Manage your cost base

What is the issue?

An economic downturn forces companies to re-evaluate their relationship between cost and profits. Although some have been doing this for a while, many others are responding late in the day. Few have managed to reduce their cost base in a long-term sustainable fashion whilst successfully maximising profitability.

In recent years inefficiencies have been tolerated and unnecessary complexities have been built into the way organisations conduct business. For some, the competitive landscape has changed so fundamentally that the previous business model will no longer be appropriate and significant change is required.

Through an economic downturn you need to consider:

  • enhancing operational performance and driving profits through improving efficiency and driving out waste
  • improving planning and execution
  • stemming value leakage
  • simplifying and improving end to end business processes
  • improving the overall cost control environment and creating a cost culture.
The challenge is to drive profits through the targeted reduction of costs without damaging the long-term health of the business.

What questions should I ask myself?

Cost of supply
  • Is the business making and buying the right things?
  • Am I putting its skills and competitive advantages in the right place?
  • Is the company eliminating waste?
  • Are the operations completely aligned to the end consumer?
  • Can we employ smarter procurement techniques?
Value creation
  • Does management understand where value is being created or destroyed?
  • Is there a direct attribution of cost to products? What is the true net product profitability?
  • What profits are my activities generating and where am I wasting money?
Business structures
  • How is the company organised to supply the customer in the lowest cost way?
  • How much is spent on business support? Is this appropriate?
  • How much overhead creates value and how much is just overhead?
  • Would it be cost effective to move transactional activity to shared service centres or outsource it?
Managing people costs
  • Are my people in the right place at the right time to maximise profit and minimise waste?
Cost culture
  • How do you take no value added cost out and keep it out?
  • Are the business processes and practices aligned to keeping costs out?