Explaining the Four Approaches to Cost Reduction and Profit
Improvement
Summary
– the unfortunate truth about most cost reduction efforts:
You’ve cut your
staff and your budgets and it’s still not enough.
You’re buying the cheapest supplies and materials you see and
the costs are still too high. But
you’re missing something.
The employees who
actually spend your budgeted dollars don’t have the time,
tools, guidance and knowledge to make the best financial
decision for you.
They’re working hard just to get by. And
at 3:39 PM the last thing on the
mind of even your most skilled employees is how to increase
your profits.
Cost
reduction efforts typically:
q
Run out of steam when
staff is cut so far things don’t get done well any more
q
Lose momentum when the
purchasing staff has beat the last vendor down to rock bottom
pricing
q
Slow when the last big
system has been replaced
q
Limit profitable
revenue growth
q
Come up short when the
business climate changes again –as it does
On the other
hand, world-class methods engage all of your people in a
positive way to create a better place to work with higher
profits.
Unless you have a
Profit Improvement Process or the equivalent you are missing
out on world-class profit methods that overcome the problems
with Cost Reduction.
Four approaches to cost
reduction and profit improvement:
Typical cost reduction efforts focus on
cutting expenses (headcount, materials, supplies, and other
purchased items). They may have a narrow focus (Level 1 in
the following table) or they may encompass the entire
organization (Level 2). In some cases they are expected to
continue year after year (Level 3).
By their very nature, all Level 1 and 2
cost reduction efforts will eventually end. And Level 3 cost
reduction approaches will eventually reach finite limits where
there is little left to cut without breaking bones.
While pure cost
reduction has its place, no company has ever cut its way to
long-term success.
Sooner or later revenue must become part of the equation. The
long-term question is whether or not
profitable revenue growth and cost-effective thinking will be
built into corporate practices and culture. When this is
accomplished, the entire company can work in concert to
achieve profit goals.
World-class companies use the
world-class methods of the Level 4, Profit Improvement Process
(PIP).
Table: The four levels
of approaches to cost reduction and profit improvement.
Level
|
Approach
|
Characteristics
|
Advantages |
|
1 |
Targeted One-time Cost Reduction Project |
o
Focused on expense reduction.
o
Narrow scope (i.e. one product or one department).
o
Finite term. Fixed objective. |
o
Limited impact on the rest of the company.
o
Ends
when goals are reached or opportunities are exhausted. |
|
2
|
Corporate wide One-time Cost Reduction Project |
o
Focused on expense reduction.
o
Corporate scope.
o
Finite term. Fixed objective. |
o
Ends
when goals are reached or opportunities are exhausted. |
|
3 |
Continuous Cost Reduction Process (CRP) |
o
Focused on cost and expense reduction.
o
Ongoing year after year. |
o
Ever-increasing goals are set and met.
o
Limited to cost/expense reduction. |
|
4 |
Profit Improvement Process (PIP) |
o
Focused on all elements of profit: expense reduction,
loss reduction, and revenue/margin improvement.
o
Ongoing year after year
o
Includes training |
o
Ever-increasing goals are set and met.
o
Everyone
in the company can contribute.
o
Carries a positive message – PIP is as much about
building as it is about cutting. |
In a Level
4 world-class Profit Improvement Process:
q
Profit goals are set
and met on a continuous basis
q
Everyone in the
organization is trained and involved as an integral part of
the solution
q
Tools, processes and
business methods are provided to empower the people
q
A cross-functional
steering committee keeps progress on course
q
No stone is left
unturned (Revenue, Loss; Expense) in every department
q
Profitable revenue is a
key part of the equation
q
Expenses and losses are
recognized and managed throughout the organization
q
Flexibility responds to
the changing business climate
q
The process keeps on
working to compound financial success year after year
What are the elements of a Profit
Improvement Process that make it so successful?
The following
four
key elements provide a
framework that gets the process up and running and
producing results year after year.
-
Training
in the most advanced
creativity and innovation techniques and cost-effective
business practices enables
people throughout the organization to build corporate
profits while they are
doing their jobs well.
Tools such as Power Idea
Sessions help them 1. Identify problems and
opportunities, 2. Find the best solutions and, 3. Put those
solutions into action quickly.
Power Idea Sessions can
be done in hours not weeks or months when you know how to
run them.
