There is a significant difference between Cost Reduction and Cost Takeout. All companies should have cost reduction as part of their business strategies. It only makes good sense. At one time or another, just about every C-suite and boardroom has had the discussion regarding Cost Takeout as a Strategy. Continuous Improvement and Lean Business concepts tell us that there are always ways to take out cost and those tools do a good job of reducing cost gradually. Cost takeout as a strategy is a completely different approach. The first thing is to make sure that everyone is clear on what a cost takeout strategy really is. Let’s start with what it isn’t.
It is not:
- A cost reduction project: That lends itself to a product, a process, a part or an activity focused on by a small number of people.
- Continuous Improvement: CI is a methodology for improving everything you do which will reduce cost. This is evolutionary, not revolutionary.
- A short-term project.
A Cost Takeout strategy is multi-phased and usually results in significant changes to the business structure and organizational design. It is often part of an integration strategy. The three phases of a cost takeout strategy are shown below:
Phase 1 – Strategy definition
- Definition of the company’s Most Important Goal
- Creation of the cost takeout strategies and the metrics that will define project success
- Creation of a cost takeout steering committee
- Development of the cost takeout assessment roadmap
- Assigning assessment teams
Phase 2: Near term – Assessment and Analysis
- Resource redundancies
- Overhead and fixed costs
- Market facing costs such as advertising, social media, marketing expenses – Calculate ROI’s
- Reduce software and hardware costs
- Supply Chain Costs
- Purchased materials study – Office supplies, MRO, service contracts
- Fix or exit non profitable products and/or customers
- Geographic footprint
- Organization design and capabilities
Phase 3: Longer term – Implementation
- Business transformation
- Redesign the fundamental elements of a business to the lowest cost structure that can support a company’s strategic objectives
- Redeploy resources to mission critical activities that can provide growth and differentiation
- Jettison non-mission critical business processes and activities
- Divest non-critical business products and services
- Leverage existing digital technology
- Rationalize the product and services portfolio to the most profitable mix
- Process re-engineering: In the office, in the field and in the shop
- Partner with vendors who can do non-mission critical activities at a lower cost
- Leverage vendor expertise in design and process
- Fix or exit higher cost vendors
- Negotiate lower “total cost” terms with vendors
- Revisit supply chain footprint and approaches to inventory management
Cost takeout is one form of Business Transformation. While the above is not a definitive list of cost takeout activities, it should give the reader a pretty good idea of the complexity of the process for doing it right. Each of these areas should be addressed with a proven approach. There are five requirements for doing it right:
- Management commitment to the project: start to finish.
- A holistic approach which is often associated with “Wall to Wall.”
- A clearly articulated Most Important Goal and business strategy from which all decisions are tested.
- A clearly defined methodology for the cost takeout activities
- A well thought through change management plan, utilizing a framework such as Group50’s Business Hierarchy of Needs®.
Given recent events, management teams have changed the way they do business multiple times: Paring down during the pandemic, rapidly scaling up after it and know faced with the challenges of normalizing business performance. They are faced with the need to significantly improve profitability and to change their business models. The urgency of the need for a cost takeout program will have a significant bearing on how the cost takeout program is structured and how to address the three phases.
It is advisable that leadership teams work with cost takeout experts who can help them structure a program that is appropriate for the business, the need, and the marketplace.
At Group50®, we have mastered this process and have a playbook that routinely generates double digit improvements in profitability for our clients. We can help you make those decisions, design a program for your business that will minimize cost and optimize strategic performance and work hand in hand with the team during implementation.
You can read more about Group50’s cost takeout methodology, projects and results here. Call a Group50® cost takeout expert today at (909) 949-9083, request more information here, or drop us a line at email@example.com.
About the Author: Jim Gitney is the CEO and Founder of Group50® Consulting, and the author of “Strategy Realized – The Business Hierarchy of Needs®” which summarizes a framework for successfully defining and implementing transformational strategies such as cost takeout (You can find out more about the book and acquire a copy by clicking on the image to the right). Founded in 2004, Group50®consulting is focused on working with middle market companies to significantly improve their productivity by leveraging people, process and technology as part of a company’s strategic plan. Restructuring and Cost Takeout in manufacturing are Group50® specialties. Group50® consists of consultants who have spent their careers in corporate America learning how to optimize businesses. We specialize in working with senior leaders to develop and implement programs that leverage people, process and technology to optimize business performance.
Strategy Realized – The Business Hierarchy of Needs
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