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 Non-Surgical Cost Reductions

by Dave Garwood

The bottom line is shrinking and it's time to tighten our belt -- again. With the current (or perceived) recession, we see many companies once again launching another round of cost reduction programs. Read today's newspapers or business magazines and you will find at least one story about another cutback. The key concern is whether they will cut to the bone and mortgage the company's future. If done right, the surgery can be done without damage. In fact, the company may be stronger -- better poised for profitable growth. The objective is to slow the flow out of the bank account while taking better care of our customers. Possible? Absolutely! Let's first discover what we are spending the money on.

Where Does the Money Go?
And the answer is: doing 100,000 tasks each day. Think about it. Everyday there is a steady stream of things to be done. We fix equipment. We administer the employee benefit program. We produce and ship product. We call on customers and hopefully get some orders. We create new products and all of the associated documentation. We cash checks and pay bills. We plan material to buy. We talk to security analysts. We process inventory transactions and produce financial statements. We go to meetings - this may account for 50% of the tasks! And the list goes on and on. Who does all these tasks? People. Lots of them. And they spend a lot of money doing them.

But which of these tasks are necessary? "All of them in my department," quips one proud manager. "But look around in some of the other departments and you'll find a lot of wasted time." No one seems convinced the scalpel is needed in their area. So how do we cut costs? One choice is to just send a bunch of people home without pay and let the chips fall where they may. While this is often the tactic of choice, this is a dangerous alternative with disastrous, long-term side effects. In the 1950's and 60's it was called ... "you have been fired." In the 70's it was called ..."letting people go or laid off." In the 80's and 90's they were downsized. Then right sized. Then re-engineered. Wonder how the same action will be labeled in the new millennium? No matter what term you use, the action and impact are the same. People are put out on the street, not because they didn't do their job, but because we finally recognized that we couldn't afford all of the100,000 tasks any longer. Something had to go. Individuals became the victims. Reduce the number of people and let the survivors independently pick and choose what will no longer be done was the default action. The result is like passing out hymn books to the choir and telling them to each pick a song and start singing. Each choir member has a great voice, sings his heart out, but the choir sounds bad -- really bad! So, what's the alternative?

First Eliminate Work, Not Workers
The key to effectively reducing costs is to first eliminate the tasks. Who knows which tasks could be eliminated without any negative impact on the business? The same people we were going to "let go" and the ones we "let stay" while fearing that they may be next to get axed. Not exactly an ideal atmosphere for spawning innovative ideas to cut costs when it means me or my buddy will get canned. So, the first step is to create a safe environment. This means a strict policy that nobody loses their job if they come up with a better way to get the job done with fewer people. The executive leadership has to be patient.

The next step in the cost reduction process is to locate tasks currently done, but unnecessary. Unfortunately, most of this low-hanging fruit has probably already been picked. The juicy fruit is near the top. And harder to reach.

The Theory of Re's
Are there any tasks necessary today but could be made unnecessary? The answer is always yes. One group of these tasks are the Re's ... tasks that had to be re-done because we didn't get it right the first time. Here are a few examples:

  • RE-working because we didn't meet spec on the first pass.
  • RE-placing because the product was so bad it couldn't be reworked.
  • RE-invoicing because we got the pricing wrong the first time.
  • RE-counting because the initial transactions were done incorrectly.
  • RE-structuring the bills of material because manufacturing methods and planning needs weren't considered by engineering on the initial design
  • RE-promising the delivery date to the customer because we missed the first promise.

Get the picture? Can we get it right the first time at least 90+% of the time? Yes! The quality revolution produced a proven process to drive defects to near zero. It usually requires a change in mindset and often some new tools. Would eliminating these tasks reduce costs without impacting the company's future. Yes! In fact, it would enhance the company's future. This is not cutting to the bone. This is making the company stronger and a less frustrating place to work.

Want to test the potential of this approach in your company? Next time you have a meeting, take 10 minutes at the start of the meeting. Explain the "Theory of Re's." Break the attendees into groups of 4-5. Ask each group to list all the Re's they can identify in the business today. Offer doughnuts, pizza or $5 for the team with the most Re's. I have done this often. The average group finds at least 50 Re's in 10 minutes. They can't all be eliminated in 24 hours, but you will be surprised at what can be done in 90 days, once the group starts thinking about it.

Making the Necessary Tasks Unnecessary
Another opportunity is to just stop doing some of the 100,000 tasks. Are they all necessary? Why? The most frequent responses are ... "we have always done it that way"...."that's the industry standard" .... "our customers or government regulators require it." Maybe. More often than not, current practices have to do mostly with the individual's comfort zone or old habits. As one manager confessed to me, "I know we are doing it wrong, but we're good at it!"

Many of these 100,000 tasks are done because that is the way someone decided a long time ago to run the business. Here are a few examples of tasks that may be necessary today but could be made unnecessary:

  • Taking a physical inventory
  • Incoming material inspection
  • Second-guessing sales forecast
  • Expediting
  • Maintaining separate bills of material for Engineering and Manufacturing
  • Staging material between operations before working on it at the next operation

Do these tasks cost money? You'd better believe it! Big bucks. Are these tasks necessary? Many would argue yes because today inventory records are not accurate, suppliers send defective material, you can't trust sales, etc. But the question is, could they be made unnecessary? Absolutely. It will likely require major paradigm shifts in how we do our jobs. What if ...

  • the daily transactions were done right the first time?
  • we worked with the suppliers to insure they understood the specs and inspected the goods before shipping?
  • we had an effective demand planning process that built company-wide confidence in the sales forecast?
  • the supplier and plant schedules were valid and done on time?
  • manufacturing, planning and engineering worked jointly to understand each others needs in the bills and structured them to meet both needs?
  • we dedicated equipment to a work cell so that material flowed nonstop through the plant, never sitting and waiting?

Can these approaches really be done? Of course they can! They are being done everyday by the leading edge companies. The costs are slashed but the stakeholders -- customers, employees, investors -- see nothing but good. This approach to cost reduction makes the company a stronger, not weaker, competitor.

When is the Right Time to Right-Size?
The best time to make these changes is before net profits start shrinking. This less threatening environment allows management to be more patient as new ideas are implemented. They are not as tempted to pull a hair trigger and kill the source of the innovative ideas. The executive leadership can afford to let natural attrition shrink the headcount.

Let's get proactive before a financial crisis is at our doorstep. Launch a double barrel program today -- simultaneously looking for the Re's and necessary tasks that can be made unnecessary and eliminated. Reward, not punish, the bounty hunters who return with the cost saving opportunities. Cost reduction can become a fun and rewarding exercise for all. Do it before you must!

All Contents Copyright � 2002 R. D. Garwood, Inc. All Rights Reserved.