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Reducing Costs Without Risking The Company’s Future

Ron Melcher, President, Step 3 Consulting Managers are cutting staff to curb costs, but in exponentially challenging times, companies must be even more diligent in rapidly driving bottom line improvements without impairing the business’ longer-term strategy.

Resource-challenged companies have proliferated like pink slips in today’s economy.  In every sector, in most regions of the country, companies are bracing for or reeling from the economic slowdown, hoping that they can maintain customers, margins, and top-line revenue.  As the latest jobless reports indicate, managers are cutting staff in order to curb costs.

But what are the medium and long-term implications for a company’s strategic plan? A November 2008 McKinsey Global Survey interviewed executives from around the world as to steps that will be taken in the current economic environment.  The top three responses were:

1. Reduce operating costs (75 percent)
2. Increase productivity (44 percent)
3. Reduce capital investments (37 percent)

Arguably, these responses seem to state the obvious.  In fact, during any economic climate, companies generally strive to accomplish these objectives.  But in exponentially challenging times, companies must be even more diligent in rapidly driving bottom line improvements without impairing the business’ longer-term strategy.

Consistent with the results of the McKinsey Survey, consulting companies can help companies achieve bottom line results in adverse conditions, while at the same time preserving their longer term vision.

Reduced Operating Costs

  • Labor costs: Labor typically represents 10-50 percent of the cost of goods sold (COGS).  It is obvious that, in a challenging economy, labor costs must be reduced proportionately to meet lowered sales levels.  But a balance must be achieved to maintain core competencies. 

Tools such as volume-driven staffing models, standardized processes, capability matrices, and cross-training programs can assist companies in meeting these challenges while preserving the longer-term viability to meet increased future demand. 

Improved productivity can be dramatically different (and incremental) to reducing labor costs.  Productivity improvements result in either achieving greater output without increasing labor, or achieving equivalent outputs with lesser labor levels.  Labor cost reductions can simply mean that a company reduces its labor expense in an environment of reduced volume/output.

  • Material costs: In many continuous process industries, material costs can outweigh all other categories comprising the COGS.  Many companies have sought to optimize their supply chains by focusing upon the price paid for raw materials, but a significant percentage of these companies have neglected to focus upon often hidden issues such as yield, scrap, and replenishment. 

In the instance of one industrial services provider, by managing something as simple as the thickness of weld wire at overlay machines, an 8 percent reduction in materials usage/cost was achieved -- more than $850,000 in annual savings.

Materials costs can also be uncovered through optimizing the manufacturing order management process to track and utilize partially used stock already available in-house.  In the case of one commercial trucking OEM, this process resulted in an 11 percent material yield improvement and significant savings.

  • Facility costs: Excess capacity becomes particularly significant in difficult economic times.  Even when variable costs can be contained, companies can “choke” on excess fixed costs associated with unnecessary facilities, utilities, etc. 

For a fiber and resins manufacturer, the implementation of improved operating processes reduced asset (draw frame) downtime by 16 percent, which enabled the idling of two assets. The results were annualized energy savings of approximately $600,000 and facilities staff reductions of an additional $675,000.

Improved Management of Benefits Costs

While a close examination of legacy benefits may be required during a downturn, a consulting company may recommend that larger companies in particular scrutinize the administration of current benefit programs to eliminate redundancies and inefficiencies.  This is another hidden cost where savings and efficiency can be achieved.

As an example, through an analysis of the administration of accident, sick and disability benefits paid to hourly employees and continuation benefits paid to salaried employees of a global packaging company, and the subsequent use of a third party administrator (TPA) to manage the ongoing process, a company saved $1.2 million, or more than 11 percent of their costs --including the incremental cost of the TPA.

Capital Investments

  • Many of the above examples could theoretically require capital investment -- usually scarce in a downturn.  Here are some examples of available improvement opportunity, without capital expenditure, through improved productivity, waste elimination, yield improvement, maintenance optimization, among others:
    • First Tier Automotive Molding Supplier: Evaluated new program launch utilizing proprietary Capital Allocation Optimization tools to reduce the footprint of a production facility by 25 percent, reduce capital expenditures by $1.25 million, and to reduce annualized projected staffing levels by $2.6 million.
    • Diesel Engine Re-manufacturer: Created an alternative layout for proposed addition to remanufacturing facility to optimize material flow, resulting in 10 percent reduction in required square footage and associated productivity improvements of $1.6 million.

In summary, an economic downturn makes cost reduction even more compelling.  Creativity and care must be dedicated to:

  • make consulting services cost neutral to the customer as expeditiously as possible
  • assure that the improved cost structure can be leveraged independently of future economic conditions
  • ensure the company leaves its long-term strategy intact for when the recovery occurs.

Step 3 Consulting provides clients with the necessary assistance to improve enterprise-wide performance. For more information, visit