How to Really Lower Costs
I heard the phrase “costs are like a waterbed” recently in a discussion about how expense management often doesn’t live up to expectations. Press cost down in one area, and it inevitably increases somewhere else.
For instance, a concrete manufacturer chose to postpone routine maintenance expenses to save $5,000. The short-term savings was appealing, but when a key piece of machinery failed, bringing the entire business to a standstill, the expense and downtime far outweighed the initial savings.
Software upgrades are so pervasive these days. Is it really necessary to invest in the latest versions? It’s tempting to save a few thousand dollars by putting off the expenditure for another year or so, but when you suddenly discover that your outdated software is no longer supported and massive data is lost in the conversion, not to mention professional fees to get everything up and running again, one must question whether the short-term savings were really worth it.
The waterbed effect causes even more waves in areas many executives don’t consider. For instance, what are the long-term effects of bulk purchasing discounts? While you may be able to push the cost of inventory down by buying more, the cost of additional space, possible damages or loss creeps up. And what about carrying costs? Distributors and manufacturers assume a 2% per month charge for holding inventory. So if your bulk purchasing slows your inventory turns, the savings derived from your discount evaporate quickly, and you may end up actually losing money!
Bulk production is another less-obvious example. Investing in machinery that allows the business to process more inventory for less seems like a cost saver. But is that really better? If your customer only wants 60 items and you’ve made 100, the remaining 40 are stuck in inventory, which is just another form of cash that you can’t use. Sure, you’ll probably sell them eventually, but what if you don’t?
So what’s the solution? Focus on the variable costs in a business. Streamline the process, make it simpler and make it cost less every time you run it. Process refinements are the real cost savings, and once you get the process started, it tends to run itself without a lot of management time, and it avoids the pain of knowing a bad decision is coming home to roost.