By Prof. Vicente Falconi, founding partner at FALCONI
Cost reduction is the order of the day! However, there is still some misunderstanding about this issue, and for good reason, many people are scared to mess with costs and lose in other fronts. In fact, most costs are necessary!
The correct reasoning in cost reduction starts with the science of value analysis. The question to ask about each cost is: does this cost add value to the company? If it doesn’t, it is waste and should be a candidate for elimination. We look for waste, and not costs!
The waste is generally “invisible.” If we were aware of it we would have already eliminated it. I remember that we once did a cost reduction project for a company and decided to list legal costs as costs that do not add any value. There were resistance, but we started the work and these costs were reduced substantially.
We also listed provisions for bad debtors as costs that do not add value, and the chief financial officer almost killed us. However, by placing a magnifying glass in the process of granting credit, we found flaws that were promptly corrected. All expenses that do not add value should merit greater attention on our part, for certainly there are opportunities for gain.
There are costs that add value, but also require our attention. For example, let’s look at any necessary cost: lubricant consumption. Nobody questions that machines need to be lubricated. However, there may be leaks and consumption be higher than normal. The lesson to be learned is that all costs must be monitored and always compared to ideal values, so that we know our losses.
Another point of learning is that a cost reduction effort cannot be occasional, but continuous and lifelong. We must create a culture of problem solving in all companies in order, not only to tackle problems but also, to develop competence in this method.
Often this can be halted by a natural resistance that people have in not wanting to expose their problems. The personal and cultural problems are very strong in a company. We must strive to create a “culture of facing the facts,” i.e., pride in showing your own gaps (opportunities for gain or problems) and getting your team to solve problems. Compliment those who present their problems!
At this point, specifically for grocery stores, I will use the “breakage indicator” as an example. Well, any breakage goes straight to the bottom line of your balance sheet. Therefore, a grocery company should maintain an ongoing effort to lower its breakage ratio by always practicing group problem solving and focus on that item.
Finally, in order for you to always improve your business, reducing all waste to a minimum, I recommend you calculate your gaps (earning opportunities) every year, so that you always have a menu of problems to solve.
Note that whenever we want to reduce costs, we can do so without much competence if “the weeds are too tall.” However, as the simpler forms of waste are solved, you will need a lot of problem solving skills. I recommend you give this competence to your staff through training and lots of practice. As problems are solved and your team gets more and more competent, and your results will get better!
In cost reduction (waste) there is no magic unless your waste is very high and the first year will show excellent results. Now, if you really want to be competitive, there is a lot of hard work and dedication ahead. Year after year.
Text featured in the february/17 edition of the magazine Super Varejo.