Companies tend not to worry too much about costs when things are going well. But then suddenly there’s an economic downturn, or a smart move by a competitor takes them by surprise, or there’s an internal crisis. A mad and uncoordinated rush to cut costs can have some short-term gains, but lasting damage may be done to the business.
Strategic business leaders are continually looking at their internal and external value chains to remove costs and provide greater value to their customers. This is particularly important as more and more goods and services are regarded as commodities and customers are buying on value and price and not on brand. Lowest cost producer is an enviable position for any organisation.
The trick to becoming the lowest cost producer is not to willy-nilly take costs out of the process. This can have unfortunate outcomes. For example, a company may pressurise a supplier to reduce prices. The supplier grudgingly does so but may skimp on product quality or delivery times.
When cost control becomes a strategic imperative, companies assimilate a new way of looking at how costs are accumulated across the organisation. They identify the bottlenecks and constraints and optimise the efficiency of facilities and resources. They deliver cost reductions through tight procedural controls, like managing inventory, optimising pack sizes, and cutting out middle people. They purge marginal or poorly paying customers from their books. They are constantly on the lookout for new processes, technology, and competitor happenings. Shorter cycle times translate to satisfied customers and better cash flow.
Leading lowest cost producer companies have developed some useful rules of thumb to help them reduce costs.
- They understand the business. Every value addition process has been dissected and is fully understood, and the appropriate measurements and controls are in place to ensure that each step in the process works quickly and cost-effectively every time.
- They understand what the biggest drivers of costs are. Logistics costs, re-work, packaging, and raw materials inventory come under intense scrutiny. Finished goods standing idle in the warehouse is working capital tied up to no advantage.
- They ask silly questions. What will happen if we stop doing this? Can we do the same thing more simply and more cheaply? Can we reconfigure the existing product to provide greater value to the customer? These silly questions challenge comfort zones and bring fresh eyes and new insights to processes that would otherwise escape scrutiny.
- They act. Once a better way has been uncovered, they don’t hesitate to implement and extract the benefits as quickly as possible.
- They make cost control and cost reduction imperative in the organisation. It becomes part of how the organisation works.
- They use technology. The Fourth Industrial Revolution (4IR) has brought with it an array of new opportunities. New applications to the market, artificial intelligence and virtual and augmented reality must be considered and harnessed in the never-ending quest for cost reduction.
Every organisation must embrace the challenge of low-cost production. Customers are demanding more for less. The only way for your company to stay ahead of the pack is to shrink your cost base continually and resolutely. It can be done, and it is being done.
