A globally diversified consumer products company had spent five years attempting to cut costs. It had looked at expenses across the board, scouring each SG&A line item looking for efficiencies. From travel and procurement to HR and IT to core business services, the company sought savings.
Unfortunately, the cost-cutting decisions the company made did not go over well. The amount it saved was neither enough nor lasting -- and the company was still recovering from an executive revolt that stemmed from making senior employees travel in economy class.
In today’s volatile consumer products market, maintaining margins requires constant attention on cost and efficiency. Flat growth in mature markets has consumer products companies moving their attention to emerging markets. But geopolitical issues, foreign currency exchange rates and rapidly evolving consumer demographics create an unpredictable playing field. At the same time, investors continue to search for companies with the leanest operations. They want to invest in companies that are not only lean today, but also have a plan to stay lean into the future.
As competition intensifies, margins tighten and stakeholders demand maximum performance efficiency, 10% cuts across the enterprise aren’t going to work. Instead, consumer products companies have to fundamentally rethink their approach to cost effectiveness.
In a recent Ernst & Young Global Consumer Products Center survey of 285 C-suite executives and analysts, 74% of participants agree that they need to make significant changes to their business model to sustain historic margin levels. Fewer than 33% say that their company is very good at increasing efficiency or productivity; 13% rate themselves as poor.
Consumer products CEOs obviously are focused on reducing the bottom line. But it is not their sole focus. They also want strategic solutions that drive long-term enterprise value. Effective, sustained cost reductions release resources to fund growth and expansion plans. They can also often improve quality and alignment with strategy. Still, sustainable cost efforts aren’t up to the CEO alone. Employees need to buy in to cost reduction efforts to provide sustainable value.
A strategic approach to cost reduction that aligns cost-cutting with the company’s broader business objectives can help to make better decisions that improve efficiency and performance. However, to achieve lasting change, companies need to know their culture.