Taiichi Ohno was considered to be the father of the Toyota Production System which eventually became Lean Manufacturing elsewhere in the world. One of his most profound statements was, ‘Costs do not exist to be calculated. Costs exist to be reduced.’ In an economic downturn, executives are forced to examine costs…..closely. In this edition of our Business Basics Series, we offer further insights on how to Focus on the Numbers to prepare for post-Covid 19 economic conditions.
- You can’t fix what you can’t measure. Put more emphasis on collecting quantitative information. Review your Key Performance Indicators. Actively monitor financial outcomes. Use the data you gather to diagnose the current situation. Analyse the position of your organisation at this moment compared to where you it want it to be in the future (despite the prevailing economic conditions) and assess the size of the gap. Take action to close that gap.
- Rationalise despite the challenges. In good times organisations can accumulate unnecessarily large and often complex product or service lines. Take the opportunity to rationalise and standardise wherever you can.
- Eliminate waste rapidly. Go for quick wins. The extent of waste in an organisation can be astounding. Success in this area can lead to similar success in eliminating costs in other areas.
- Manage overheads. In managing overheads, caution and timing are essential. You must strike a balance between delaying new costs for as long as possible without jeopardising the future growth and health of the organisation.
- Increase awareness of costs across the organisation. You must influence people’s attitudes towards cost and wastage. Although it is important to focus on major items of cost you can still cut the cost of smaller items. Scrutinise your own attitude towards cost control and waste reduction. As the saying goes, ‘Fish rots from the head down’.
- Peel the onion. Start from the perspective of the organisation’s strategic priorities, followed by revenue and cashflow, systematically peeling back the layers of costs. Concentrate effort on the largest elements of cost because obviously these will have the greatest impact on the bottom line.
- Apply the 80/20 rule. Focus on major items of expenditure. Classify costs into two categories – major and peripheral. Too often undue focus is given to the 80% of activities accounting for 20% of costs, rather than to activities that generate most costs.
- Be objective in analysing sales and profits. Analyse how sales and profits break down for each product or service. Determine how they have changed over time and how they have changed relative to each other. Repeat the process for costs. Be clear about how every cost element fits into the big picture and how it impacts on the bottom line.
- Exploit your buying power. Because, in a downturn, the seller is more dependent on the buyer than the buyer is on the seller, there is a golden opportunity to extract cost benefits from suppliers. One way of increasing buying power is simply to rationalise your list of suppliers. You might also seek concessions such as trade rebates, cumulative volume discounts or more frequent deliveries.
- Use a scalpel, not a bacon slicer, to cut costs. Do not ask for ‘across-the-board’ cuts from every cost centre, department or section. Doing so may demonstrate equality of sacrifice but it does not solve the problem. Worst of all, ‘equality of misery’ misses the opportunity to remove fat from ‘overweight’ departments. Such an approach could result in cuts into healthy muscle rather than just ‘the fat’.
- Avoid ‘analysis paralysis. In difficult times the temptation is to put off the hard decisions until all the information you think you need is on hand. Be prepared to use ‘gut feeling’ and commonsense in determining when to make some of the ‘hard calls’.
The following topic in our Business Basics Series looks at Improving Your Flexibility and Responsiveness.