Critical analysis of cost reduction in the company

Whether the company is receiving the impact of globalization, is subject to low profitability or shows losses at the end of its results table, it is losing market share due to high costs, it lacks maneuverability, you want waging war in the market, or facing a lack of liquidity, invariably resorts to cost reduction. A reduction of costs generally applied without strategic projection, lacking method and system, which often does not produce the expected results in the short term, and never achieves objectives in the medium or long term.

For example, in the desire to eliminate excesses, not only fat is eliminated, but also muscles and nerves of the organization are destroyed. In order to show better results in the short term, training and coaching plans are eliminated, which means that what is not spent on training ends up paying higher costs as a result of lower levels of productivity and quality. On the other hand, current profits eat up the future of the company by decreasing the levels of response and competitiveness of a staff that is not adapted to the needs of the market and the advancement of technology. Running a company with Taylorist concepts already entered the 21st century or having staff with little or no versatility prevents all kinds of ability to compete.

As for the restructuring of personnel without due analysis and methodology, it ends up not only losing in many cases very valuable personnel in terms of experience, intellectual capacities and technical skills, but also the product of demoralization in the rest of the personnel, added to a greater burden. work decreases both quality and productivity levels.

Aiming to reduce advertising expenses does nothing but open the way for competitors and lose market position.

Likewise, there is a tendency to acquire lower-cost inputs, or to change formulas, structures or content of goods or services with the intention of reducing costs, without considering the consequences not only on total costs, but also on the effect on the consumers.

There are companies that with very little sense decrease the work or preventive maintenance activities.

There are two fundamental issues that many leaders and even advisers do not understand: "It is not about reducing total costs, but costs per unit of income." The question should focus on improving productivity so that even with increases in total costs higher increases in income can be obtained. The second issue is that "it is not really about reducing costs, but rather about eliminating their causes"; To exemplify this last concept, the case of a photocopying machine in a company can be taken, with which a large number of photocopies are issued that are unnecessary or not related to the activity of the company, it would be totally wrong to reduce such costs by renting a cheaper photocopier or using lower quality paper,What it really is about is avoiding the incorrect use of the photocopier.

It must be clearly recognized those situations in which the company due to lack of liquidity is forced to restrict expenses, even in this situation improving the use of resources in order to generate more income than expenses will overcome the lack of liquidity. This does not imply that the relationship of income and expenses over time should not be analyzed, which would give rise not only to the need to methodically and systematically restrict expenses so as to avoid damaging the solvency of the company, but also modify sales and financial policies (such as prices, discounts for prompt payment, delaying payment to suppliers, payment terms to clients, etc.). In these cases the cost reduction occurs within a process of financial rehabilitation of the company,therefore, it only represents one of its components within the recovery strategy.

2. Critical analysis

Under the concepts outlined above, it is essential to recognize those most common and serious mistakes made by companies in their intention to reduce costs. To do this, it is then processed to develop a series of criticisms of the methods, policies or points of view that prevent an authentic and successful process of cost reduction.

Criticism 1 - Lack of system

Many of the previous errors, as well as the lack of criteria to implement a methodology aimed at raising quality and productivity levels, subjecting them to a process of continuous improvement, to achieve cost optimization, are the product of a lack or absence of a systemic vision or a partial vision that leads to the adoption of restricted and inconsistent measures, both in time and in relation to the strategic objectives and the balance between the various areas of the company.

Costs are the product of multiple factors that affect the production process, and therefore trying to control and reduce them implies the need to know what they are and how they interrelate with each other. Failure to do so may not only lead to inconsistent actions, but may also produce contrary effects.

Thus, among the main factors that affect production processes, and thus production costs, we have: raw materials, labor, machines, measurements, method and the environment (called the Six M).

Criticism 2 - Lack of application of statistical instruments

Due to business or professional training problems, such as lack of training, valuable statistical tools are not used, including a tool as powerful as Statistical Process Control. This instrument is not only of great importance for its application to quality and productivity, with its indirect effect on costs, but also on the control of average costs by product or service. The use of this management tool allows the administration to know the capacity of the production process to generate goods within certain cost parameters, but also to avoid errors in decision making when verifying variations in costs, constituting for another It is a valuable element of preventive monitoring.

