Step 7 in Avoiding Bankruptcy – Embrace a Cost Reduction Culture
Truly embracing a cost reduction culture is a unique and special achievement for most companies. It is a philosophy and a way-of-life that sets them apart and establishes a competitive advantage.
To state the obvious, bankruptcy can best be avoided through prevention. Maintaining organizational health requires constant attention to the financial statements. As I wrote in Step 3 of this Avoiding Bankruptcy series, a business should be designed so that it can absorb a 30% reduction in revenue and still be viable. In order to do so, cost reduction must become part of the corporate culture.
Cost reduction is too broad a topic to concisely provide the tactical secrets within the confines of this article. Instead, I’m going to discuss some fundamental structures to establish an environment in which the organization will learn to strive for cost reductions around the clock, year after year.
Of all the Lean principles available to companies in a difficult economy, adopting a Continuous Improvement (CI) discipline is the best way to institute a Cost Reduction Culture.
Customer loyalty can provide benefits far beyond the immediate cash flow. In 2008 we had a situation with a manufacturing client that highlighted this. Our client worked diligently through the years and successfully established exceptional relationships with its customers. When the economic downturn finally took its toll on the business, one of our client’s top customers stepped forward and purchased $3.0 million of raw materials directly from the supplier on their behalf. This was a huge source of liquidity that helped our client get through a severe cash flow and set it on the path to viability.
CI as a Cornerstone to a Cost Reduction Culture
We coach our clients on effectively employing a defined CI process to identify and eliminate waste as part of The Kibel Green System™. By identifying the aspects of a product or service that customers are willing to pay for, we strive to eliminate all other costs that provide no perceived value. This is a detailed process that must be performed in a highly structured manner.
When I talk with CEO’s I am sometimes asked why the CI discipline is so important. Well, it is because of entropy – the tendency of all things to deteriorate. The graphic of the stopwatch on the right depicts the critical stages in a company’s existence. While the goal is to remain in the Healthy phase, a company will drift into the Crossroads phase if left to itself. This leads to the Conflict phase causing the best people to rapidly exit the company (i.e. “brain-drain”). By the time the company is in the Crisis phase, the best people are no longer available to solve a myriad of complex problems.
Since companies entropy, the CI discipline becomes the guardian of the Healthy phase and ensures the business stays there. Many companies must reinvent themselves every five years just to survive. Leaders who ignore CI do so at their own peril.
A Different Mindset
Having the mindset of assigning values to costs and then eliminating the excess can be challenging as it is a foreign approach for many businesspeople. Our firm had an interesting example of this a few years ago. We worked with a company that manufactured a premium line of household goods and much of their demand came from the new home segment. When the real estate bubble burst, so did the company’s sales.
The Kibel Green team relied on Lean principles and CI discipline, concluding that the company needed to downscale the product’s quality, specifically to use a lower grade of raw materials. Simply put, customers were either no longer willing to pay or did not have the funds to purchase goods at the premium price-point. Our client’s choices were to either 1) maintain price and continue to lose market share, 2) set competitive prices but sell at a loss, or 3) to reduce both price and cost. The appropriate CI decision was to eliminate the costs for which value was not attributed by customers; that is, use a lesser grade of raw materials and still sell the household goods at a profit.
Spreading the CI Discipline
Kaizen is the Japanese word that best explains the CI discipline. The CI concepts were originally developed at Toyota where they refer to any activity intended to improve an operation. Kaizen also implies working within a team to identify problems and to develop and implement countermeasures consistent with the problem-solving cycle.
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The key challenge in using CI to create a Cost Reduction Culture is establishing a permanent belief system that actively identifies opportunities. The company must be committed to identifying and solving problems as well as continuously training its people on techniques such as value stream mapping, Six Sigma and inventory control. Once trained, people then spread CI throughout the company and act as a positive influence.
Most companies simply do not have the expertise to empower each and every department with its own capability to make improvements. Leaders must strive to build a culture where CI is one of the pillars on which the business is built.
Many best-in-class companies take other measures to adopt a CI discipline. Some companies we’ve worked with create self-directed teams as part of their CI program and other companies offer incentives to employees that identify costs for which the customers bestow no value to. Regardless of the specific supporting infrastructure, the key is creating mechanisms that entrench the CI discipline and then reap the benefits of a self-propagating Cost Reduction Culture.
A Final Word on Embracing a Cost Reduction Culture
As I’ve discussed in other publications, one of the most important things to do is to be willing to accept small, incremental improvements. Rather than seeking huge improvements all at once, companies striving to avoid bankruptcy will find a series of small improvements incredibly valuable. These small improvements are easier to manage, require fewer resources to implement, and provide benefits quickly. If the ultimate goal is to establish a Cost Reduction Culture, one of the best ways to achieve positive momentum is through proven results and this is why initially seeking incremental improvements is so effective.
In closing, my experience has been that the extent to which a company consistently analyzes and strives to eliminate the wasteful costs directly impacts its ability to 1) establish a disciplined mindset, 2) improve its competitiveness, and 3) maintain a stronger financial position. And in doing so, this is among the best ways to avoid bankruptcy.
Whether a Company is struggling financially or on the cusp of breakthrough growth, Kibel Green can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, Kibel Green provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.
