Using Cost Optimization to Evaluate the Profitability of Your Company
In a business environment where it is a daily struggle to keep up with workforce challenges, rapidly changing technology, and increased competition, it can be even more challenging to divert focus into areas that are not in your realm of expertise. This could be why so many businesses have not optimized operational costs and expenses. You may feel your costs are already optimized, but without taking the proper steps to ensure it, you may still be leaving money on the table every day your business operates.
Now, you may ask, "are these pennies or dollars?" Great question! To properly answer, you need to do some digging to see what areas can make an impact on your business. We will go through some of these steps with you to help build a strategy. Keep in mind, single digit percentage changes in costs can have the same impact to your profitability as double-digit sales growth, and normally are much easier to achieve.
Low Hanging Fruit
First, the saying is true, "low hanging fruit is the easiest to reach!" Review areas that stand out when looking at your P&L. What are some of the costs that you use daily that you know can immediately impact your bottom line?
These costs can be a combination of operational fixed costs and variable / process costs. Fixed costs are ones that support your business conducting business, such as communications, shipping, waste removal, merchant services, utilities, leases, insurance, benefits, etc. Most of these are cost centers that if you did not have your business could not be supported properly. Variable / process costs are things like materials, inventory management, lean / 6-sigma, scrap, etc. These are critical items needed for your finished product or service.
single digit percentage changes in costs can have the same impact to your profitability as double-digit sales growth
Opportunity Lost Scenario
Now that you have identified which costs to focus on based on the P&L impact, rely on your expertise and the best use of your teams' time and resources versus an outsourced expert to determine the best way forward. I call this your "Opportunity Lost Scenario." That means determining what new business opportunities, projects, core business objectives (the items you are great at) that will not get done if you dedicate time and resources for cost reduction.
This differs for every business as you want the evaluation to always be a positive impact for your business. Positive impacts mean optimizing costs without impacting other current projects or new opportunities or adding more cost to your business than the savings provides.
Negative impacts would mean not getting projects done or done on time, or missing new opportunities, or adding more costs to your business compared to potential savings. In most cases, organizations run lean and do not have the extra resources to divert to specialized projects like cost reduction. Additionally, most do not have the expertise to perform it properly.
What Expertise Do You Need for Cost Reduction?
Having the knowledge or expertise in multiple cost markets is critical. You need to know and understand items like price benchmarks, vendor performance, technology, industry standards, etc. on every type of cost it takes to operate your business. This is a critical requirement of the process.
One solution to the negative impacts would be to use an outsourced expert who can provide the time, resources, and expertise without taking away from your current projects and should cost less than the savings achieved.
To evaluate your situation properly, consider the following
- Do you have the proper resources?
- Do you have the proper expertise to ensure you are maximizing savings?
- Can you perform audits on a quarterly basis?
- Can you perform a full analysis on an annual basis?
- Do you have that same resource available to fix any cost items that may change quarter to quarter or year to year?
Each one is critical to the success of your cost reduction strategy. This should not be a one-and-done project. In many cases, higher costs have infiltrated your business because you have not been able to perform these tasks consistently. Most likely, you are focused on growing sales more than reducing costs. You could also be a business that is very lean, working on revitalizing your growth strategies and just limited on bandwidth.
Once you evaluate your "Opportunity Lost Scenario," then you can move forward with a plan to reduce costs. Either through your own dedicated resources, through an outsourced expert, or a combination of both, you can maximize the time, resources, and expertise you need long term to help your business become more profitable.
Jim Lichtenberg is a Strategic-Partner at Schooley Mitchell. Schooley Mitchell is driven by producing results for their clients and have no ties to vendors or service providers. Fees are self-funded by a portion of the savings they find – no savings, no charge to you. Jim is an integral member of Manufacturing Works' Membership committee.