What type of cost savings goals are you setting this year? Are they "right" or "wrong"?
Well it's a new year, which means time to put new goals together. Have you started looking at your savings goals? Do you create goals that are "right" or "wrong"? It's easy to state a goal such as: “Achieve cost savings of $500,000 this year.”
The article, "The Wrong Cost Savings Goal" discusses why creating a vague goal may do more harm than good for your organization. You can read the article at: http://nextlevelpurchasing.com/articles/cost-savings-goal.html?source=linkedin
So, when it comes to setting cost savings goals, does your organization encourage the "wrong" or "right" type of cost savings goal?
What other thoughts do you have on cost savings goals?
Answers (9)
Vince B
Venture Capital & Private Equity Consultant and Contractor
Best Answers in: Packaging and Labeling (1)
Hi Megan
As of yesterdays meeting we are setting a cost savings goal of 15% internal cost saveings while increasing our sales and marketing budget up 5%. Cost reductions are going to come from two major areas External vendor contracting we are looking to reduce our expenditures there by 25% and internal efficencies, cheaper travel, ect.
Vince
Bjorn N
Senior Leader in International Supply Chain, Purchasing, Material, and Logistic Operations
Best Answers in: Change Management (2), Organizational Development (2), Mentoring (1), Labor Relations (1), Supply Chain Management (1)
Megan:
Well, your question sure brings back some bad memories of having been pressed into make a broad statement such as "$500,000 in material cost savings this year" without the benefit of doing the proper material and commodity group analyses -- only later to have my rear end held to the fire for having not achieved the commitment!
Lesson one -- Do not make blind, uneducated, vague cost savings goals under any circumstance.
Thankfully, I now work for a boss who appreciates the total cost of ownership of materials, that commodity groups have different economy factors that affect them (and that I can not control them), and that changes in the business environment can have a profound effect on that final number (and unit price, too!). So with that particular blessing, I'd say we are currently formulating our cost savings goals (read "goal" as a "target", not a "commitment") in a much more realistic light and, hence, "right".
For example, the number one commodity that affects my COGS is steel. Last year the steel market took a good portion of the country for one heck of a ride (although now we are on the better part of that ride). In this particular instance, my cost savings goal is one that is better stated as one of "cost control"....that is to say, my goal is to limit the affect of market changes in steel by linking my price against an index thereby limiting any increase in price to only the material content of my cost. Further, my goal with a commodity like this is defined by finding reductions in the other factors that affect my total cost of ownership (e.g leveraging my spend with that of sister companies, supplier consolidations, reductions in transportation costs, negotiating the price margin allowed over the agreed upon index, etc.)
Similar approaches are also taken with metal fabricators from whom I buy. I may not be able to control the material cost of the steel (other than dictating they buy off of my contracted price agreement or forming a purchasing co-op), but I can look into the details of a fabricator's conversion costs and define my goals aginst those elements.
All too often the goal of cost savings is set in too general of a manner, when closer inspection and analysis of cost factors that we can control and negotiate are what is really required. Currently, I'm fortunate to work for a manager/leader who recognizes this fact....to my way of thinking that leads us to doing things "right", and not just working to manage to a number.
Bjorn Nilsen
Veronica D
Science Editor/writer at Dailysite.com
Best Answers in: Regulation and Compliance (1), Using LinkedIn (1)
In college I majored in science. During my employment for chevron research and technology as a laboratory assistant, I never was not learning finance management.
In, 2002, an college associate (Maria )invited me, to World Financial Group in Milpitas, were she was learning finance management, during the summer, studying for an Insurance License.
Classes were presented in the evening after work hours and she provided the transportation for me which was so, cool of her.
The short training allowed me to get a bird eye's view of the direction of my
financial goals.
I was heading to the "run out of money soon", department.
I recommend these courses to my friends.
I think that any blanket cost reduction statement is prone to failure, or at best, misunderstanding the consequences of "success". At my firm we are targeting inventory reduction as the first step. We understand however that this goal will result in a, hopefully, slight increase in transportation costs due to increased shortages and urgent freight orders. The target number is a 20% reduction in inventory value.
As a company, we are always cost conscious. The nature of our buiness is providing Supply Chain Solution and Managed IT services to our customers.
Our costs are in direct proportion to volume of business. The more product we sell, the higher our costs. Over the past couple years we have dramatically reduced our operating costs by improving efficiency.
One major cost reduction we have enjoyed is reducing our office size and using our services to enable remote workers. I for one work at home and only commute in for meetings. As a result, our operating costs dropped significantly and as an added benefit, my net income has incresed because I don't have to pay the expense to commute. When gas was high, it saved me $75 per week / $300 per month. That helps keep our employment cost down as well.
We have been helping our customers secure and enable their remote workers for years. We took our own advice and it is paying off in spades.
Links:
Edward H. B
Operations Leader, Energy Broker, Mentor
Best Answers in: Supply Chain Management (3), Staffing and Recruiting (2), E-Commerce (1)
Setting cost saving goals blindly, such as X% across the board is often a very poor process. What you have to do is to find the fat and cut the fat. If you take 15 % out of everything, you will take 15 % out of areas which are tight, ensuring you hit bone and adversely impact quality or service.. on the other hand you might be able to take 50 % of an relatively loose area and not impact anything... you won’t reach the true potential for savings with this approach.. Of course once you start doing the old “cuts across the board” game, then you eliminate any further internal drive to be efficient or effective... “if i cut my operation to the bone, you’ll only come round again next year and ask me for more again”.. so you penalize the efficient parts of your operation while leaving inefficient parts unscathed.. That will start up several rounds of gaming of performance, whereby managers will hold back cost savings they know are there, in order to save them up to be offered up later when asked.. is this the behaviour you want to encourage?
