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Balancing Cost Reduction and Competitive Drivers: Avoiding Blinkered Vision
Global supply chain blogs
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
Introduction
Companies must recognize the importance of balancing cost with quality in order to achieve sustainable success. While cost-cutting initiatives in itself may seem like a logical approach to improving profitability, it can lead to suboptimal decisions that compromises on product quality and ultimately damage the company’s brand equity. Sophisticated management teams understand the importance of discerning pricing trends in the market and using pricing power to drive profitability. They recognize that sometimes it may be more beneficial to offer a higher price in return for information that can reduce the overall end-to-end supply chain cost.
In the following blog, we will discuss the risks associated with an overemphasis on cost reduction and explore strategies for achieving a balance between cost reduction and other drivers of competitive advantage
Understanding cost cutting
Cost cutting is a strategy that businesses use to reduce expenses and improve profitability at all levels. While cost cutting can be effective, it should be approached with caution as it can have negative impacts on the organization if not managed effectively.
There are different types of cost cutting strategies that businesses can use.
The first is operational cost cutting.
This strategy involves reducing expenses related to the day-to-day operations of the business, such as rent, utilities, and supplies. One way to achieve this is by renegotiating contracts with vendors to obtain better pricing or switching to a cheaper vendor. Another way is to improve operational efficiency, for example, by optimizing production processes or reducing waste.
The second is structural cost cutting.
This strategy involves making changes to the organization’s structure, such as downsizing or restructuring. Downsizing involves reducing the number of employees or departments, while restructuring involves changing the organizational hierarchy or business units. This type of cost cutting is usually more drastic and can have a significant impact on the organization.
The third is strategic cost cutting.
This involves eliminating or reducing activities that are not essential to the organization’s core business. For example, a company might decide to exit a non-core business segment that is not profitable or reduce spending on non-core activities such as marketing or research and development.
While cost cutting can be an effective way to improve profitability, it can also have negative impacts on the organization. If cost cutting is not managed effectively, it can lead to reduced quality, decreased employee morale, and damage to the organization’s reputation.
Too much cost focused leads to blinkered vision
While cost-cutting can be effective in boosting the bottom line, it’s crucial for businesses to balance it with other drivers of competitive advantage such as quality. Focusing solely on cost reduction can have detrimental effects on any business. A business that is only focused on reducing costs may make suboptimal decisions and compromise quality, leading to damaged brand equity and reduced profitability. In fact, cutting costs without considering quality can result in higher expenses in the long run. For instance, a manufacturer that cuts corners on materials or labour to reduce costs may produce low-quality products that fail to meet customer expectations. This can lead to a negative impact on the brand’s reputation, reduced customer loyalty, and ultimately, decreased sales and profits. Moreover, management teams can discern pricing trends in the market and use pricing power to drive profitability.
By offering high-quality products and services, businesses can differentiate themselves from their competitors, attract loyal customers, and maintain higher margins. It’s essential to understand that balancing cost reduction with other drivers of competitive advantage is a continuous process. It requires businesses to evaluate and prioritize their cost-cutting initiatives while keeping a focus on delivering quality products and services. Sometimes, offering a higher price can actually lead to cost reduction in the long run.
For instance, a business may pay a premium for materials or services that are known to be of high quality or are more sustainable. This may seem counterintuitive in terms of cost reduction, but the information obtained through this investment can ultimately reduce the overall end-to-end supply chain cost.
Tesco
Tesco in 2014, decided to cut costs by reducing the number of employees and decreasing staff pay. While at the same time increasing the workload for the remaining employees. This move was aimed at reducing costs and boosting profits. This strategy backfired as it led to a decline in the quality of customer service and employee morale, resulting in lower sales and profits. The cost-cutting measures caused a negative impact on Tesco’s brand image, which had previously been known for its high-quality products and excellent customer service. This strategy also created issues in the supply chain, as the company struggled to manage inventory and restock shelves in a timely manner, leading to product shortages and further damaging customer satisfaction. The cost-cutting measures also affected Tesco’s relationship with suppliers, as the company demanded lower prices from them, which caused many of them to leave and find other retailers who valued their business.
