Defining and Controlling Costs

Understanding and controlling costs has always been a critical success factor for the majority of businesses; however, during times of economic turmoil, it elevates to an urgent level – after all, there are two main ways to increase profitability in a business: increase revenues or decrease expenses/ costs. In my experience in working with multiple businesses across multiple industries during different business cycles/ stages, a commonality has emerged – 80% of businesses typically do not focus the required attention on the fundamental of controlling costs. Why? My best guess goes straight back to the solution – there are no quick fixes. However, if you are willing to invest a bit of effort, the results can be staggering.

So, how does one go about defining cost? It is as simple as defining the intersection and sweet spot of your organization’s people, process and technology assets. It doesn’t require complex solutions or significant capital investment; instead, it requires a focus on these three, key variables – people, process and technology.

First, it all begins with people. As my HR mentor used to say, the right people are your #1 asset. And, I’ve never seen an example where this didn’t turn out to be valid. From the perspective of defining and controlling costs, there are a few keys to success related to the people component:

1. Explain the big picture – since defining and controlling costs involves hard work, a strict process discipline and doesn’t typically involve a new and exciting technology or the latest fad or program, it is not likely to win popularity contests. In my experience, most people want to be working on something considered interesting or leading edge; therefore, it is essential that leadership not only present the big picture vision behind this initiative including the why’s to the company goals but they also must emphasize the importance and priority. The talent will be far more focused on delivering results if they understand how they are contributing to the company’s success – and they know that their efforts are valued. When I was VP of Operations, I found it amazing how many times I received feedback about how this seemingly small communication step was not only appreciated but also a key reason for people feeling a part of something important.
2. An accountability culture – since controlling costs requires a rigorous process discipline combined with metric tracking, a culture of accountability is essential. This sounds far easier to achieve than it is in practice, yet, in my experience, it is the 80/20 of delivering results. So, it is worth it to invest the efforts upfront to achieve a significant return on investment. The keys steps involved in creating a culture of accountability include: jointly establishing performance goals, providing/ seeking continual feedback and improvement, tracking progress to goals, revising based on changing business priorities, following up with an audit and acknowledgement of completion/ success. I found that people resist at first as a culture of accountability is uncommon and uncomfortable (after all, being busy feels good and is easier to control than being accountable for results); however, when consistently applied, 80% of the people step up to the plate, the low performers leave (which further energizes the high achievers) and, in the end, the majority of people find more meaning in this culture and can no longer imagine going back.
3. Value your people – as obvious as it sounds, people are cornerstone to achieving a successful end result. People are not only the thinking power of the organization but they also drive the bottom line results. With the clarity of goals and framework, people will rise to the occasion and contribute to success through involvement and participation. The key is for leadership to get out of the way of success; instead, if they provide support and tools, ask questions and encourage continual progress, you will accelerate your timeline to success.
4. Cross-functional team – 80% of the time, a cross-functional team will not only accelerate the results but will also improve the quality of the results. For example, in one project, our goal was to define material usage and find a way to reduce back to standard levels. There were at least 10 possible scenarios of why material usage was higher than standard, ranging from high scrap levels to adding extra material during the process in order to speed up the run rate on the machine (which produced 5-10% additional parts) to receiving materials that weighed on the high side of tolerance. By including team members from Engineering, Operations, Maintenance, Quality, and Finance in the process, we were able to reduce the time required to identify and solve the problem.

In addition to prioritizing people, it is imperative to focus on process and technology. In the case of defining and controlling costs, the keys to success are interrelated and largely interdependent for process and technology. They include the following:

1. Simplicity – I thought we’d start with this key to success because it is fundamental and often the lack of simplicity is a root cause of poor results. There is an intense pressure throughout organizations to add complexity – it is quite enticing, and most companies think it is essential to success so they create a never-ending web of complexity to supposedly provide them with “the latest and greatest” analytic tools (which few if anyone truly understands) and ways of tracking cost. For example, in multiple projects, I’ve worked with teams who thought that tracking material issued to the line, specific piece by specific piece or specific unit by specific unit was absolutely critical to understanding scrap per line crew, per supplier etc. In each of these cases, there was some benefit to tracking this data; however, it was the 20% of the 80/20 rule. There was a cost associated with the extra level of detail tracked. And the data was only as good as the data going into the process (garbage in, garbage out). Therefore, aside from an industry or manufacturing processes that requires this level of complexity, you’ll achieve exponentially better results with simplicity, just as we did in our projects. Actually, in one case, we invested extra resources and time in order to reverse the complexity and simplify the process, yielding an improved bottom line result. In another example, instead of investing in the latest and greatest software, we invested significantly less to develop reporting that separated the purchase price variance from the usage/ volume variance. This report unscrambled the complexity. We then leveraged this information and focused exclusively on the controllable factors that could be modified or managed in order to have a direct impact on results. Why waste time with anything else? I’ve found repeatedly that the simplest, straight-forward, typically ‘boring’ solution yields the best results for less cost.
2. Data integrity – data integrity is one of the “simple” solutions which typically provides the most significant return on your investment in these types of projects. I equate a focus on data integrity to ensuring that your house’s foundation is stable. Although widely popular, why do you want to spend significant resources, time and funds to implement complex systems (similar to installing just the right home theatre surround sound system) when you have a huge crack in the foundation of your house? It sounds ridiculous but it is common – my guess is that it is more exciting and interesting to talk with your friends and neighbors about your new surround sound system with the latest features instead of dealing with the builder to fix the boring yet structural problem in the foundation.
3. Analysis, prioritization, and follow-up – in essence, process discipline. I consider this blocking and tackling – hard work yet essential to success. Typically there are endless opportunities to define and control costs. This is exactly why timely analysis and prioritization are key components in every successful cost initiative – no company can afford to staff every potential opportunity; instead, staff and prioritize those with the most potential impact to the bottom line or those affecting the critical product lines or key customers. Don’t get stuck in analysis paralysis; instead take your best shot at prioritizing and then focus your efforts solely on execution. During execution, it is critical to track progress, identify root causes, resolve problems, test, re-test, follow-up – and repeat the process. On one project team, for every 1% reduction in line scrap, we would save one million dollars. We didn’t find the “million dollar solution”. Instead, we saved a few million dollars by identifying a series of anomalies, analyzing root causes and developing solutions with the cross-functional team. No fancy systems, no complexity, no significant capital investment. Instead the cross-functional team developed simple reports/ metrics, analyzed, brainstormed, and instilled a rigorous process discipline – essentially worked hard and found a way to deliver more than a million dollars to the bottom line.
4. Continuous improvement – defining and controlling costs is not an event or project; instead, it is a process (a way of doing business). There are never-ending tweaks to the people, process and technology to optimize operational processes – thereby reducing cost. In the best organizations, optimizing the tradeoffs of line efficiency, line scrap and staffing levels is built into the daily routine. For example, in an operational turnaround project which resulted in a 20% gain in efficiencies, the key to success was focus. Each morning in the operations meeting, a cross-functional team met to review the prior day’s key performance indicators (such as efficiencies, downtime, scrap levels etc), set today’s priorities and develop simple action plans with associated resources to address. In a manufacturing environment, there is always an opportunity for improvement. Resolving the “low hanging fruit” opportunities alone doesn’t propel an operation forward; it is the day-to-day discipline of tackling problems and identifying opportunities that achieves the result. In essence, a rigorous process discipline focused on continuous improvement was the key to delivering a successful operational turnaround.

Defining and controlling costs is not about the people, the process or the technology; instead, it is about leveraging the right combination of people, process and technology to catapult your organization to the next level.