Good cost management is necessary for all companies, all year round. But where do you start?
“During the boom, many companies were enjoying high growth, and so did not bother to keep an eye on costs.” Hay says. “Now with the recent downturn, companies both SME’s and corporates alike have to look for ways to curb costs. We are currently receiving a lot of calls for help as companies recognise the challenge of needing to reduce costs, without wanting to downsize their workforce.”
1. Develop a corporate culture of effective cost management
If leadership is complacent about financial performance and cost control, there is little chance that a cost-saving project will succeed. Executives must take an interest in reviewing expenses and reducing costs – often staff will mould their behaviour to match that of management.
2. Understand where you spend your money
Determine what goods you need and services you require. There is no need for gold – plated service if standard services are adequate. Buying unnecessary extras or add-on services such as maintenance agreements will prevent you getting value for money. Also, avoid loyalty programs that offer freebies such as bottles of wine or tickets to sporting events to lure you away from more competitive offerings?
3. Consolidate your purchasing
Quite often, we see different divisions or departments within the one company buying from a variety of suppliers, losing any opportunity to consolidate purchasing and negotiate better pricing.
4. Benchmark your procurement
Your suppliers will always know the market better than you will, so never assume that they’re providing you the best deal possible. For instance, are your competitors buying better than you for the same products? How does your cost-management performance compare to others. Talk to consultants or benchmarking services, but make sure you understand the information correctly; otherwise you’re paying for useless information.
5. Build strong supplier relationships
Building a good relationship with suppliers will enhance opportunities for cost reductions. Engage your suppliers for suggestions on how to improve the way in which you purchase their goods and services. Ordering online, or less frequently, may allow them to reduce their own administration costs and enable them to pass the savings on linking your stock levels to their ordering platform any provide monitoring of your PAR levels (protection against runout), avoiding any loss of sales.
6. Maintain controls on your purchasing
Ensure you have separate staff responsible for negotiating terms to those involved in day to day operations. Staff empowered to order product need to establish good relationships with suppliers and so may not be the best negotiates come tender time. Use the good cop/bad cop approach, calling in someone else, so that emotion is not involved in the process.
7. Continually test your suppliers
Companies that buy the same product and quantities year in, year out can become very complacent and are probably paying way too much. Suppliers will price their offerings according to what the market will bear. Compare prices across suppliers and, having done your research, tell suppliers that you are reviewing your costs, which have to be reduced. Then prepare to negotiate and to comparison shop.
8. Ensure you have open book pricing
Negotiate open book pricing so you have full transparency. Every supplier is entitled to a margin; however you want to be confident it is not inflated. Don’t accept price increases without proof that the increase is a result of supply-chain cost increases beyond their control and not just a blow-out in costs that they are trying to pass on.
9. Be consistent
Create a culture of ongoing cost management, not just a “flavour of the month” approach. Establish benchmarks that allow for ongoing comparison, to ensure you are always on top of costs. Measure them as a percentage of sales, thereby ensuring that if sales drop, you can see costs drop accordingly.
10. Stay alert
Maintaining strong cost management is critical to the success of any business. Ensure staff doesn’t revert to old habits, watch your suppliers, and monitor your benchmarks. You need to watch that staff members don’t slip back into old habits. Of all cost reduction programs in Australia, approximately 84% of projects slip back to previous pricing within 2 years. Engage an expert or appoint a deducted staff member to this, and they will soon pay their way.