Pretty much every company wants to increase its profit, and most managers devote a large portion of their time to trying to increase revenues and margins, or reduce costs. As a financial manager and consultant, I have been involved in many profit improvement initiatives. Here are some examples – they are mostly from construction, retail and land development, but the concepts can be applied to any business.
Reducing costs can be as simple as finding a new supplier, but sometimes a more detailed analysis or a global approach can be effective.
Looking at the details – A retailer’s payroll is typically its largest expense. At one company, the standing order was to maintain payroll at 10% of sales. This worked consistently, but when we started to look at customer traffic patterns, we saw that staffing was not being increased at peak times, or decreased during the slow hours of the morning or evening. A new staff planning system improved customer service and brought payroll under the 10% target.
Statistical analysis – A homebuilder had a problem with windows leaking during rainstorms. Nobody really knew why, but replacement was costly, and it was a serious customer satisfaction problem. We formed a Six Sigma task force to gather and analyze the data. We broke down the data by community, by subcontractor, by supervisor, by manufacturer and installer until a pattern became evident. After a few changes, leaking window problems were reduced by 60%.
Centralization – At another retailer, repairs and maintenance expenses were the responsibility of the local management, and no amount of threats or encouragement could stop costs from increasing. We centralized the function in the corporate office, and made low cost arrangements with regional contractors, reducing costs by over 30%.
Glaring opportunities – A land developer always paid for up-front infrastructure costs – roads, sewer, etc. – on its development projects. This had a huge impact on cash flow and ROI. I learned that most cities are willing to finance these costs with municipal bonds. It wasn’t a secret, but the company never took advantage of the opportunity. I set about becoming something of an expert on the subject, and initiated over $100 million of cost savings that went straight to the bottom line when the developed properties were sold.
Planning – At a homebuilder, we carefully reviewed the cost of every house, and construction (or even purchase of the land) would not be approved until we were certain that projected profits met our investment return guidelines. Marketing would sometimes change design specifications, but the purchasing managers were often the ones who would drop the cost per square foot by changing a material or redesigning a minor architectural detail. This was sometimes a painful process, but the result was a low cost, high value product.
Does your CFO encourage your management team to look at cost reduction in a comprehensive way?