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Cost Reduction Practices Most Leaders Miss

In my last blog for the Manufacturers Alliance I shared the principles behind a wise approach to cost reduction, to define the broad processes involved. In this article I want to examine some of the key areas where opportunities lie.

However, before we start, it is incumbent upon management to get its own house in order before looking at the rest of the organisation. As has been said many times, change fails. Probably less than 20% of management initiatives succeed, the balance failing for a number of reasons but an inability to get the organisation to commit to the collective vision one of the biggest. Without high levels of communication, recognition and a credible and a clear Values/Behaviour profile, this commitment may not be forthcoming.

The first step is therefore for management to both clean up its act and be perceived to do so, demonstrating seriousness of intent and providing an example for the rest of the organisation. Areas could include meeting and email disciplines, overtly reducing micro-management, eliminating perceived perks and privileges and generally streamlining operational management.

Then examine your organisational structure. Supervision, the overseeing of employees, is ‘by definition’ a non-value-added activity. The existence of an additional layer in the managerial hierarchy, whether formal or otherwise, will add bureaucracy and obstruct decision making. It is also expensive. Often these “supervisory” roles are created not because of business need but to keep individuals happy. They can also be there to make life comfortable for others in authority who avoid the people management aspect of the role.

Instead examine more delegated authority, perhaps even autonomous work groups. Within the right culture, another subject, these self-managing units can be highly efficient and productive.  The non-financial benefits include vastly improved engagement and ownership down to operator level which enhances quality and innovation. In any event, keep the organisation as flat as possible and steer clear of pseudo-managerial positions.

Then examine your bonus schemes which seem to more commonplace nowadays as performance management tools, despite showing no evidence of effectivity in the majority of applications. In my experience as a negotiator over many years in this field, bonus schemes are motivational for a very short time, often just one cycle. Thereafter they are distracting, demotivational, expensive and often inflationary. Management are wonderful in persuading themselves that their schemes achieve the opposite, usually because they lack the tools or the willingness to do the job properly by effective interpersonal interaction. Ask yourself why you have such schemes and interrogate why they are beneficial. If you find that they are, then ask again-you’ve probably got it wrong! Make sure that you are not using a bonus scheme to compensate for proper recognition practice. A simple thank you can be much more powerful, if you exhibit the necessary sincerity.

Other areas to scrutinise include the ancient art of inspection and audit, both complete non-value-added activities. We often institutionalise poor value added by failing to get responsibility back to the operator or service provider. Look to eliminate all internal inspection by improving right first time right across the piece, including office activities. An incorrect invoice can cause as much damage as a faulty product.

Recognise that the cost of holding stock in all its forms can be very high, dependent on interest rates. When the costs of storage, excess and obsolescence, movement, deterioration and interest charges are thrown in, your margins may look somewhat sicker. Just in Time and Build to Order can revolutionise here if feasible.

And finally look to your customer service standards. Added value here only comes from customer delight. A delighted customer will be a repeat customer so ensure that the chain of decision making is geared to that end, often exploiting what Chris Daffy calls the “Plus Ones”, little things that cost nothing but create the perception of exceptional service in the eyes of the customer. Retaining customers is said to cost one tenth of acquiring a new one. Now that is a cost saving.

Prof John J Oliver OBE, is leading expert on radical employee engagement, is a Masterclass speaker and former CEO of Leyland Truck. At Leyland Trucks, Europe’s largest truck manufacturer, he transformed the company from an unprofitable, declining truck-maker into the most cost-efficient operation of its kind in Europe through employee engagement.