Cost reduction efforts require more focus than sacrifice
Research shows overhead cost cuts don't provide long-term savings
Dave Hannon -- Purchasing, 8/6/2009 12:23:01 PM
In the current economic climate companies in nearly every industry and size are focusing on cost reduction. But are companies focusing too much on short-term cost reductions at the expense of long-term savings?
According to a recent survey of private companies by PricewaterhouseCoopers, the area companies are focusing on most to reduce costs is discretionary spending such as travel and entertainment cost. And the other top three areas of include streamlining operations, workforce reductions and employee compensation.
But according to PWC's Ken Esch, "Given our experience with prior recessions and recoveries, cost reduction efforts are most sustainable when companies establish the right controls environment...The key to future success is having the process, procedures and controls in place, even as the economy recovers. Costs, particularly discretionary costs, tend to creep back in when times are good."
Another piece of research from the Corporate Executive Board, supports this thinking, saying companies need to focus more on reducing cost of goods sold and less on SG&A. "While most CFOs are quick to cut overhead (SG&A) to achieve cost-reduction goals, the companies that are able to maintain cost reductions over the long term spend more on SG&A as a leveraged way to help the business drive operational efficiency and reduce cost of goods sold," the CEB report says. In fact, it says on average, the better cost-cutting companies report cost of goods sold being about 49% of sales vs. 62.8% for average companies. However, the best cost-cutters have slightly higher SG&A.
But where to focus cost-reducing efforts in the supply chain remains a challenge for companies struggling in a down market. The CEB says the top areas for cost savings potential this year include:
- Finance transaction processing
- Supplier management
- Health care benefits
- IT asset management
- Logistics
"By focusing cost cutting on operational efficiency rather than overhead, elite cost cutters are able to boost return on equity relative to peers without sacrificing growth," the CEB says.
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