Tool Box
Issue No. 52 - April/May 2010
Don’t cut your value-adding systems
by Mr Steven Toth
The current economic climate has forced many businesses to ‘get their house in order’ to remain profitable and competitive, but has the need to focus passed with easing economic conditions?
To maintain efficiency, these initiatives should become an integral part of an ongoing review of operations, not treated as one-off measures that only need to be thought about once or twice a year. Moreover, it is vital that cost-cutting steps don’t end up affecting service levels and compromising competitive advantage.
Generally speaking, businesses should refocus on profitable lines and cut those products and services which have marginal profitability.
At the core of cost-cutting activities is the assessment of ‘value’. Non-value-adding processes or inputs should be identified so you can take action to eliminate them.
This process can also encourage understanding of your various cost drivers and generate information about those areas where the business holds a competitive advantage. Knowing this will help the business leverage off opportunities which arise when the market turns.
Cost-cutting programs based on processes have the potential to unlock more savings than “top-down directives” which specify cutting expenditure across the board by arbitrary amounts. Such directives may usefully cut discretionary spend on areas such as executive travel or entertainment, but can prove counterproductive when applied to business processes.
Cost-cutting activities must not cut into investment in the future of the business. Investment in areas such as capital requirements, staff and marketing is vital to the long-term success of any organisation.
Capital structure
Review working capital requirements to reduce stock holding and outstanding debtors. Focus on those areas which can create major benefits through strong enforcement of credit conditions, raw material purchases at the start of the month and more efficien...
