Waste not, want not
Reduce waste to reduce costs - and increase profits
By Charles W. Kyd
When business is bad, cost-cutting helps a company survive. When business is good, cost-cutting helps a company take better advantage of the joyful time.
But I've found that mere penny-pinching measures (reusing paper clips, etc.) won't do the job. So, in addition to encouraging financial discipline, I make it a practice to look for pockets of waste in a company. And I look for these among the "cost drivers" - the activities that influence the spending of money.
Often these activities not only stand in the way of success, they are simply irrelevant and should be eliminated. The following areas are a good place to start.
Number of transactions
In his book Managing for Results, Peter F. Drucker suggests taking a hard look at transactions within a company. Revenues are proportionate to volume, he points out, but costs are proportionate to the number of transactions. In practical terms, this means that a very effective way to cut costs is to cut the number of transactions.
Years ago, for example, I was the chief financial officer of a cash-poor company that was purchased by a larger company. Suddenly, the accompanying cash infusion caused the number of our accounts-payable transactions to plummet. We had 30 days' worth of invoices to track and file, not 90 or more. One check could pay for dozens of invoices at a time, not just for one invoice as we found the cash. Suddenly, my accounts-payable costs plummeted as well.
When you look for waste among your transactions, you'll find at least two ways to eliminate it. First, you may find ways to reduce the number of transactions, and thus the overhead costs needed to process them. Second, you may find ways to make each transaction less time-consuming, allowing the same number of people to start performing a larger number of transactions.
Job positions and departments
Every position and department in a company, of course, is a cost driver. And some turn out to be unnecessary, or even a hindrance, to your company's success.
Many companies pay for positions that were needed in the past but not any longer. Several years ago, for example, I was vice president of finance for a small manufacturer in desperate need of a turnaround. To raise cash and cut costs, we sold our manufacturing plant and then purchased our product from private-label manufacturers. With only 10 employees remaining in the company and no manufacturing plant, the firm didn't need a vice president of finance. So I fired myself.
Maybe you can depend on your employees to do the same, but a better tactic is to look at each manager objectively once in a while. Do the pay, position and person match up profitably? If not, the answer may not be to fire that person but to redirect his or her efforts.
Products and product lines
It's often true that 80 percent of the profits come from 20 percent of the products, and many of the non-performing products are candidates for the trash pile. But deciding which ones to drop can be tricky, because cost-accounting information often disguises the way that each product actually drives company costs.
When it's time to drop products, you must ignore cost-accounting formulas and ask tough questions. Which products drive overhead and marketing costs? Which cause inventory to bloat? Do prices adequately cover these costs? If you drop the major cost drivers, would their overhead costs actually go away? Do you have more profitable products in which to invest your scarce resources?
More than any other cost driver, poor quality is a deadly virus that can infect an entire company. The obvious problem is the direct cost of failures: the product that must be scrapped, the error that must be corrected or the job that takes twice the time that it should.
But soon, waste infects other parts of a company: More and more employees work full time on problems - supervising rework, expediting deliveries, processing corrected paperwork and apologizing to customers. Soon, more and more managers work to "streamline" the error-correction process. And as the problems multiply, they become obvious to customers, who stop buying, and to vendors, who tighten credit terms in fear that the company won't last.
But the worst day-to-day effect of poor quality is that it takes the fun out of going to work. It just isn't satisfying to rework products, apologize to customers, make excuses to the sales force and scrap bad material. Doing these things can destroy pride and cause ulcers. It's no wonder that poor quality means low productivity.
It's already tough enough to succeed in business. There's no need to make the job even tougher by carrying a heavy load of unnecessary cost drivers.
Charley Kyd is president of IncSight Corp., which specializes in helping owners turn business data into management insight.