The Biggest Cost Reduction Opportunities are Often Hidden from the Profit and Loss Statements

During my corporate days, I spent a fair amount of time on the shop floor. This gave me an opportunity to speak with operators to understand how the lines were performing, what their frustrations and concerns were, and how things could be improved.

During one of those conversations, an operator took me through a new and better way of sprinkling Pecorino cheese onto the product. He simply pointed out that if we repositioned the spinkler five meters down the line, it would allow us to recover the excess sprinkled cheese. The challenge, however, was that the existing spinkler wouldn’t fit into the new location so we’d have to purchase a customised sprinkler.

After walking back to my office, I made some calculations centered on how much we could save based on recovered cheese, and I also got an estimate for a customised sprinkler. I couldn’t believe it. The sprinkler would cost $25k and the projected savings were $200k–$250k annually – it is an expensive ingredient, so the savings add up. With a 1000% ROI, this was a ‘no-brainer’ project.

On another occasion, I unearthed a $300k savings opportunity that required no capital expenses.

Both these opportunities were identified on a line that was running efficiently with little waste, when I took over. These ideas would not have been discovered had I stayed in my office and analysed the Profit and Loss (P&L) statement, as both products were running as per the standard rates / costs, at the time. Therefore, everything was ‘green’ and didn’t trigger any alarm bells for usage variances or wastage.

These are not isolated incidents. Similar golden opportunities exist in our workplaces but are hidden from the P&L. So the question is, how do we unearth them?

THE PURSUIT OF CONTINUOUS IMPROVEMENT

There are two paths businesses can take to improve performance, productivity and profitability, year-on-year: cost-cutting and cost-reduction. This is not just a play on words. These are distinctively different approaches that yield different results. Most world-class businesses take the cost reduction approach—it’s their competitive edge. Other businesses take on a cost-cutting approach. But what’s the difference?

THE COST-CUTTING APPROACH

This is where we predominantly try to drive the business forward and identify improvement opportunities through the lense of the P&L. It’s like driving your car mainly looking in the rear-view mirror. When we explore improvement opportunities through the P&L, we are merely in cost-cutting mode. We sit with our finance expert and attempt to identify expense line items where we can either cross out or tighten our spending, for example, reducing overtime, cutting down on training and even restricting colour printing.

The culture we create in such businesses is a restrictive mindset with employees fearing that eventually their jobs will be on the line. Leaders are ‘stuck in the business’ as they are the only ones who can identify ways to improve profitability. In turn, they are frustrated with how little time they have to focus on the strategic journey. It’s a viscious cycle that makes leaders feels like they are fighting a losing battle against rising input costs.

THE COST-REDUCTION APPROACH

Many world-class businesses have processes, systems and structures to engage employees to continually identify improvement opportunities. The culture is a rewarding one where employees feel like part of a purposeful journey. There isn’t a threat to jobs—only opportunities for growth (for the individual and the business). Leaders prioritise these identified opportunities and implement them in line with the strategic plan.

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

When you are digging for oil, you cannot see the diamonds under your feet. Which approach will you adopt?

Written by Ishan Galapathy.