“Management tends to take the smallest bite out of the cost apple,” says Jack Welch, as opposed to cost being the #1 enemy of any organization. Jack goes on to say, “I’ve never seen a business ruined because it cut costs too much, too fast.”
It has been my experience as a consultant that organizations nationwide tend to follow this same cost-cutting model – taking small bites out of the cost apple – when they should always be on the attack. Even when I thought that a corporation had cut its supplies or labor costs too much, I observed that these egregious errors could be fixed quickly when management realized their error in judgment. More importantly, I noticed that no real harm came to these organizations’ quality standards, because these errors were quickly identified and rectified before any real harm was done.
Anecdotally, one of my heroes in the war against cost was the president of a corporation in the Northeast who realized that there was no sin in cutting costs too much or too fast. His philosophy was that if he didn’t need the savings today, he would certainly need them tomorrow, so make big savings happen now. Further, this president was a champion for installing cost management systems to manage and control his labor and non-labor costs continuously, as opposed to reacting to revenue downturns by cranking up a rusty savings machine to prevent a disaster from happening. He didn’t like surprises and was always proactive in his cost management efforts because he realized that he could never lose by being the low-cost competitor in his marketplace.
His first line of defense was to install an activity-based labor management system to measure and control his system’s departmental workloads and staffing ratios on a continuous basis. This enabled him and his management team to have a real picture of their labor resources so they could take action to control, refine, or reallocate them in real time, if necessary, and provide him with a framework for accurate benchmarking with his peer organizations. It was his goal with this new system to no longer be held captive by the whims of his department and managers or swings in his volume, but instead to manage by fact!
Next, he installed a value analysis program to manage and control his non-salary expenses, which replaced his product evaluation committee that had previously had this responsibility. His reason for making this change in philosophy, form, and function of this critical activity was that he realized that his former product evaluation committee had limited scope, focus, and wasn’t function-oriented, but was rather price-oriented, which was a limiting factor in this committee’s maturity. Conversely, he saw a greater opportunity for savings breakthroughs with a value analysis approach to managing his non-salary expenses that would streamline and reinvent the products, services, and technologies he was buying, in place of just getting a better price for what he was buying. This new approach to non-salary expense management generated hundreds of thousands of dollars of new savings for this corporation within one year of its adoption. The savings was in addition to giving the organization a new management system to evaluate the worth and relevance of the products, services, and technologies in a strategic manner by recognizing how they fit into the hierarchy of the corporation’s overall product, service, or technology mix, not just how much the product, service, or technology cost.
The moral to this story is that whether your organization is in financial difficulty now or you’re just looking to increase your profits, you should realize that cost is always your #1 enemy and you should always be on the attack. Preferably, by installing a management system to manage and control your labor and non-labor costs continuously, not just when a crisis rears its ugly head.