Criticism 3 - Partial vision

The functional structures corresponding to what has been called “control organizations” (as opposed to participatory) have personnel in each area in which they focus their decisions and actions on a particular vision of the area in which they are involved. This has been called "trained disability" referring to training in a given area, leaving aside the company's own processes. This tends to make bad decisions in the use of resources, where each sector struggles for greater budgets and exclusivities, but also the lack of collaboration reigns among the sectors, which generates duplication of activities, underutilization of resources and higher costs than necessary..

Critic # 4 - Lack of application of Bad Quality Costs

Keeping track of the costs of prevention, evaluation and internal and external failures is essential for a company that intends to compete with possibilities in today's markets. Failure to do so is to ignore the effects that the costs of poor quality have on the company.

Critic 5 - Lack of analysis and evaluation in product and process designs

Design costs represent 5%, on average, of the cost of production, but are responsible for 70% of the cost of products or services. Concentrating more effort and resources on design activities results in a lower total cost of the products or services produced.

Review # 6 - Little emphasis on pre-production phases

In the pre-production stages within the product life cycle, it is when the key decisions about the product design, its components and production technology are being made and when more than 90% of the total cost is committed. The use of the objective cost, functional analysis, estimated cost and cost tables are intended to "achieve the correct cost" before starting production. This is essential in the Japanese approach, but not in the West, where more emphasis has been placed on evaluating the costs incurred once production has been started.

Review # 7 - Not making optimal use of ABC (Activity Based Costing)

ABC (activity-based costing) provides a methodology for estimating costs for product or service lines, thereby directing management's attention to areas where costs can be reduced.

Criticism 8 - The TQM, or the Continuous Improvement are not properly focused

When we talk about Total Quality Management, we are not only referring to the quality of products or services, but to the overall quality of the organization. The lack of quality in management is responsible in conventional companies for up to 25% of the total invoiced. Quality is the fundamental foundation of any cost reduction plan. Thus, much of the responsibility for excess inventories, overproductions, long waiting times, and the costs of reprocessing and inspections are motivated or originate from the lack of quality. Furthermore, this lack of quality leads to customer losses, also constituting powerful negative publicity. An satisfied customer makes their satisfaction known to an average of 3 people, but an unsatisfied one makes it known to nine.Let's consider what effect this has on the flow of funds in the medium and long term. For this reason, a good plan to reduce costs is to install a TQM in addition to a powerful measurement and analysis tool such as the Six Sigma method.

Based on empirical studies carried out (Meredith, 1999), the existence of relationships between 5: 3 and 5: 1 was recognized, between response time and unit cost. This is that a 50 percent reduction in response time results in a corresponding reduction of between 30 and 10 percent in unit cost. Achieving this is only feasible through continuous improvement in quality and productivity levels.

A very common mistake of entrepreneurs is to focus their attention only on compliance with specifications or control of measures, leaving aside both total quality management, as well as the philosophy and policy that support it.

Achieving certain levels in terms of quality, productivity, costs and delivery times (or cycles) is not everything. It is of no use if it is not accompanied by a continuous improvement system in order to remain continuously competitive. Although the TQM has continuous improvement in its structure or tooling, there are systems that have continuous improvement in their continuous raison d'être, such as the Harrington Total Administration for Continuous Improvement, the Tompkins Continuous Improvement System and the Kaizen (compiled by Masaaki Imai).

It is therefore essential to achieve new higher levels of quality and productivity that allow the company to obtain products and services at a lower cost.

Criticism 9 - Lack of application of standards control

Yes, by standardizing we understand the wording of the best methods of action aimed at achieving or concreting certain results, it is obvious that making the activities and processes of the company more efficient, and creating the conditions for its improvement implies the need to verify the existence of such standards, but also those of their compliance.

Criticism 10 - Lack of application of waste control

Not knowing the various types of waste or waste that take place in the processes or activities of the organization leads both to a lack of awareness, and to an absence of plans for the systematic control and elimination of them.

These wastes or wastes occur in excess inventories, overproductions, waiting times, repairs and elimination of failed products, unnecessary movements, excessive and unnecessary internal transport, unproductive processes generated in design failures (be it of the product or service, as of its production).

The objectives of world-class companies is to reach the Six Zeroes: "zero inventories - zero defects - zero accidents - zero repairs - zero papers - zero waiting times". To achieve this is to reduce costs to the competitive level, since all activities that do not add added value for the consumer will have been eliminated.

The need to analyze and classify activities among those that add economic value for the consumer (AVA), of those that are supportive or with added value for the company (ASVA) or that lack added value is usually not properly taken into consideration. (SVA). His analysis is not a minor issue, not recognizing this implies the lack of capacity to systematically reduce costs.