Training not only includes these tools but also provides
awareness in what elements actually determine profits and
how to manage those at every level, how to overcome
resistance to change, and the role that each individual can
play to create a better company.
-
Process and
structure as
provided by the PIP organization keeps everything running
and on track. Management can keep their hands on the
steering wheel without stifling progress.
-
Guidelines
ensure that the profits are actually real unlike many other
approaches that allow for phony money and phantom profits to
be counted.
-
Reporting
keeps everyone’s eyes on the goal and measures progress
toward the goals.
World-class systems include
all of these four key elements for success. Anything less
will not achieve your full potential.
Getting started:
How can I bring this to my organization?
Achieving Level 4
World-Class Profit Improvement requires a commitment.
The primary key to success is
management commitment. Management and leadership
must be willing to invest time, money and resources toward
getting it started and keeping it supported. Once that
commitment is made, the process will take on a life of its own
and will pay for itself.
We start
the process with an initial assessment of the following:
q
Management goals
q
Organizational
readiness
q
Existing improvement
initiatives underway – how are they working and where will
they fit in PIP –productive initiatives are kept going
q
Potential barriers to
success
q
Opportunity
This
assessment is accomplished through management and staff
interviews and through an initial
Power Idea Session.
Give us 16 hours over two days with a group of up to 24 of
your key people and we will not only complete the assessment,
we will:
-
Identify profit
opportunities worth tens of thousands to millions of
dollars in increased profits.
-
Prioritize and convert select opportunities into preliminary
projects for implementation.
-
Clearly identify and prioritize barriers to success and
how to overcome them.
-
Identify sources of support
for success and how to tap into them.
- Get a
clear understanding of the
reaction of these key personnel to the concept of moving to
Level 4 with a Profit Improvement Process.
- Build
initial support for the PIP
-
Evaluate candidates for PIP leadership (e.g. project leader
and steering committee membership)
-
Demonstrate how a PIP
can improve morale, quality, attitude and overall corporate
climate in addition to profits.
- Get a
sense for the size of your
opportunities for increased profits.
It is at
this point, with this powerful information in hand, that we
will meet with management and make the decision on how to
proceed. Options are to move
ahead with a limited trial or to move toward a full PIP
installation. Our Business Solutions consultants will fully
support your PIP installation, teach
you how to be self sufficient, and provide ongoing
support if needed.
At the very
least, as a result of the Initial Power Idea Session, you
probably will have identified profit improvement projects that
can substantially or completely pay for the PIP consulting
and training work.
Power
Idea Sessions and the Profit Improvement Process tap
the intellectual capital of your people to help you help them
achieve increased profitability and better corporate health.
These methods are described in our
books.
Steven C. Martin
Business Solutions – The Positive Way
Contact Us Today
What’s the Difference Between
the Profit Improvement Process and a Power Idea Session?
|
Element |
Power Idea Session
(PI) |
Profit Improvement Process
(PIP) |
|
Overview |
A
Power Idea Session is a facilitated meeting with a
relatively small number of people (typically 7 – 24)
that will achieve specific results. |
The
Profit Improvement Process is a large-scale change
process that is focused on achieving real profit growth
for the organization. |
|
Timing |
A
power idea session is a discrete event that lasts from 4
to 16 hours. |
PIP
lasts for years and produces ongoing results |
|
Scope |
Is
focused on select objectives and scope and includes
limited training. Conducted with a small group of
people. This is a piece of the PIP process. |
As
defined by the objectives and typically encompasses the
entire organization. |
|
Elements |
This is run in a training and/or
working session format. They:
q
Clarify and set
objectives
q
Identify
opportunities
q
Find solutions
q
Convert priority
solutions to projects
q
Accomplish
training |
Includes all of the elements
necessary for a change process to function such as:
q
Goals
q
Training
q
Process structure
q
Guidelines
q
Reporting |
|
Methods |
Uses specific creativity and innovation tools in small
working groups led by skilled facilitators. |
Relies on the above elements to organize the use of any
and all appropriate business and technical tools and
methods that enable people to achieve PIP goals. PI
sessions are one of those tools. |
|
Results |
Finite actionable decisions and product for results
within the limited scope and objectives of the session. |
Overall corporate profit improvement through the
engaging of the intellectual capital of the entire
organization. |
|
Impact |
Support for profit growth and corporate improvement |
Maximum profit growth and corporate improvement |
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