"No problem can be solved from the same level of consciousness that created it." - Albert Einstein
Discretionary spending cuts, suspension of the 401K match, multiple layoffs and across-the-board pay cuts - those choices are hard, but straightforward. And when no other choices remain, consultants can't add much value.
But at some earlier point, additional cost reduction opportunities always exist. They just go unnoticed or unexploited. Why?
Human nature is partly to blame - the toughest choices aren't palatable until survival is at stake; and by then, time is too precious to consider anything other than "quick" solutions. Cost reduction opportunities are also obscured by financial reporting systems built only to produce GAAP(1) financial statements rather than to inform management decisions. Other opportunities are overlooked when cost reduction efforts focus only on company activities.
Visualize the activities in your company's value chain - manufacturing and sourcing, logistics, marketing, sales and service - as well as the functions that support those activities - human resource management, information technology, R&D, finance and treasury. Can your financial reporting system tell you:
- how much of the cost of each activity and function is consumed by each customer? each delivery channel? or each market segment?
- which customers, channels, and segments consume the most working capital? or the least?
- how much of the cost of each activity and function is variable? how much is fixed? how much is really a step-cost (a combination of variable and fixed?)
- what drives cost within each activity and function - e.g. for customer service and warehouse stock picking, is it the number of customer orders? or the order size? or the timing of order receipt?
Chances are good that your financial reporting system is mute. Yet these are the right questions and strategic cost reductions - those which create sustainable savings - depend on the answers. For instance, a company that offers a single bundle of product and services might discover that a small population of "service abusing" customers accounts for its rising service costs. If those customers can be operationally segmented, the company might un-bundle pricing - either completely, or by offering a more limited service package to that segment.(2)
Opportunities are also often missed when cost cutting efforts focus exclusively on activities within company boundaries - and for companies that occupy just one or two links in the extended supply chain (3), the missed savings can be huge. All companies try to buy from suppliers at a low cost, but few understand how their choices and policies (e.g. packaging, PO frequency and cancellation policy, quality requirements, etc.) affect supplier costs. Many purchasing managers are incapable of exploring those opportunities because they view supplier negotiation as an adversarial zero-sum game.
How Snap Vector Can Help
Snap Vector can identify drivers for the largest and most rapidly increasing cost categories. We can unlock useful data that might reside within an ERP data warehouse, even when the integrated financial reporting system is too "GAAP-oriented" to be helpful in its own right. And if such data doesn't exist, we can almost always approximate it. Interviewing key employees in various activities and functions often yields the best information - they usually "know" cost drivers, even when they don't think of them as such.
But in the jigsaw puzzle of strategic cost management, knowing the cost drivers is like finding the corners - just a necessary starting point. To make that knowledge actionable, Snap Vector goes a step further to establish a link between each cost driver and one or more customer segments. We then "work backwards" to establish a link between each customer segment and one or more cost drivers. Those linkages illuminate opportunities to modify or influence (cost causing) customer behaviors through changes in Product Pricing or Business Strategy.
Snap Vector can also expand the scope of cost reduction efforts. In much the same way that Customer Depth Interviews reveal hidden product value drivers, we can conduct "vendor depth interviews" to reveal hidden cost drivers caused by a client's purchasing policies, preferences and specifications.
Footnotes
(1)Generally accepted accounting principles
(2)Profitability analysis of individual customers often overlooks such opportunities because the focus is on the customer, rather than costs to serve - instead of identifying "drivers," indirect costs are treated as "overhead" and allocated to customers on some arbitrary basis such as percentage of revenue.
(3)The extended supply chain includes your supplier's suppliers, the end or "final" consumer of your product, and every company in-between.
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