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Good Advice from A Business Consultancy – Reducing Costs Can Seriously Damage Your Profits!

by Paul Forsythe

in Product Development

Some project requests need a cautious response. One that always puts a business consultancy on the alert is the request from a client that wants to reduce his costs. Cost saving is not an objective. It’s an approach to meeting the true objective – prevent losses, win orders, protect business – and without understanding the objective, the project is pointless.

An axiom of my business consultancy is that the project must have a higher purpose. If it doesn’t it’s likely to cost more than it saves. I’m not criticising the introduction of a new less expensive version of a product with a lower specification, as that’s a different matter. Frugal innovation to supply a “Lite” version of a product, to customers you wouldn’t normally acquire, would tick all the boxes for a switched on business consultancy.

What I’m getting at is the temptation to use cheaper but inferior raw materials that are more difficult to process or affect the quality the product. The loss in productivity can easily outweigh a trivial saving.

It’s also easy to underestimate the time and cost of testing to ensure that the product continues to meet the customer’s specification.

A good business consultancy will advise that if the goal is to reduce costs, the business should look at their processes to identify inefficiency, unnecessary activities, bottle-necks and waste. They should also work closely with their suppliers to identify opportunities for savings – for example their packaging and delivery arrangements or even the purchase of higher specification raw materials that can reduce future maintenance and warranty costs.

Don’t neglect less obvious alternatives. I recall a company where the technician had spent a month to reduce the raw material cost of the product by two per cent. Then, while waiting outside the sales manager’s office, he heard him approve a discount of several times that amount that one of the field team had requested. My business consultancy would advise that teaching good negotiating skills to the sales force, and limiting their freedom to offer discounts would be a very quick and easy way to increase their profits

As a final thought, before cutting costs by turning off obvious targets like heating and lighting, consider whether they might be investments. A retail store of my acquaintance discovered this principle by accident one hot summer’s day when the manager forgot to follow their normal practice of turning off the air conditioning. As a result, they were full of customers seeking somewhere cool, and for a cost that was considerably less than an advertisement. A good business consultancy would review all these aspects of the business and offer advice that may seem paradoxical without the experience they bring to the table.

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