Articles on “reducing costs and improving performance” written over the past few years would yield many stacks of paper, or megabytes of data. Many companies are dedicated to reducing costs and improving performance.
At the end of last year, there was a significant recovery of the Czech economy and companies often focus more on timely security of supply than on reducing costs. However, in connection with the termination of currency interventions by the Czech National Bank, many companies will face the difficult task of how to best cope with the onslaught of orders and successfully cope with foreign competition in the current set-up. The appreciation of the koruna, accompanied by record-breaking unemployment, which will put pressure on wage growth, may naturally jeopardise the competitiveness of some goods and services. However, companies that manage to keep costs at a satisfactory level and reduce them further through advanced techniques have a good chance of succeeding in the face of stiff competition.
In the past, the usual starting point for cost reductions used to be cost materiality analysis and the progression from the most significant costs to the least significant. Current trends are based on more advanced approaches based on the principles of cost controlling and product calculations, which show the size and structure of costs in relation to sales and profitability of the product. Such an approach allows for controlled cost reductions across the company that are consistent with the company’s corporate strategy, business goals and objectives, and thus do not threaten the stability and performance of the company. However, for successful and, above all, sustainable cost reduction, it is necessary to address not only the resulting costs, but also the cost factors that predetermine them and influence their amount.
The results of cost controlling in manufacturing companies typically result in high material demands. It can be argued that the cost of purchasing in the case of a well-established product is largely determined by the market situation, possibilities and willingness of suppliers to offer attractive prices. In reality, however, the amount of these costs is predetermined much earlier, already at the moment of development of the new product, that is, during the pre-production stages. Design and technology prescribes how the final product will look, what materials will be used and how the product will be produced. If at this moment the link between the departments of research and development, design, technology, purchasing, production and, last but not least, finance and trade does not work well, in many cases a product is designed for which it is subsequently difficult to find affordable materials on the market or to ensure its efficient production. The cost structure of the product is then not the best possible achievable and the resulting cost calculation of the product may be at the limit of profitability. The path leading to success in this case is the controlled cooperation of all participating departments already at the stage of product development, while their common goal is to design a product that will be attractive to the customer and at the same time for his materials there will be a sufficient number of potential suppliers on the market. Based on a thorough mapping of the market, the purchasing department is significantly better positioned in dealing with suppliers, among whom it can create a sufficient competitive environment.
An integral part of a successful product design from the point of view of its future costs is also the inheritance of parts of individual products. A high degree of heredity allows the purchasing department to better merge purchasing needs, which leads to a number of positive influences. Naturally, by aggregating purchasing needs, the number of tenders decreases and their financial volume increases, which improves the bargaining position vis-à-vis suppliers. The use of identical or unified materials leads to the need for a lower volume of insurance stocks and thus to a reduction in the need for working capital and a reduction in storage costs.
In the overall portfolio of product costs, the costs associated with production, respectively the costs that enter into the rates of machines, workplaces, workshops, cost centers or workers, also reach relatively high values. Here it should be remembered that opportunities to reduce costs can lie not only in the actual amount of the hourly rate (energy costs, depreciation, repair and maintenance costs, leases and others), but also in the time required for production. Moreover, the time required for production is consumed by working capital, which leads to a greater need for external resources, a greater degree of indebtedness, and an increased cost of additional interest to be paid in the price of the product. In this context, all activities must be thoroughly planned not only with regard to the continuous production time, but also to the duration of the pre-production stages. Shortening of pre-production phases can be achieved, for example, by using advanced methods of simultaneous engineering, by carrying out activities in parallel where possible.
In connection with the level of rates, it is often possible to see situations where companies use cooperation and outsourcing instead of their own production capacities. If the capacity of its own production is filled, or the company is unable to ensure production by its own forces (it is a capacity or technological cooperation), the decision is basically easy. However, in the case of unfilled own production capacities, when deciding to export an order, it is necessary to consider whether external processing is really cheaper than using own assets. The total price of the product must cover not only the costs of cooperation, including the costs of production and the overheads of the supplier, but also the corresponding part of the company’s fixed costs – typically the costs associated with the operation of buildings, workers and technical and economic workers on a fixed working time and with all overheads, which are paid essentially twice.
Maintenance also has a significant impact on performance improvements and cost savings. Properly managed maintenance and a targeted approach to individual production facilities increase the availability of equipment, thus allowing the company to generate higher revenue. On the cost side, there are savings in funds that did not have to be spent on interventions related to unexpected equipment failures. Within the framework of maintenance, there is another area that requires rigorous management, namely the provision of repairs and maintenance by external sources, which applies in particular to general and other complex repairs, where the extent of the work requested is not known and obvious in advance. Here, considerable attention should be paid to entering enquiries, managing suppliers, taking over the work carried out and, in particular, checking whether the invoiced services were actually carried out and the invoiced material really needed to be replaced. However, in-house maintenance often also offers the potential to reduce costs, with the first step being to increase consistency in reviewing reports.
A frequent question is the setting of the necessary number of employees to ensure the operation of the company with a given volume of orders, which, however, is variable over time. Benefits in this area can be achieved by determining an appropriate number of permanent staff, which can be supplemented by agency workers if necessary.
Success in reducing costs cannot be achieved without clearly set realistic goals, the fulfillment of which must be continuously evaluated. The method of evaluation depends not only on the specific sector in which the company operates, but also on its own specific settings. A suitable benchmark is therefore, at least for the beginning, internal benchmarking, through which it is possible to monitor the development of individual areas of costs and the shift in the company’s performance over time. An integral part of internal benchmarking is the comparison of the performance of employees within sub-organizational units, such as trade, purchasing, production, engineering; it is essential to establish a suitable base that ensures mutual comparability. The achieved results of the selected workers can then be declared a goal for other workers, while the advantage of such a set goal is proven achievability in the environment of the organization.
Good luck and fingers crossed for everyone who doesn’t leave cost management!