I previously worked at a large Fortune 100 company that was aiming to cut costs across the board to improve profitability. This generally comes down to removing fixed costs like unnecessary infrastructure, finding cheaper sources of materials, and cutting the workforce. Infrastructure tends to be hard to get rid of, as there is generally a long migration period involved. Finding cheaper materials may not be possible. Sometimes cutting payroll seems like the only option.
When you are looking at the balance sheet for a company, it is all just numbers that need adjusting. It is reasonable to conclude that budgets for lower priority departments need to be cut. It’s someone else’s problem to figure out how to stay productive on a lower budget. Sometimes products are discontinued and offices closed when the remaining budget isn’t enough to continue the effort.
I’ve thought a lot about this over the years, but never really saw a solution. My manager at the time gave me a book to read called The Goal. I was a little skeptical at first (how many times have you heard about a book that claims it will change your life, only too be disappointed by it when you actually read it), but I read it, and now it is the book that I recommend everyone read. There is a related book called The Phoenix Project, but I prefer The Goal as it talks more about the core principles.
I don’t want to spoil it for you, so if you want to avoid the spoilers below, stop now, head to Amazon, and get the Kindle version for just $13. Or ̶s̶t̶e̶a̶l̶ borrow it from a good friend. Or go to your local library and check out a copy. I personally own both a paper copy and the Kindle version because I like to loan it out.
Still here? Awesome. The book is about a man who has 90 days to make his manufacturing plant profitable or it will close. He goes around the plant, talking to folks in different areas and asks them for ideas on ways to reduce costs. After a few days of this, he hasn’t come up with any meaningful way of cutting costs without breaking the processes required for manufacturing the products. The budget has already been cut to the bone.
He notices there is a lot of inventory items that are sitting on shelves waiting to be processed. He begins digging deeper to find out why these items are sitting idle, and it turns out there are a number of bottlenecks on the assembly line. A limited number of machines cause delays because other processes upstream finish faster than the machines can process the items. Other items are processed early in the pipeline but wait on shelves until other items are ready.
The factory works at a relative constant pace, always producing items whether or not customers had actually purchased them. These unsold products require being stored until customers require them. There are also issues with having enough product on hand for big orders or having too much product around for stretches between customer orders.
The general issue is that the processes in the factory aren’t organized well. The latency to get an item from start to finish was high, and the overall throughput of sold items was unpredictable but generally low, causing big orders to take many months. He realized what he needed to do was make changes to reduce latency and increase throughput.
There is a real cost to holding inventory items on shelves until they can be processed or shipped to customers. The more inventory you have just sitting around, the less product you are actually getting out the door. Until those items are sold, they are a hidden cost that may not be obvious. This was a startling revelation, as most companies don’t consider inventory to be a real cost.
He began to rearrange the processes in the company so that items were manufactured in a more efficient manner so that they were ready when needed, not sitting idle in the meantime. He invested money to buy more machines to reduce the bottlenecks. He began working closer with customers to gauge what they actually needed and when.
Productivity in the factory began to go up. Items spent less time on shelves and less time moving through the pipeline. With better expectations on what customers needed, product was manufactured to meet specific orders, leaving less inventory sitting around. Customers were pleased with getting product sooner and began ordering more.
In the end, the factory actually cost more to run, but this was greatly offset by the increased profits as more products were sold. The factory went from being a liability to the most profitable factory in the company. Eventually his methods were adopted universally across the company.
The moral of the story is that while you might be able to cut costs, there is likely a lot of inefficient processes that are actually resulting in lost revenue. If you streamline those processes to reduce bottlenecks and items waiting on other items, you will see a boost in productivity. Your customers will be happier, your employees will be happier, and even your shareholders will be happier. Stop cutting costs and go and find those bottlenecks right now.