You have to understand the performance level and the efficiency/effectiveness level of each area before you start swinging the axe.. You can do this by commonsense “ it costs us how much to do this!”, business acumen “this process is pretty inefficient, redundancies & duplications are everywhere”, or industry “ our competitors can do the same thing for half what it costs us”.. Focus in on the fat and go after that. Approaches like zero based budgeting, benchmarking etc can be helpful in identifying areas where fat has crept in..
Putting out an arbitrary target is fairly meaningless, and won’t get you anywhere near to the level you could get to if you did it intelligently..
Watch you are not trading off cost savings in one area with cost increases in another area... just a caution against excessive siloing. It’s quite easy to cut costs actually, the hard part is doing it without adversely impacting anything else.
Also watch short term vs long term, again it’s easy to cut costs that will be fine for the short term, but then 2 years later, everything disintegrates.......
One easy route is to segregate expenses/costs into variable and fixed expenses.. If your top line declines 20 %, the your variable expenses have to be cut 20 %. Getting into fixed costs is harder, but do-able with appropriate techniques.
Finally, if you are in desperate straights, you can use what is called the “Woods Gordon” approach after the consulting firm that came up with it. Basically you list all the activities from most important to least important ( as in contributing to your business goals), then you identify costs/resources/people used to perform or support each activity. Then you start from the bottom up, and just draw a line when you reach the savings level you want, and eliminate everything below that line. It’s brutal, effective, and only to be used in situations such as imminent bankruptcy, but is works.
Hope that helps.
Clarification added 5 months ago:
Now I’m thinking about this, also watch for visible vs invisible costs.. management often focusses on visible costs, not realizing invisible costs can be much greater, for instance, as a simple example, suppose you decide to eliminate air travel, and tell managers they have to drive ( it’s cheaper because our mileage allowance is so crummy ). Your dutiful management team obeys, you save a fortune in air fare, spend a little more in mileage, but your productivity tanks since management are spending all their time driving around in their cars.. The cost savings in T&E expenses is outweighed several times over by the invisible costs of lost productivity.. which after a while will be not so invisible ( no work will be getting done, customers will be unserviced, and your management team will be exiting ).. a trivial example, but you get what I mean
Oliver S
VP Sales/Promotional Product Consultant @ Image Premiums
Best Answers in: Event Marketing and Promotions (3), Events Marketing (2)
Hi Megan: I sell promotional products and I am blown away how drastically companies have lowered their spending on this. See, from a sales perspective, it's like a lot of people stop promoting their businesses...but in bad times supporting sales initiatives especially via promotional items (which are often rather inexpensive) seems counterproductive. Finding ways for internal savings yes, stop spending on clients/marketing: NOOOOO!
Links:
Norman K
Owner, Katzscan Inc. - Supply Chain Vendor Compliance~Supply Chain Fraud~Supply Chain SOX~Turnaround Management Help
Best Answers in: Inventory Management (10), Supply Chain Management (9), Risk Management (6), Packaging and Labeling (4), Business Development (3), Distribution (3), Organizational Development (2), Manufacturing (2), Quality Management and Standards (2), Branding (2), Information Security (2), Purchasing (1), Regulation and Compliance (1), Conference Venues (1), Auditing (1), Business Analytics (1), Corporate Governance (1), Change Management (1), Project Management (1), Ethics (1), Small Business (1)
Greetings Megan.
When the wrong costs are slashed, a company may find itself with Sarbanes-Oxley violations, possible regulatory agency investigations for the manufacture and/or distribution of unsafe products, and more prone to fraud.
Costs associated with regulatory mandates really cannot be cut, but what can be done is to invest in training and technology to make processes more efficient. How you get to the end result does matter.
Quality Assurance departments cannot be left without the ability to perform the necessary tests to ensure safe products are delivered to consumers; the backlash could be injury or death and the effect on the company's financials far worse than the money "saved" by slashing the QA budget.
When too many people are cut and more (software application) capabilities are put in the hands of a few, such broad power of a process can provide the opportunity to commit fraud, especially if the pressure of being next to be cut is intense, the employee wanting to either protect themselves from being cut or ensuring they get "what's theirs" before the cut happens, enhanced possibly by the fact that the employee was burdened by more work without a pay increase (likely scenario).
There is nothing wrong with wanting to save money by driving towards efficiencies, but when the cuts are too extreme, it increases the company's exposure to risk.
Brief, but I hope helpful.
~~ Norman Katz, Katzscan Inc., www.katzscan.com
Peter S
Experienced consultant, senior executive, project/programme consultant, change manager, business advisor
Best Answers in: Quality Management and Standards (1), Supply Chain Management (1)
Megan
I think Edward Burns and Norman Katz are on the money. All too often 'cost savings' are counter productive. Indeed in many cases they are to plagiarise a quote about as effective as an Indian raindance. To my mind the raindance may be more effective.
The issue over invisibles is especially relevant, I have seen the impact of that type of decision first hand a number of times.
Especially pernicious are short term savings like cutting back on training or building brand awareness. Savings now, problems later.
Hope this helps.
