During times of crisis, companies will often cut costs to survive. Which costs must be first cut is a matter for deliberation, as cutting the wrong areas will destroy future competitiveness. Instead of taking across-the board cuts, utilizing a strategic approach will not only help to save money, but allow you to thrive after the economy recovers.
As the year end approaches, there are an increasing number of positive signs that the worst of the global economic downturn may be behind us. Nevertheless, the pace of economic recovery remains uncertain. Sales in many sectors are still down, with full recovery still a distance away.
In a bid to sustain profitability, many companies have sought solutions to better manage their costs. However in too many cases, cost-cutting is being achieved through impulsive, top-down or arbitrary reductions, such as headcount targets, that often have unanticipated results. For example, the initial savings from headcount reductions are often offset in the medium to long term, once business units realize that they have insufficient resources and require outsourced workers, or when they subsequently hire cheaper, inexperienced workers who cannot perform the job as well.
In knowledge-based and manufacturing-based organizations alike, where company and industry-specific knowledge and experience can be critical for organizational competitiveness, the most significant assets of a business are often its people.
An alternative to across-the-board cost-cutting is to engage in Strategic Cost Management, which aims to give firms the ability to generate revenue while optimizing costs, but without losing competitive advantage or the ability to respond once the economy rebounds. It focuses on three areas: operational effectiveness, developing a strategic supply chain and deploying effective IT solutions.
To apply the operational effectiveness component, a firm should bring together a management team to identify specific areas within the business (operations, functions, activities, systems, people) that are under-deployed or have diminished economic value. The next step is to re-deploy these resources to where they can generate the most value. This may help to reduce costs and provide additional potential for revenue generation, while also taking a long-term view by building human capital through workshops and experience sharing.
Supply Chain Management
When looking at the supply chain, organizations should engage in strategic sourcing by reviewing key vendor and supplier relationships. These relationships often represent a significant amount of business good will, especially in times of crisis. If applicable, consolidation of suppliers and improvement of contract and inventory management will also assist in lowering costs.
Effective IT Solutions
The final component is the implementation of Management Information IT solutions. Utilizing effective business intelligence tools can help management to identify areas of priority, while helping to determine the appropriate levels of effort and allocation of resources. Business intelligence solutions provide management with solid data to support decisions, assisting them to reduce costs in a more precise, evidence-supported manner.
In summary, Strategic Cost Management can generate more savings than traditional cost cutting measures, through the identification and redeployment of resources to the places where they can generate the most value, the reduction in supply chain and sourcing costs and the deployment of business intelligence solutions to provide more meaningful information on focus areas requiring resource transfer. As a result, it is not only an effective tool in managing costs in these challenging economic times, but is also an important element in preparing a company for better economic times to come.
This article was ghost-written by Karn G. Bulsuk and was originally published in the December edition of T-AB, the American Chamber of Commerce’s magazine in Thailand. It contains both existing and original material.