Critic 11 - Diagnostic errors

They are the result of lacking a survey methodology to diagnose quickly and effectively:

1. The company's ability to generate output within certain levels of resource utilization.

2. The aptitude and culture to control and reduce costs.

3. The knowledge of managers and employees on the systemic relationship of factors that affect cost levels.

4. The existing gap, between the objective and actual costs, to be overcome.

Review # 12 - Implementation Errors

Not taking due account of the organizational culture leads to not adequately readapting the systems to be implemented in the company, a reason that causes various inconveniences when it comes to putting it into practice. Likewise, and as already commented in other points of criticism, organizational behavior is not analyzed or taken into account, which leads to not being able to adequately overcome resistance to change. Staying only in the technical aspects leaving human factors aside is an invitation to failure.

Critic 13 - Errors due to lack of planning

If there is something that is typical of many companies it is the lack of planning. Reference is made here to both the strategic, tactical and operational planning of the company, as well as to what must take place to achieve optimal implementation of the system aimed at controlling and reducing costs.

Good planning, both for the resulting plans and for the process itself, is of fundamental importance in order to generate financial budgets that serve as conductive elements for both Management Control and Budgetary Control.

Critic No. 14 - Lack of external advisers or consultants

Whether for the advice, or for the training and implementation they can provide, many of them have a partial view of the company and its costs. Regarding their knowledge, they offer training based on superficial knowledge, lacking breadth, depth and practical experience. This results in poor training of those attending such courses or seminars, generating more costs than concrete application results. As for his advice, it usually lacks conceptual breadth, remaining mere accounting issues and conceptualizations, or of an engineering nature, depending on his profession. When what corresponds is a global vision of the company, which is achieved both through the expansion of knowledge and teamwork.It is essential that a consultant knows about organizational behavior, such as having a high creative and innovative aptitude.

Critic # 15 - Lack of executives and management levels

Shortcomings such as lack of systemic vision, excessive sectoral focus (trained incapacity), lack of supervisory, leadership and motivation capacity, lack of knowledge in organizational behavior and organizational psychology, as well as thinking within limits, lacking Emotional intelligence ability, and problem solving and decision making, leads to very poor business management. This affects the lack of excellence, which relegates the company to a less competitive framework. Today proactive mindsets are demanded, managers and managers must not react to the results, but must create the conditions for the results to take place. It is therefore a change of mentality, a change focused on marketing,with concern for the quality of services and customer satisfaction, thinking strategically, with a high development of creativity and innovation. The current manager should never settle, he must continually seek new achievements. Leading change and continuous improvement is today the dominant slogan, to ignore it is to be marginalized from the market.

Critic 16 - Lack of culture and discipline to achieve low costs and reduce them continuously

Continuously achieving improved levels of quality, cost, and productivity requires strong discipline, a deep work ethic, and a culture of preeminence in research and development, the achievement of new and better standards, and a continuous search for satisfaction. to the client.

Without discipline and a culture to frame it, the results of any search for improvement will be circumstantial or will be shipwrecked in failure.

Critic No. 17 - Lack of controls

Too many companies focus on trying to reduce their costs without paying due attention to the form or methodology they will apply to control the evolution of these variables. Implementing Management and Budgetary Controls, accompanied by Dashboards and Balanced Scorecards allows a fast and safe way to monitor the evolution of the variables and objectives set.

Critic No. 18 - Do not change the working methods before computerizing or automating processes

Applying computer technology on legacy processes without improvement and simplification does not lead to cost savings. It is essential to simplify, redesign and improve processes before applying or changing software, otherwise only the same inefficiencies will be done but at a higher speed.

This is as valid for production processes as for administrative ones that seek to automate or computerize.

It will be useless to apply more powerful means or instruments to processes lacking innovation and therefore inadequate.

Review # 19 - Lack of use of Operations Research

Very few companies make optimal use of the various tools that operations research makes available to us to make more efficient use of resources. They can be applied in an infinity of areas and projects, be they logistics, use of scarce resources, location and location of plants and warehouses, plant distribution and better use of bottlenecks.

Critic # 20 - Lack of preventive maintenance plans

Not having plans and policies for preventive maintenance that maximize productivity, minimizing downtime and failure of products or services, and reducing the need for preventive stock, is something that a company that it really tries to reduce its costs cannot be ignored. Doing so leads to preserving the old, unproductive, resource-consuming structure.

