About what cost reduction is
In their cost reduction practices, some organizations often exceed their cost-cutting limits and, therefore, stray from their ideal strategies for sustainable medium- and long-term growth. On the other hand, companies wait to act until they face extreme situations and end up making hasty decisions that directly impact the corporate future.
Cost reduction goes beyond simply reducing labor and purchasing raw materials in favor of greater profitability. This outdated idea has given way to the concept of "Cost Management," in which profitability depends on optimizations in production management and the development of tools that enhance employee careers.
It is important to establish this approach as companies implement Digital Transformation processes, especially when they wish to face the new challenges posed by rapid technological advancement.
New Cost Management strategies, applicable to any business and combined with technology, must be implemented to help markets in their economic recovery processes. This ensures the constant growth of organizations in increasingly challenging digital business environments.
How to reduce costs in a company
To achieve significant operating expense reductions, the first step is to implement cost reduction strategies focused on product quality. By applying inspection tools, it's possible to objectively determine the role of inputs in the production chain and what can be cut to increase profits.
When considering company expenses, it's crucial to have a direct link between costs and strategy (usually medium- and long-term). Knowing your strengths and focusing on those that need improvement means continuing your organization's activities.
Furthermore, management teams are responsible for determining which reductions can translate into competitive advantage and which don't.
These actions will lay the foundation for increased process effectiveness and healthy productivity in a world where production, distribution, and consumption methods are becoming increasingly complex.
To assist companies, there are a number of technological tools that can help them in their new resource management journeys.
Cost Reduction on the Production Line
Leading organizations in their segments consider Cost Management a fundamental part of establishing their Business Process Management strategies. In these cases, cost cuts are seen as the necessary fuel for innovative corporate actions.
In 1991, when he took over Frito-Lay (from Pepsico), Roger Enrico developed an innovative methodology to establish a direct market presence. By cutting 40% of general and administrative costs (US$100 million), resources were reinvested in delivery, new product development, and innovation initiatives. The layoff of 1,800 management and production professionals raised doubts about the company's continued existence as a food producer. However, the bold decision (in a time of incipient business technology, at least as we know it today) allowed the elimination of a series of unnecessary management practices that hindered the subsidiary's development of high effectiveness and responsiveness. In 2017, Frito-Lay's brands represented a market value of over US$1 billion for Pepsico.
This case demonstrates that reducing production costs doesn't necessarily mean a decline in product and service quality. The key to cost reduction that generates value is tied to the strategic vision of managers!
About reducing operating costs
Implementing cost-cutting policies involves differentiating between positive and negative costs in business contexts. Positive costs include those that allow organizations to advance their strategies to reach new markets. Positive costs allow companies to stand out from their competitors.
However, it's also worth mentioning those costs that refer to the ability to create or increase what is known as "unique customer value," that is, the value that would be the focus of a company's reason for existing: to serve all its customers as best as possible.
Tech companies are extremely adept at leveraging this concept to create new and sophisticated product experiences tailored to their customers. Historically, tech companies have made blatant cost cuts in their operations. s so that their customers can recognize them as disruptive and innovative organizations. For companies like the FAANGs (Facebook, Amazon, Apple, Netflix, and Google), the maxim holds true: sometimes it's worth taking a step back (to rethink strategies) to quickly leap toward the future of business.
Technologies and ideas for saving money
By leveraging technological resources (acquired or to be acquired), it has become easier to stand out from competitors within business networks. Thanks to innovative Automation tools, the processing and execution of tedious and repetitive tasks have become more precise and efficient. In recent years, this phenomenon has led to increased competitiveness and resource savings (inputs and time) in all markets and sectors.
For example, robotic tools are being implemented in the manufacturing of automotive vehicles (cars, trucks, agricultural machinery, and motorcycles). Even more digital, RPA (Robotic Process Automation) services are capable of handling administrative, banking, and financial processes through the use of bots or robots.
Little by little, the term "cost reduction" is shifting to "resource optimization," especially of time and labor utilization in work contexts. In this regard, cost cuts tend to redefine the synergies that all areas of a business must channel to promote business continuity.
Digital Transformation projects, through the acquisition of a technology-focused mindset, are a possible starting point for companies wishing to initiate cost reduction processes with organizational sustainability characteristics.
After all, technology and agility methods exist to accelerate companies' participation in highly competitive markets and meet the diverse demands of new, now much more digitalized consumers.
Taking Actions to Reduce Company Costs
Establishing cost-reduction methodologies can be the foundation for beginning a journey aimed at increasing operational activities. Discipline and focus are crucial for leaders and employees to implement strategies that will enable companies to gain a prominent position in business (analog or digital).
Furthermore, when taking strategic actions to optimize resources from cuts, it is important to consider creating a "bridge" between cost reduction and strategy. Ultimately, cuts or reductions should serve as opportunities to channel investments to strengthen business institutions.
Another important action to take is to connect budgets to strategic priorities. It should be remembered that if investment capital is not reflected in priorities, there will be few opportunities to execute the business "vision."
Finally, it's important to rethink costs in terms of the amounts allocated to production tools (machinery, for example) and employees. In many companies, investments in these areas are hidden within the company's "functional budget." Separating these two budgets allows for a strategic view of the implications inherent in corporate spending patterns. This makes it clearer where an organization should reduce costs and reinvest them in other areas.
Cost Reduction and Processes: Organizational Consequences
Cost reduction must be established as a sustainable management plan. Implementing digital and technological systems that promote "spending transparency" leverages a digitally oriented mindset that will determine the growth and duration of company projects.
For companies that have implemented the popular "owner mentality," full awareness of operational costs tends to become an additional organizational capability, becoming a shared mindset that fosters team spirit and personal development (especially for new leaders). It is in this context that cost reduction can gain positive aspects. Investments are redirected to innovation and the acquisition of efficient work tools.
Savings and Investments in Technology
Strategically reinvesting resources to supply technology sectors should be a priority for companies seeking to digitally transform.
Allocating capital to the implementation and maintenance of on-premise solutions is not even an option for "digitally mature" companies.
To become a relevant Digital Business, it is necessary to rely on the best professionals in the market. I hope they understand what it truly means to have a Data-Driven Digital Mindset.
The world has already transformed: it's more digital and more demanding of new solutions.
For organizations that align cost reduction with technological innovation (while bridging the gaps between strategy and execution), the future is much more promising.
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