Home | About Us | Inventory Process Optimization | Consulting | Training | Books & Software | Articles & Pod Casts | Contact Us

Why Cost Reduction Efforts Fail

Free Feature Article

Every business is trying to improve profitability, after all this is why the business exists. To achieve this goal there are only two paths that can be taken – increase revenue or reduce costs. The path of increasing revenue is typically seen as the most positive step. It is exciting, involves expansion and creates opportunities. Conversely, reducing costs is seen as negative and backward and so this approach often gets much less attention that it deserves.

The problem with continuous improvement is that it can be really hard work. But, just like its glamorous sibling, achieving lasting and positive cost reduction requires creativity and imagination. Most continuous improvement initiatives begin as a last minute and unplanned way to ‘make budget’. The focus is short term and as a result the approach can be a destructive ‘slash and burn’.  Managing costs should be a strategic decision not an ad hoc reaction to short term revenue failure.

The hard work of continuous improvement occurs because it is often seen as boring and internally focused. And it often is! Cost reduction is seen as being ‘tight fisted’ and squeezing more out of the lemon or getting blood from a stone.

Also, whatever cost base exists is a reflection of the past management, after all somebody set up the system or allowed the development of the current cost base. This poses a problem for many because it can be seen as admitting past failures. This is also the reason why it often takes a change in management to kick start a true continuous improvement initiative.

It is because of these issues that people take short cuts and this leads to mistakes and unsatisfactory outcomes. The book A New Strategy For Continuous Improvement explains all the issues with continuous improvement activity but the eight reasons why continuous improvement efforts fail are:

1. There is no base to build upon -   Most continuous improvement initiatives just start with whatever systems the company has in place at that the time. They do not review the suitability of those systems or what can change to provide a ‘good practice’ base for future activity.

2. They rely on finding breakthroughs – Too often companies spend their time and energy looking for the leading edge breakthrough that will change everything. Unfortunately this approach diverts attention from applying the simple and known solutions that already work.

3. They try to ‘reinvent the wheel’ – Few companies are in the business of management innovation yet too many want to develop management systems or overly customize something to their business. If you are in the early stages of continuous improvement just copy something that works. Later, as part of your improvement processes you can work on evolving that more specifically.

4. They ‘cherry pick’ good practice – Often it seems easy to try and identify the single element of good practice that is the key to another company’s success and apply that to your own business. This ignores that the result is likely to be systematic and comes from having established a sound base to build upon (see item 1).

5. They are too hung up on efficiency – In my view efficiency is over rated. Companies that strive for efficiency need to be sure that they are being effective first. There is no point in doing the wrong thing very well.

6. They don’t pay attention to the little things – It is also too easy and popular to take the ‘big picture’ view and it is often assumed that things will just work. This is especially the case when human intervention is required to document details. In a recent case a company spent millions of dollars on new inventory software only to find that their team did not complete the required daily updates. This meant that their data was out of date and their original problem was not resolved. They are now focusing on changing their culture and this will lead to the delivery of their main benefits.

7. They are locked into a silo approach -   Business structure often impacts the way we see the world. If someone is busy trying to optimize their own small part of a company in isolation from the surrounding departments, suppliers and customers with whom they interact, it is likely that the result will be suboptimal.

8. There is no process of renewal – Finally, having completed the tasks required to achieve their immediate goals many companies then change focus onto some other problem. However, if the cost base is not regularly reviewed in line with changes that occur in product, customers, technology etc. then the problem is not resolved only temporarily addressed.

Good continuous improvement requires a long-term view, imagination, creativity and innovation. Success can be achieved through doing things differently, being systematic in your process and making continuous improvement a strategic choice.

About The Author

Phillip Slater is the author of the book A New Strategy For Continuous Improvement and the developer of systems that help companies reduce their costs in a systematic and lasting way. For more information visit his website at http://www.InitiateAction.com.

Note: You are welcome to reprint this article online on the condition that it remains complete and unaltered (including the ‘About the author’ info at the end) and you send a reprint to enquiries@InitiateAction.com   

Initiate Action Pty Ltd

49 Vida Street, Aberfeldie Vic 3040 Australia

phone: +61 3 9331 3181 fax: +61 3 9331 3180

USA and Canada Free Call 800-581-7678