Some ways to combat corruption in Union
- Increased Transparency: Transparency is key to preventing corruption. Unions can establish clear rules and public procedures for financial management and ensure that union leaders are accountable for their actions. Members should have access to financial records, and audits should be conducted regularly to identify any irregularities.
- Education and Training: Education and training programs can help union members and leaders understand their rights and responsibilities, as well as the consequences of corruption. These programs can cover topics such as conflict of interest, financial management, and ethical behaviour.
- Enforcement of Laws and Regulations: Laws and regulations that govern union activities should be enforced rigorously. Unions should work closely with government agencies to ensure compliance with labour laws and regulations.
- Democratic Elections: Elections within unions should be free, fair, and transparent. Members should have the right to vote without fear of intimidation or retaliation. Unions should also establish procedures for the removal of corrupt officials.
- Whistle-blower Protections: Whistle-blowers play an important role in exposing corruption. Unions should establish procedures for whistle-blowers to report corruption without fear of retaliation..
Starbucks
In 2020, the company announced a plan to cut $2 billion in costs over the following 18 months. They achieved this by implementing measures such as reducing labor costs through modified store hours and staffing models, closing underperforming stores, and renegotiating contracts with suppliers to obtain better pricing. As a result, the company was able to increase profits and exceed earnings expectations in the fourth quarter of 2020. Additionally, they were able to reinvest some of the savings into new store designs and digital initiatives to improve the customer experience.
Conclusion
The different types of cost cutting strategies that businesses can use to reduce expenses and improve profitability. These include operational, structural, and strategic cost cutting. While cost cutting can be an effective way to improve the bottom line, businesses should approach it with caution as it can have negative impacts if not managed effectively. Focusing solely on cost reduction can lead to suboptimal decisions and compromise quality, which can damage brand equity and profitability in the long run. The article emphasizes the importance of balancing cost reduction with other drivers of competitive advantage such as quality, which can help businesses differentiate themselves from competitors and attract loyal customers. Ultimately, businesses should continuously evaluate and prioritize their cost-cutting initiatives while keeping a focus on delivering quality products and services.
Introducing.....
The global supply chain of products is an immense and complex system. It involves the movement of goods from the point of origin to the point of consumption, with intermediate steps that involve resources, materials and services to transport them. A supply chain encompasses activities such as purchasing, production, distribution and marketing in order to satisfy customer demands. Companies rely on a well-managed supply chain to meet their business goals by providing quality products and services at competitive prices.
Efficiently managing a global supply chain requires considerable effort, particularly when dealing with multiple suppliers located around the world. Complex logistics tracking systems are needed to monitor product movements from one place to another. Technologies such as artificial intelligence (AI) can help companies keep track of shipments across different locations for greater visibility into their processes.
what did Our Reader say?
GARRY BADDOCK
Chief Operating Officer Graphite Energy
I have experience with many of the well-known top-tier strategy firms but chose Global Supply Chain to support me on my supply chain projects. They always meet and exceed my expectations due to the quality of the work, the ability to work collaboratively with internal teams, and the flexibility to adjust the project approach when required.
PHILLIPPE ETTIENNE
CEO - Large Global transnational corporation From: FOREWORD - OUTSOURCING 3.0
When I engaged Vivek’s services for supply chain transformation in one of the companies I was heading, we expected the careful and methodical approach that he was famous for... I was pleased to note that the original target set for 3 years was surpassed by almost 70% in just 18 months.
TONY FEDOROWICZ
Vice-President Supply Chain Asia Pacific
I have used their services for several business transformations and workshops in many companies. Each time an outstanding workshop and project result was delivered ensuring the success of the business transformation project. Savings surpassed $25 Million per annum in one case. Very powerful ideas, were implemented very diligently.
Jean-Briac Le Dean
Co-Founder & Agen
Vivek is a very collaborative and open leader who leads teams by example. Whether internal teams, or clients teams, all are impressed by his intensity, energy level and drive to make things a little better.
Lorna Calder Johnson
Omni-Channel Product Marketing
P & L Executive
Vivek's transformation expertise is apparent from his results and dedication to operations and supply chains. His strategic expertise, knowledge and network make him a standout even among an excellent team.
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