First quarter train wreck not necessarily an anomaly
Don’t let traditional accounting get in the way of cost control – Many manage cost reduction efforts by scrutinizing P&L statements. This can be a useful starting point absent other data. But P&L categories, such as overall SG&A numbers, don’t give the kind of per-unit, fine grained insights that help focus cuts. Department managers often use data issues to divert attention from their lack of progress. Identifying, measuring and controlling the most important cost misalignments are way more important than who gets the credit.
Clearly articulate the link between cost management and strategy – Strategy must lead cost-control efforts, not vice versa. Meeting a random bottom-line target provides lousy motivation. Never set reduction targets so that each department does “its fair share”- kind of your own personal ‘sequester’. This starves high-performing units of the resources needed for valuable growth while generating only meager improvements in marginally performing areas.
Treat cost management as an ongoing exercise – Distributors tend to treat cost management as a one-off exercise driven by the need to manage short-term results. Such hasty programs rarely create sustainable improvements in cost structure. The reason is that one-off exercises don’t require internal capability building, an organizational bias that needs to become a core competency. A better approach is to use the initial cost reduction program as an opportunity to build sensitivity towards cost management rather than in mere cost reduction. Effective cost-management programs include plans to adjust for activity-level changes (up as well as down), competitive forces or supplier policies.
Focus on how to cut, not just how much – To keep your hard won cost cuts from eroding, change the way people think about costs. And planning alone is not enough. As Cassius Clay so eloquently observed, “Everyone has a plan, ‘til they get hit.” Cost reduction programs often lose effectiveness over time because top management kicks off the effort with broad cost reduction targets, but then leaves politically charged decisions on how to meet those targets to individual line managers. The trick is to assign accountability at the right level.
Most cost innovation happens at a very small and practical level. These informed cuts are more likely to endure because the people responsible for them can be held singularly accountable.
Bill Wade is a partner at Wade & Partners and a heavy-duty aftermarket veteran. He is the author of Aftermarket Innovations. He can be reached at email@example.com.