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COLUMN SYED NASIM MANZUR

Hold the coffee ...
It's a sign of the times when the largest and one of the most profitable private companies in India announces an austerity drive that includes limiting tea and coffee consumption in the workplace and encouraging use of pen refills for ballpoint pens. This move was by a company that earned profits of approximately $ 4.5 billion in FY 08 and has investment plans of $ 4.5 billion in its new retail business in India.
Interestingly, the company has officially denied any such move, yet internal emails have described it as a mission. This is a fascinating example of the stigma of cost cutting in South Asia. Part of this is derived, I believe, from our refusal to admit that we have fat to trim in the first place, seen often as an admission of inefficiency by the management or chief executive officer (CEO) and part of it comes from the importance of 'face' in our society. Public opinion disproportionately affects not only our social lives but also our corporate lives, and the conventional wisdom has been that only failing firms cut costs.
Ironically, although we are traditionally very cost conscious, cost reduction is often seen as a negative, as historically cost cutting has been seen as an act of last resort and not as a strategic initiative. But times are changing.
The Chancellor of the Exchequer in Great Britain has said that the economy in the UK is at its lowest in 60 years and the people have a right to be annoyed with the government. Eurozone stores have recorded consecutive months of declining apparel and footwear retail sales. In the US, retail stores are closing by the hundreds. Banks in Bangladesh have reported how depositors are eating into their savings, literally. The largest cellular operator and pharmaceutical company and the entire RMG export industry of Bangladesh everyone is facing retail price pressure and spiraling costs in a very competitive business environment.
The harsh reality is that the credit squeeze coupled with food and energy inflation has seriously dampened consumer sentiments. Consumers are demanding lower or static prices to keep buying. For manufacturers with seemingly spiraling out of control labour and raw material costs, keeping costs aligned with revenues is imperative to maintain profitability and for long-term survival.
Today more than ever, effective cost control is an essential discipline for every size business and opportunities for cost reduction can be better determined by understanding how costs behave rather than how we account for costs.
The kneejerk reaction to cost pressure is to pass on the pain i.e., to immediately squeeze the supplier base for lower prices. But switching to the lowest cost solution based purely on price is not only an ineffective way to
achieve real cost reduction but can also substantially raise less obvious costs and compromise other important goals like quality and delivery. Mercedes Benz cars were rated highest in the JD Power rating of automobile reliability in 1990.
“Executives of what then was Daimler-Benz in the early 90s worried about escalating production costs in the early 90s. Executives then made a policy to start trimming costs by notching down specifications for many components."
(John O'Dell: Los Angeles Times, July 13,2003)
By 2003 Mercedes' rank slipped to 26 out of 37 cars ranked in the same poll.
The morale of this anecdote is to focus on reducing total costs rather than focusing on cheap parts, because eventually we get what we
pay for. The most successful real progress in cost reduction in supply change management has come from long-term relationships where manufacturers work with suppliers. Also sometimes our systems and processes add more cost than the parts themselves.
My favourite example is how one US auto major used to issue bags of three screws to assembly areas. Not only was the cost of issuance hundreds of times the cost of the parts, but if the assemblers lost one screw, they had to fill out multiple replacement forms to get one replacement screw! No doubt the work of some highly paid efficiency consultant.
So how can businesses survive in between the rock of static and falling prices and the hard place of rising costs today?
The answer is to try and deliver the same quality output but for a reduced cost through a process of continuous improvement. This cannot be achieved by only beating up suppliers for lower prices. Productivity increases and innovation can also help lower costs as can reducing wastage by improving quality. Other options are faster throughput through process re-engineering and increasing flexibility of people and machinery in terms of what they can do, especially how quickly they can changeover between activities.
All of the above however depends on the ability of the leadership to lead by example and implement the new Corporate Social Responsibility (CSR) standards for cost reduction:
COMMUNICATE: every' member of the team must understand why cost reduction is important. Leaders need to stress that it is not only to protect profits but also jobs.
SCORE: what gets measured gets done. By quantifying and measuring we show intent and can measure effectiveness.
RELATE: answer the “what's in it for me” question? Employees must see a clear relation between reducing costs and personal reward or recognition
So next time you are not offered a cup of tea just remember, it's not personal, its just business.
The water is the managing director of Apex Adelchi Footwear and welcomes feedback at Nasim@apexadelchi com