Is Cost Reduction a Good Thing?

Can I assume your company is in the business of making money and not saving money through cost reduction??

Isn’t to make money a positive action?

• Making good money and a sound return on investment are signs your company is sustaining itself. From the money you earn you can invest in the future.
• If you can show and excellent and continuing good return on investment you can attract new money to expand your business even faster.
• Your ability to make good money and excellent returns is a sign you are competitive in your market. You know how to select and organise people and processes to ensure success.
• You can transfer business processes, expertise, and technology to other similar markets. What you know in your segment cannot translate 100% to other markets. You have the engineering and technological know how to enter these markets.?You have the resources to do so.
• So, fix your company. Make it profitable with a great ROI. Then use your reputation and financial strength to expand into a new market.
• If you have a strong market share don’t go for more growth. Expand into related markets. Such expansion helps insulate your core business from the realities of uncertainty.
• You start by increasing the rate at which you make money in your core business. Use existing resources to add production and sales capability. Do this without increased operating expenses (fixed cost) and investment.

Sounds nice! But how are you going to achieve such a target?

Maybe your company’s imagination is not up to the task. Cost reduction is much easier to implement. If we let Joe Blow go his salary will increase our bottom line (after we have paid for the severance). It is quite easy to determine the impact of cost reductions. Their cost is known and will disappear.

Gaining sales, increasing capacity, and developing more new products has a price tag. We hire and train new salespeople. Factories add equipment and people. Product development (R&D) buys equipment and adds engineers. No wonder managements are wary of expansion. Added cost and investment may be deadly. Unfulfilled promises are career threatening. Risk averse managers shy away from making promises in an environment of uncertainty.

You promise the following and show the promise is not hollow?

a.?????Our due date quotations become accurate and competitive.

b.?????Our lead times are cut by 50% and are reliable and competitive.

c.?????Market demand increases.

d.?????The factory can produce between 25 and 50% more.

e.?????Inventory levels are 40% less.

f.??????Item availability in all warehouses is close to 100%.

g.?????R&D develops more new products per year.

h.?????We deliver these promises are delivered with little added cost and investment. The return on investment will be very high.

i.??????The Theory of Constraints coupled with Lean, and 6-Sigma make it probable.

Why the Theory of Constraints (with Lean and 6-Sigma)?

1.?????Many companies do not recognise and focus on their key resource.?

a.?????Many companies know something constrains them.?

b.?????They often complain about many constraints despite knowing a system can have only one.

c.?????Often, they complain about “dancing” constraints. Their constraint moves around the factory.

2.?????Most companies give improvement targets to all functions and areas. This has a detrimental effect on the constraint’s and thus the company’s capability.

3.?????TOC (Theory of Constraints) focuses management attention on their constraint.

4.?????TOC guides management to exploit their constraint’s capacity to maximise its Throughput.

5.?????TOC helps management guide the rest of their organisation (the non-constraints). Management must ensure that non-constraints respect their decision. They must respect the decision to maximise constraint (and thus company) Throughput.

6.?????Can you get just 10% more from your constraint? Can you sell this added volume? Can you sell the added volume at the same average price? What will be the impact on the company? (Remember, fixed costs remain constant!) The table below illustrates.

???There will be a bit more investment. Receivables and payables will increase with sales. Inventory will decrease (about 40%) due to dynamic stock management – a part of TOC. On balance, there is a small decrease in working capital.

7.?????The above makes no sense unless the company has a goal. Only if a company has a goal can there be something that constrains it.

8.?????The above makes no sense unless the company has the necessary KPIs to determine if it is getting closer to its goal.

If you follow the Theory of Constraints guidelines and use Lean and 6-Sigma as and when appropriate you will become more and more successful. If you do cut a cost, it will only be to cut a truly superfluous one. I would seek a way to use a superfluous in some way that helps the company and does not damage morale.

To get 10% more it is very often sufficient if you follow the first 3 steps of the 5 focusing steps:

1.?????Identify your constraint.

2.?????Decide how to exploit it.

3.?????Subordinate everything else to the exploit decision.

Why not get up to speed with the Theory of Constraints? Training seminars are available.

I mentioned little added cost or investment. Software support is important when your environment is complex and there is a lot of data to deal with. Software solutions are available:

For production, distribution and supply chains Alkyone’s Simple Planning is a good choice. It is advanced enough that it can often manage the supply chain system autonomously. You do not need to do this, you may want to maintain control over your planning, scheduling, and execution.

Alkyone have worked with SAP to put the Simple Planning functionality into the SAP ERP products (R3 and S4 Hana). You can contact Alkyone or me:

Rudolf Burkhard:

????????????Email: [email protected]

Tel: +41 79 413 5709

Web:?https://rudolfburkhard.com/??????

Alkyone Consulting:

Email: [email protected]

Tel:?+49 741 2096 924-0

Web:?https://toc-power.com

Alkyone operates mainly in Germany, Austria, and Switzerland. They are based in southern Germany near Stuttgart. I hope that response to such articles will encourage them to embrace the English language on their website and in their trainings and software. I can do TOC training in English!

Alkyone is not alone with software that supports TOC. You can find others by Googling!

Critical Chain Project Management Software:

Look up the following on Google:

Adato, ProChain, Realization, Allex there are more that you can find by Googling!