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Whenever you read in the financial press about a company making a large cost reduction, try to recollect whether or now not the same firm has done this before in recent history. Chances are that the latest announcement is just the latest in a series of such cuts. If layoffs and facility shut-downs are such a good idea, why didn't the company make all of the changes sooner? The usual answer is because the company didn't achieve its sales targets following the last round of cost-cutting.
On another occasion, you might consider cost reductions that can help increase sales from the major trend-setting customers. At another time, your attention might focus on customers whose volume would fine-tune your operations to become vastly more efficient.
While cost-cutting ideas are being generated, more analysis goes into examining how they'll affect bills at budgeted or anticipated sales levels than into how the sales levels themselves will likely be affected.
When is a cost reduction a cost increase? When the worth reduction drives too many customers away!
Layoffs, for instance, often mean delays in making existing and new offerings available, poorer service, and worse quality. Do those degradations in performance usually help sales? Usually now not. These harmful effects occur as many productive employees choose to leave for better opportunities with generous severance pay packets in their pockets, and processes are disrupted as work is reassigned to those with less experience in the key activities.
If you are careful, you will discover sales-increasing ways to established lower-cost business models almost as easily as ones that harm profitable sales. That care in selecting the right sales-increasing quality is a key secret of the most successful companies who routinely improve their business models, and makes all of the difference in your long-run success!
Most ideas that companies have for cutting bills will also cut sales. In fact, some of these "cost reductions" will permanently reduce earnings because lost sales will more than offset lower bills. For a typical manufacturing company, a one % sales decline will have the equivalent profit impact of a six % reduction in payroll bills.
Spend ten hours examining the potential sales impact of any cost reduction you evaluate for every hour you spend on considering how it will improve your business model. The best cost reductions will likely be those, like Beckman Coulter made through its merger, that lead to better quality, more effective performance, and greater benefits for customers and end users.
Copyright 2008 Donald W. Mitchell, All Rights Reserved
