How To Reduce Costs…Or Just Cut It?

As I was sitting in the 12:25 London Stansted Express to the airport at the end of a nice site seeing weekend in London with my son, I got an email on my Blackberry from a friend.

He said that he may have one interesting prospective customer for my Lean Six Sigma (LSS) advisory business. He told me that company ABC (let’s keep it private) where our mutual friend works, 20 people will be dismissed in the coming month.

As he put it: this company could achieve much better results with LSS then by only cutting the manpower.

He is absolutely right…

When I was a Finance Manager I had to find ways to reduce the costs of the company. But I was desperate…
I really had very limited means to do that and I think you are a lot like me: you know you should do SOMETHING about your expenses but you don’t not how…

That’s very frustrating.

When the company I was responsible got into bad finances, I have done (some of) the following to reduce costs:

1. They dismiss people

2. They squeeze out the suppliers

3. Stop unprofitable operations

4. Miscellaneous: cancel subscriptions, change lease contract, etc.

I am sure that more than 90% of the companies do this. What are the consequences?

Costs are going down quickly but not without consequences.

Let’s look at some aspects of it.

#1 Impact on the organization

The employees who are still in the company will have to do more to compensate somehow the work of those who are dismissed. In some extend it will not be possible at all.

So the work of those who are now dismissed not being done anymore, why let managers do it in the first place? Why did those employees carried out tasks that are not regarded value-adding anymore at the moment when the company is in financial trouble and those employees have to leave?

Isn’t it strange?

Or it was not investigated like that…Impact on the profit has a much bigger weight when the those managers took the decision than the impact on the remaining part of the organization.

I know I made such decision myself: I had to dismiss people and even I got awful lot of more work. Only then you realize all the bits and pieces of some ones job.

#2 Impact on customers

When due to cutting in manpower, the job is not taken over by the rest of the organization, it means:

a. Job was not important – so you let your customers finance it for all those years, paying for something that had no value to them and even no value to you. That’s not faire, is it?

b. Job was important but it will not be continued due to lack of manpower – “thank you very much” says your customer. “So I don’t get the same level of service anymore?” “All right then, I’ll pay you less…or go to somewhere else…”
You don’t want that either because you want to improve your profit and not make it even worse. But that is often the case.

#3 Impact on suppliers

When you want to reduce your cost, you suddenly think about your suppliers. You, being very analytical – it feels good anyway to do some number crunching – apply the 80/20 rule and you see at which suppliers you spend most of your money.

There you go: you try to push them to lower their prices, and to squeeze out every penny you can. Excellent! Your are on the way to make things even worse!

If you believe in the importance of good relationship with your customers for long term benefits for both of you. That is equally true for your suppliers and you being their customer.

Good negotiation for a nice purchase price is of course part of the way you do business. And if you have strong purchasing power you can achieve even more discounts and price reduction at some of your suppliers.

Again, this is normal business and you pay additional attention to this when your results are disappointing but even then don’t expect sudden, significant improvement in your financial position.

What to do?

You have to cut cost when sudden, unexpected things happens to your business.

It is much better if you can work on reducing your costs on an ongoing base.

You should continuously improve the efficiency of the work.

Applying Lean methodology to reduce unrequited, unnecessary steps in every process will result in streamlined operation. That people will leave, take up other opportunities within or outside your organization will be a normal way of adjusting your capacity to the required work.

Improving organizational efficiency on an ongoing base will make your organization lean and flexible and also robust to changing demand.

Applying Six Sigma to reduce the mistakes, defects in every body’s output will make your processes more predictable and of high quality. The quality that your customer is looking for.

Your customers will recognize it and you will standing out among your competitors.

Conclusion

Cutting costs is sometimes unavoidable but reducing costs on a structured, pragmatic, purpose driven way and doing it together with your whole organization is far more better.

Having a structure to start improvement projects – Lean or Six Sigma ones – will help you and your organization to focus on the important areas.

Having the right tool in the form of Lean and Six Sigma methodology will guarantee that you find solutions to your problems in a short period of time. Also the improvements, changes you will make will last for long.

Warm regards,

peter

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2 Responses to How To Reduce Costs…Or Just Cut It?

  1. Kitti Rangsigutta says:

    Dear Sir:
    By lean six sigma, most of manufacturers do labour reduction which results to increasing many numbers of unemployed. Large amount of unemployed may have more troubles to public. Then lean six sigma is a new method to throw plant trouble away to the public or government.
    Then what to do next.

  2. Peter Herku says:

    Hi Kitti,

    You mention a very important point and you are right.

    Applying Lean and Six Sigma will improve the company’s efficiency, which means you can achieve the same output with less manpower.

    In that case, the management has to take the decision for the good of the business: “do we expect demand increase so we can keep the people or not”.

    If not, they have to let people go or try to re-assign them another job, which is not easy.

    Letting people go is always a difficult decision but it has to happen because the company MUST make profit in order to survive.

    Though working on efficiency with Lean and Six Sigma on a continuous base is always a much better alternative than just cutting the costs, laying down employees when the profit is in danger.

    Only by cutting cost, you do not make any significant efficiency improvements, just giving your financial figures a “face lift” with the consequences as described in my post.

    Thanks,
    Peter