Home Profit statement The biggest cost reduction opportunities are often hidden in the income statement

The biggest cost reduction opportunities are often hidden in the income statement

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During my corporate days, I spent quite a bit of time in the workshop. It gave me the opportunity to speak with the operators to understand how the lines worked, what their frustrations and concerns were, and how things could be improved.

During one of these conversations, an operator introduced me to a new and better way to sprinkle Pecorino cheese on the product. He simply specified that if we repositioned the sprinkler five meters lower, that would allow us to recover the surplus of sprinkled cheese. The challenge, however, was that the existing sprinkler would not fit in the new location, so we had to purchase a custom sprinkler.

After I got back to my desk, I did some math focused on how much savings we could save based on the cheese collected, and also got an estimate for a custom sprinkler. I could not believe it. The sprinkler would cost $ 25,000 and the expected savings would be $ 200,000 to $ 250,000 per year – it’s an expensive ingredient, so the savings add up. With a return on investment of 1000%, this was an “obvious” project.

On another occasion, I found a $ 300,000 savings opportunity that did not require any capital expenditure.

Both of these opportunities were identified on a line that was operating efficiently with little waste when I took over. These ideas would not have been discovered if I had stayed in my office and analyzed the Income Statement (P&L), as both products were operating at the standard rates / costs of the time. As a result, everything was “green” and did not sound any alarm bells for misuse or waste.

These are not isolated incidents. Similar golden opportunities exist in our workplaces but are hidden from the income statement. The question is therefore: how to unearth them?

THE PURSUIT OF CONTINUOUS IMPROVEMENT

There are two avenues that companies can take to improve their performance, productivity and profitability year over year: cost reduction and cost reduction. It’s not just a play on words. They are distinctly different approaches that yield different results. Most of the world class companies take a cost saving approach, that is their competitive advantage. Other companies are taking a cost reduction approach. But what is the difference?

THE COST REDUCTION APPROACH

This is where we mainly try to move the business forward and identify opportunities for improvement through the prism of P&L. It is like driving your car while looking mainly in the rear view mirror. When we explore opportunities for improvement through P&L, we are simply in cost reduction mode. We sit down with our financial expert and try to identify expense items where we can either cross out or tighten our spending, for example, by reducing overtime, reducing training and even limiting color printing.

The culture we create in such companies is a restrictive mindset, with employees worried that their jobs might be at risk. Managers are “stuck in the company” because they are the only ones who can identify ways of working. ” improve profitability. In turn, they are frustrated with how little time they have to focus on the strategic journey. It’s a vicious cycle that makes executives feel like they’re fighting a losing battle against rising input costs.

THE COST REDUCTION APPROACH

Many world-class companies have processes, systems, and structures to encourage employees to continually identify opportunities for improvement. The culture is rewarding where employees feel like part of a worthwhile journey. There is no threat to employment, only growth opportunities (for the individual and the company). Managers prioritize these identified opportunities and implement them in accordance with the strategic plan.

Companies such as 3M and Atlassian are well known for their quarterly innovation days, where they are free to explore new ideas for growth and improvement. Since there is a constant funnel of ideas being generated, they can focus on quality rather than quantity. Therefore, a strict cadence exists not only to identify, but to prioritize and implement initiatives in a targeted manner. Training employees to identify hidden opportunities and having expert facilitators to lead cross-functional teams to implement priority ideas is key to success.

When looking for oil, you cannot see the diamonds under your feet. What approach will you take?

Written by Ishan Galapathy.

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