedCost 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. 

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