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Critical factors for pruning costs
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Pulling down the cost line for immediate gain by skipping some quality control measures can be fatal..
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Volatility is inherent in the present global financial system and it is going to stay, observes Mr Siddhartha Sen, a Kolkata-based cost accountant who was formerly the Senior Director (Research & Journal) of the ICWAI (Institute of Cost and Works Accountants of India).
You cannot just wish away an unwelcome guest staying too long, you have to learn to live with him, explains Mr Sen, through an analogy. "Marginalise impact of his stay and make him uncomfortable till he is bored enough to leave you!"
Likewise, cost management and appropriate cost strategies constitute an essential helpline for corporate survival in this scenario, he adds, during a recent email interaction with Business Line.
How to go about cost management? "Frankly, there is no hard and fast rule," Mr Sen concedes. "In a period of sagging demand, collapsing prices and a severe cash crunch, the obvious aim is to hold the demand line while pulling down the cost line (in the medium and long term) to have enough breathing space to survive and set for a take-off as opportunity arises."
However, he hastens to caution that pulling down the cost line for immediate gain by skipping some quality control measures to `save' cost can be fatal. "For rejections and poor quality you will lose even your loyal customers dipping further the demand line along with the bottom line, thus hiking sky-high your `hidden costs' for `saving' your immediate visible costs."
Excerpts from the interview:
What are the key factors in managing financial volatility?
There are five critical success factors for managing financial volatility - each of them vital for pruning costs in such a situation.
Sustainable cost control: This aims to achieve permanently sustainable cost reduction viewing the enterprise and its supply chain as an integrated whole. It synchronises efforts across various functions and trade-partners, resolving goal conflicts among various departments and across the value chain so that cost reduction effort of one is not hindered or derailed by other.
VEN (virtual enterprise network): Enterprise collaboration is needed in a higher way not just in a buyer-seller relationship but as a single extended, virtual enterprise. E-commerce, computer network-enabled electronic manufacturing services (EMS), outsourcing, and global operation with local presence through the network (VEN) can facilitate permanently-sustainable cost reduction. Examples are multiple sales channelling through VEN for positive cost and market impact, and visibility to many locations with instant two-way/multi-way access to synergise cost reduction efforts.
Dynamic market responsiveness (DMR): You do not have the opportunity to continue with status quo or delay market response and succeed. That is why DMR is so important. Besides many other issues it also involves collaboration from the conception stage of any new application area for positive cost benefits, and faster inventory flow over entire value chain to achieve cost advantage.
Product lifecycle management (PLM): Speed of innovation and market change compel you to consider product lifecycle and its cost management. This involves consideration of product quality early in the production ramp-up with quality cost advantages; and synchronisation of design, procurement, manufacturing, suppliers and buyers, which is essential to achieve cost advantages of PLM.
Value-driven performance: Value maximisation is key to your success vis-…-vis other market competitors in the face of sagging demand line. The key aspects of value-driven performance are: bundling service with products for greater customer delight; enhanced collaboration with the partners of extended virtual enterprise; creating market trend; and being the first to reap greater margin in the initial phase. ABC (activity-based costing) and activity-based value management go a long way in this domain.
Achieving the above critical success factors is based on one mantra: Integration and collaboration over the entire value chain.
Should companies think of quickly harvesting the low-hanging fruits?
Harvesting the low-hanging fruits or achieving the easily achievable targets and easily available solutions to problems that are often overlooked, leads to considerable gains if one can think out of the box.
A stitch in time saves nine, goes the old saying. The manager of a company is using refilled toner cartridge (for use in inkjet printers) of Rs 250 each instead of new cartridge (Rs 1,100). Is he saving cost? Wrong! A refilled cartridge gives such a poor impression requiring re-printing of documents again and again (or requiring to use bold types, consuming more ink) so much so that at least one refilling is required every month, while a new cartridge lasts six months. So, refilling costs you Rs 1,500 every six months instead of Rs 1,100. Add up the cost difference for hundreds of printers in use in a big company - it means a substantial saving if new cartridge is used instead of refilling.
Common innovations can save you huge costs and improve productivity and profitability to a very large extent. To cite a real-life example, a company producing lightweight suitcases used to send them by road transport. One full truckload consisted of 500 big-sized suitcases or 750 medium-sized ones or, 1,500 small-sized ones. So, 500 suitcases of three sizes each required two truckloads (because 500 medium-sized suitcases needed two-thirds of one truckload and 500 small ones needed one-third of one truckload).
Weary of reducing transport costs (as at that time the Railway strike was continuing and so transport by rail, though cheaper, could not be availed of) the company came up with a novel way of loading suitcases.
One small-sized suitcase was put inside a medium-sized one and the medium-sized suitcase was placed inside one big-sized suitcase. Thus, one truckload was needed to transport 1,500 suitcases (that is, 500 of each variety).
Instead of doubling, the transport cost was just cut to half, and that turned out to be even cheaper than the railway transport!
Thus there are numerous ways to harvest low-hanging fruits to achieve enormous cost saving and profitability hike.
Is this the time to put in place robust processes to cut the flab in operations and other functions?
Of course, finance is the constraint particularly in this regime of cash crunch. But the efforts should be to optimise results subject to fund constraint. And if you can cut your coat according to cloth it would be possible to put in place processes (may be sub-optimal) to cut corporate flab, achieving considerable cost saving and productivity-profitability increase.
Before putting such process in place corporate risk management is an essential pre-requisite. Knowing your risk and risk costs and deciding your risk-tolerance is the crux of the matter.
A decision to put in place flab-cutting process can then be taken after evaluating project and transaction strategies that may result in lower than market costs, strategy adjustment possibilities to seek lower cost by buying and selling, and the choice of predictable cost/stable cost/lower cost strategy.
What are the pitfalls of aggressive cost control?
First, avoid retrenching your employees for the sake of quick cost-cutting. It not only gives you bad press but ultimately turns into its opposite; for example, in a possible VRS (voluntary retirement scheme) scenario you may lose all your efficient hands and retain only those who are unemployable! Moreover, an economy cannot afford a growing population of unemployed that creates social strife ultimately hiking the very risks of doing business, staking your very existence. Negotiation for pruning perquisites and excessive incentive is a better alternative.
Second, avoid cutting your quality control system that ultimately will lash you back in terms of losing customers and causing further dip in demand.
Last but not the least, you must be very sure about your costs and cost projections before taking any cost-cutting measure. Just don't go in by the internal views of your managers. You compulsorily require a review of costs by an independent expert (cost and management accountant) by way of cost audit - whether statutory or voluntarily.
Our premier schools/colleges always claim they know their students better, but still we need the Board examinations or the University examinations to judge the students independently!
D. MURALI
AccountSpeak.blogspot.com
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