Critic No. 21 - Adoption of methods to reduce costs based on "fashions"

Trying to reduce costs or improve profitability following management fads is dangerous and unsuccessful. The staff turns cynical and wonders about how long the change will last and what new method awaits. There is only one way to approach change, and it is with a comprehensive system that analyzes all areas and processes of the organization. It is not a matter of following fads, but of adopting a system and then adding elements to it that enrich its operation.

Criticism No. 22 - Adoption of partial methods

Related to the previous point, there are those partial positions as a result of the inclinations of the managers or the paradigms to which they are subject. Reviewing the paradigms to which one is inclined is essential when reconsidering our way of seeing reality and the methods to be used. Paretian analysis of costs is a very good instrument to show where they really go, so that the vital few will be clearly distinguished from the trivial many. Failure to take this into account leads many managers to waste efforts to reduce or eliminate small or relatively insignificant expenses or costs.

Criticism No. 23 - Neglecting the importance of information systems

Trying to reduce costs without having an accurate, timely and relevant information system will prevent not only monitoring the evolution of costs, but also taking measures quickly in the event of deviations.

Equally important is the information system for monitoring internal control, which, as will be seen in Critic 30, is a fundamental factor in improving the results table.

Critic # 24 - Not taking due account of the Total Quality of Services

Providing an outstanding service to the consumer through what is currently called a Five Star Service (SCE) allows customers to be kept for longer (50% more at least), reduces sales and marketing costs (between 20% and 40% lower), higher sales returns are achieved (between 7% and 12% higher) and higher net profits are obtained (from 7% to 17% better).

It is totally clear that a policy that tends to reduce services ends up having the opposite effect. Focusing attention on borrowing an SCE achieves very important returns both in costs and in income and profitability.

Critic No. 25 - Failure to adopt measures to control expenses such as energy and telephone

It is not just about measurements and ratios, it is also about raising awareness, and above all, understanding about the best use of each resource or service. The phone is necessary, or we can use the internet or intranet (chat, voice chat or mail). What special communication systems or plans exist that can save us costs. These are all questions that managers must ask themselves in order to make use of the services of a specialist on the subject to reduce said costs.

Something similar can be done regarding the use of energy. What source of energy is used? What other font could be used? How is it spent or misused? What means can be used to avoid losses? What special plans do energy supplier companies have?

Criticism 26 - Measure productivity but do not take measures to improve it

Firstly, in terms of measuring productivity, there is much to be done in companies, but much more needs to be done in terms of actions to improve it.

Not understanding both the incidence of physical and psychological factors has given rise to very little concern about these factors, which is a reason for lower levels of productivity than can be achieved. Leaving aside motivation, ergonomics, environmental and safety factors are the cause of low work performances with their consequent incidences on cost levels.

Criticism 27 - Lack of due attention to human resources

Human resources are not managed properly, which generates high costs for non-productivity. Human resources are what give life to the organization, especially in a stage of society in which knowledge prevails. If measures are adopted for the acquisition of inputs verifying their quality, the same should be done with human resources. Not only do aptitudes and capacities count, but in current management there is a tendency to give fundamental importance to the culture and behavior of the organization and the sector or area within which the individual must perform, in order to select this person. only because of their abilities, but also because of their ability to integrate harmoniously into the work group.

On the other hand, the work of education and training is essential to keep the staff updated. Failure to do so involves a serious fact, since knowledge cannot be updated overnight as if it could be done with a machine. But beware, it will be useless to acquire the most modern machinery without personnel who know how to make optimal use of it.

Training personnel for teamwork, problem solving, quality control, a higher level of versatility and a better understanding of production and business processes is essential to make the company competitive.

Critic # 28 - Acquire supplies and materials based on price and payment terms

Acquiring inputs based on price and payment terms, making suppliers compete with each other is a serious mistake. Today the new forms of production management such as Just in Time. Currently, it is aimed at long-range contracts with a supplier per input, in which not only the price and the method of payment are privileged, but also the quality of the products, the supplier's capacity for innovation, just-in-time deliveries and in the exact quantities requested, in order to achieve the minimum total cost. The new management aims at strategic alliances with suppliers.

