Cut the Fat, Not the Limb: Using Technology to Cut the Right Costs

Jan. 21, 2009
A few strategic projects could provide an internal rate of return far greater than merely slashing costs.

Laying off employees, consolidating suppliers, reducing product offerings, and halting key projects are common ways to cut costs, but they aren't the always the smartest. So while increasing efficiency is important, deciding which costs to cut means the difference between trimming the fat and severing a limb.

Companies may be inadvertently getting rid of the very things that made them so strong in the first place. Losing employees, damaging relationships with suppliers, reducing product lines and stopping critical investments in the business do not fare well for companies that plan on growing once the economy picks back up.

The real answer is to leverage technology to root out inefficient and redundant processes. Managers must look at innovative and aggressive technology projects that will provide increases in operational efficiency. Gone are the days of IT led Business Intelligence initiatives. Performance management projects are all the rage now, where IT projects are defined by business needs, providing valuable data to managers. A few strategic projects could provide an internal rate of return far greater than merely slashing costs... and build a healthier, stronger company in the process. Below are three ugly costs to cut using technology:

Excess Inventory

Investing in proper technology to synchronize actual inventory to what's recorded will provide the data to make sound purchasing decisions. The CEO of a chemical and fertilizer manufacturer issued a mandate to cut end of year inventory by $25 million. The challenge was to immediately track inventory and forecast consumption to know the estimated value of inventory leftover. Because they lacked a sales forecasting application, they developed one by integrating current inventory levels, open purchase orders, past-year sales and predicted shortages/overages. The application then notified managers across the country whenever a purchase had the potential to create excess inventory. Within two weeks they noticed that they were over purchasing from suppliers and cancelled $2 million in unnecessary orders.

As seen here, proper data also helps prevent the "whiplash" effect where small bumps in demand lead to unjustified purchases from suppliers. Knowing exactly what you have and comparing it to sales forecasts is imperative.

Manual Processes

Unnecessary manual processes lead to errors and wasted time. Medium enterprises should look at their business processes and determine what can be automated. It is important to quantify costs related to error handling, re-processing and lost productivity when seeking to justify automation projects.

A multi-billion dollar health retailer had a problem in their distribution centers where they were occasionally sending the wrong merchandise to the wrong stores. This was because the shipping process was very manual. Packers were loading boxes on trucks in the wrong order, leading to shortages and overages at the stores. They decided to implement a solution using handheld scanners and RFID tags which helped the shipping staff load products more accurately. The solution has been very successful in reducing packing errors (and subsequent store shortages) and the company is considering rolling it out to its other distribution centers.

An Arizona bread manufacturer realized their manual process for delivering and ordering products was becoming inefficient. The distributors were responsible for delivering and ordering the bread, but the stale rates were too high. This meant the distributor had to credit the stores for this amount as well as invoice them for the next order. Discrepancies to invoices had to be changed manually. They recently implemented a solution using handheld devices that automatically recorded the stale rate and optimal order quantity for the next order. The device wirelessly communicated with the headquarters and automatically created the next order. Using this system, they were able to grow their business 40% without hiring additional employees.

Weak Links in the Supply Chain

Supply chain collaboration is on the mind of manufacturers and their suppliers. Aside from the hype, there is a huge opportunity for both suppliers and buyers in terms of leveraged costs for buyers and accurate inventory management (via vendor managed inventory) and better and longer contracts for suppliers.

Consider a project by a multi-billion dollar snack and beverage company that was having problems ordering plastic bottles from suppliers, resulting in exorbitantly long lead time. The firm used to order bottles from their suppliers by faxing paper forms back and forth. The suppliers would make their notes on the order forms and send them back to procurement. Procurement would make their own changes and fax them back to the supplier. In all, ordering bottles took up to a week because it was such a manual process. Last year the firm implemented an ERP system that cut the time from 40 hours to less than 5 hours. The time savings here creates a real incentive for manufacturers and their suppliers to embark on supply chain collaboration initiatives.

With 2009 in line to be a challenging year, companies can fairly easily implement technology solutions to eliminate waste and put money back on the table. Take a close look at your current business practices with a focus on improving efficiency while reducing redundant processes.

Raza Imam is Managing Partner of Chicago-based offshore development firm Adaptive Solutions, Inc. which has a strong focus in retail, manufacturing, and hospitality. ASI creates custom solutions that align business and technology. Raza Imam also writes about technology outsourcing issues at his blog

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