Unless you are a hermit who has been stranded on a deserted island for the past 12 months, you get it -- we are in a recession.
Let's see what all the "smart" companies are doing, in manufacturing and in other industries. Many are cutting payroll, cutting advertising, cutting consulting, and cutting strategic initiatives.
So should you follow along and also cut, cut, cut? No, because this is not a strategy that leads to success. Across the board cuts, without understanding where your company's real profitability lies, results in average performance at best and leaves your organization wide open to failure at worst. That old saying, "When you do average, you get average" applies more than ever in these volatile times.
The Difference Between Cut and Reduce
But wait a minute, isn't this column supposed to be about Supply Chain Cost Reduction? Yes, and there really is a difference between cut, cut, cut and cost reduction.
Unfortunately, in this terrible economy, the difference shown between the two approaches is zero in most organizations. Today, cut, cut, cut and cost reduction are wrongly considered the same thing. This is a disaster, as cut, cut, cut done across the board without more definition will not result in greater organizational success. On the contrary, it will lead to stagnation and declining profits. Haphazard, across the board, uniform, indiscriminate cost reduction will beget the unintended result of less profit -- not more.
However, in an organization that is aligned with its Model of Success, which defines vision, mission, requirements of success, guiding principles, and measures of success, and is doing the BIG 7 -- strategic planning, action plan, budget, risk mitigation, contingency plans, execution and accountability -- the difference between cut, cut, cut and cost reduction is huge! In these visionary/strategic firms, costs are separated into three categories:
- Category 1. Capital and operating costs: Traditional ongoing expenditures
- Category 2. Talent costs: Expenditures for key resources that are required to reduce costs and increase profitability
- Cateorgy 3. Strategic costs: Expenditures for strategic profit improvement initiatives
Category 1 is wide open for cost reduction and should always be pursued, but pursued even harder during difficult times. Today is clearly a difficult time, and I strongly believe, support, and encourage cut, cut, cut in Category 1.
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