Critic 29 - Not taking due account of the Experience Curve

The Experience Curve (or Learning) is a tool that, either not known, or knowing it, is not used, or is applied incorrectly. The experience curve as an element for measuring and analyzing the reduction of resources and the decrease in costs over time due to the cumulative increase in production is a tool that no company can ignore. Being unaware of the ability to reduce costs by increasing operational experience and not concentrating on the best way to increase those experiences is a very serious strategic mistake. This issue is directly linked to continuous improvement, as well as the need for statistical data that allow the process evolution to be measured precisely in terms of costs, productivity and quality.

Critic No. 30 - Absence or lack of appropriate software

Combining modern management techniques with sophisticated computer languages ​​and systems can enable powerful systems to control and track the evolution of plans, budgets, cost and productivity levels, early detection of deviations and trends.

Critic No. 31 - Shortcomings in internal control

Although many consider the negative effects on the results of a company as a result of internal control failures as losses and not as costs, others consider them as a “cost for being in the activity”. The concrete thing is that it is useless to implement a strong cost control if you end up losing resources due to negligence and poor controls. Furthermore, these losses generate pessimism and demotivation in the company. For this reason, the introduction of systems that preventively avoid risks due to a lack of internal control is essential, and the implementation of the Internal Control Matrix System is one way of achieving this.

It should not be overlooked that many concepts considered as costs in the results table are nothing more than the reflection of a bad or a lack of internal control policy. A review of all the problems and losses that bad internal controls can generate would clearly show the urgent need to start any plan to reduce costs with a survey and evaluation of internal control.

Covering all the fissures where resources are lost is fundamental, of which many external consultants and managers do not take due care.

Criticism No. 32 - Failure to duly consider the company's mission

Although placed in this location, it must be taken into account at the beginning of any analysis as it will clearly indicate the degree of focus, and will serve together with the Experience Curve to determine those activities that are specific to the company, from those others that must be derived or outsourced. For example, for a company that produces road works, it is absurd to have programmers to design software, since their mission is to build road works, not to produce computer programs. It could produce special software for road works, but then it would be appropriate to organize it as a separate company, allocating its products to the provision of the parent company and for sale to third parties.There are cases such as that of financial entities that, given the strategic importance that software has for them as a tool for the provision of services, the production of such programs is relevant to the mission of the company.

This shows the key importance that a clear and updated definition of the mission has for the company.

Criticism No. 33 - Is the staff's skills, experiences, abilities and creativity not properly taken into account?

One of the main assets of the company that is made up of its human capital, both managers and employees, is left aside. The idea that personnel should only obey orders, leaving their mind when entering work and performing only tasks with their hands, not only causes a waste of the capacities that the personnel who are in the field of action every day can turn to company, but also constitutes a strong demotivating generator of lower productivity and consequently higher costs. Generating the application of suggestion systems is a way of allowing staff to actively participate in the generation of ideas to improve quality, productivity and cost levels. So,By taking advantage of their experiences and creativity, it is possible to significantly improve organizational performance. Japanese companies record new records each year in terms of the number of suggestions made by their employees and workers, and in terms of significant cost reductions.

Critic 34 - Absence of teamwork

In the current era of production, you can only be competitive if you work as a team, in the organization as a whole, and in group activities by products, processes, activities and functions. Generating continuous action groups, as destined to specific objectives is vital, for this reason, belonging or not to groups has ceased to be something voluntary to be a requirement of the time. If competitors are stronger among other things by working with work teams, not applying the same rules is losing responsiveness to the action of the environment. It is not enough to motivate and sensitize staff about the need for their participation in work teams, but when selecting staff, the capacity of individuals for teamwork must be taken into account,and then you must address yourself in such a role.

Annexes

Annex I - Self-evaluation questionnaire

Its objective is to allow, individually and jointly, and in collaboration with the external consultant, to become aware of how well or poorly control and cost reduction are being focused. With a total of 42 questions to the extent that the positive percentage is below 70%, immediate measures should be taken to correct this approach. In this case, all the questions have the same value, but they could be weighted in order to clearly determine the relative value of each one to achieve the objectives.

Annex II - Reasoning about systemic thinking

Some important lessons about what it means for an organization to think systemically in order to avoid mistakes are:

1. No solution proposed for a business problem should be adopted without first examining its consequences for the overall system.

2. The more desirable a proposed solution or argument seems, the more they should be questioned and the more one should be suspicious before adopting them.

3. Unless a proposed solution to a problem or crisis is discussed in relation to the total system in which it must operate, it can lead to worse problems or crises.

4. In studying the effects of any argument or solution, one must examine not only its structural (eg, financial) consequences, but also its emotional, cultural, and symbolic (eg, reputation) effects.