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 Juergen Ziehfreund, Senior associate, Booz & Company

In times of steadily increasing overheads arising from fuel costs, it is important for companies to
increase transparency in the supply chain in order to remove unnecessary expenses.

This is especially so as businesses expand into different markets around the world and supply chain
operations become more complicated. Taking a simple approach to cutting costs will also fail to yield
results in the long term. When cutting costs it is therefore important to ensure that they stay cut.










 



 





Structural cost-cutting are those measures that take out layers of the organisation, reduce workforce
and cut budgets across the board. While these measures are valid and usually yield immediate results,
the cost savings don't tend to last long.

Although they may be credited with addressing the superficial symptoms of organisational bloat, they
do not treat the root causes of the problem.

Sustainable cost management goes beyond structural solutions and also addresses decision rights,
information flows and motivators in an integrated approach. Therefore it aims to create savings in the
business by changing the way people are empowered, informed and motivated.

  




The lack of transparency in terms of financial matters - from IT to manufacturing to distribution costs -
typically lets business units and departments act as though they have a blank cheque.

This can quickly lead a business into financial trouble and can be dealt with by creating real transparency
on the price of goods and services. In doing so, companies can force departments to make decisions by
allocating services on the basis of fixed prices.

Alternatively this can be through competitive bidding between service providers. Once information on
the real costs is available, companies can use this data to make better, more sustainable cost-cutting
decisions.





 

  



  

Decision rights should neither be concentrated at a high, centralised level where they become inflexible,
nor should they be too decentralised so that it makes the business chaotic.

To reach an optimal balance, senior managers should push decision rights further down the
organisational chart. At the same time they should monitor the decisions that have been made in order
to ensure accountability. This ensures a more effective decision-making process based on local
knowledge. It will also lower the cost of the decision-making process.

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Motivational incentives, whether financial or otherwise, can reinforce and help sustain cost-reduction
efforts if properly applied. They work best when aligned with the achievement of specific targets.

It means creating a bonus system that rewards managers who meet specific cost targets, not just
business targets, as well as developing a promotion strategy that goes beyond standard vertical
promotion schemes.

Companies should develop strategies for top performers that emphasise lateral promotions - conferring
more responsibility and higher salaries without a move up the management ladder. Such moves open up
the channels of communication with the increased movement of managers between departments.

 
 


 

The forces of supply and demand, which determine prices in the outside world, can also be leveraged
inside a corporation using the rate card system. In essence, these rate cards spell out the costs of a
standard level of service, as well as the incremental charges for added or special services.

For instance, in one company, distribution costs were a considerable expense as they were treated as
fixed costs charged back to sales teams as a percentage of sales.

By introducing rate cards, distribution costs became transparent and eventually sales teams reduced
their special requests substantially once they knew the high price of these requests.