Low cost may come at a high price

What Lessons Can We Learn from the Covid Pandemic?

Isn’t it curious and disturbing how, when a severe crisis happens, companies suddenly decide to reduce costs by laying off huge numbers of staff?

It does seem strange to me that, if you accept that a company is as good as its people, why they feel they can find their way through and beyond the crisis by severely cutting back on those people.

I understand that if you suddenly lose sales to the extent that you don’t need the factories, then you do have to  do something about it.  But what about if and when the sales return – not only have you lost the people who make it all happen but you have lost their skill, their experience and you have forfeited all the expenses that have gone into their recruitment, training and development.  Plus, if they’re good, they will be snapped up by another more progressive company, so they are lost to you, for ever.

You  will also have lost their loyalty. You may get some back, but at what cost? You have indicated to them and to all your workforce very clearly that they are expendable, creating uncertainty and restlessness.

These are strange times with the magnitude of the recent shift.  But, as a matter of principle, a good company will constantly review its positioning, organisation, people and performance regularly and diligently and revise accordingly, particularly in the good times. 

Their normal risk management and emergency planning processes would also drive them to assess routinely and rigorously how to deal with serious loss in sales and other areas of potential extreme risk. 

If this approach to good management is not taken in the good times, and the company allows a sense of comfort to pervade, it will be caught unawares by a crisis. Then it is often too late to course correct, too late to search for and find cost reduction opportunities and too late and expensive in the short term to implement them.

Cost reduction is a vital part of managing any business.  It must, however, be a constant drive within the business, but always be based on what is good for the company. There are always opportunities to reduce cost – ALWAYS.  And if managed correctly they will bring greater flexibility and agility, better efficiency and better customer service, while improving your bottom line.

To stay competitive, firms should always be striving for as lean an organisation as possible. Removing redundant jobs through reorganisation and replacing poorly performing people with fewer, better paid, more competent and driven staff can often be done with the same or less resulting total payroll cost.

However it’s clear that finding and implementing these cost reduction opportunities often (not always) comes with upfront expenditure, with the benefits kicking in over a period. So the investment must be made in the good times when you can afford it.  For example, a capital investment may provide a 5 year payback, which is good for the business in the medium term, but won’t help you out of a crisis. 

Let me give you a few examples of how pursuing a rigorous and continuous cost optimisation process, focussed on waste reduction, will help you:

• An intense energy and water conservation study and usage reduction programme will not only reduce your expenditure but lead to less wastage through losses or leakages and improved environmental impact. It also reduces the cost of future price increases.
• Investment in a distribution route planning and scheduling system will not only reduce delivery distance travelled and hence fuel costs, but also you’ll need fewer vehicles. It will also improve your planning, delivery accuracy and hence customer service satisfaction levels.
• Introducing an advanced plant planned maintenance programme will improve plant reliability, reduce downtime, limit unplanned shutdowns and improve capacity, as well as enhancing flexibility and planning accuracy. It will lead to a reduction in time and materials lost due to waste and may lead to you not having to invest in new plant.
• The increased reliability can in turn lead to a reduction of inventory of raw materials, in-process materials and finished goods, which improve working capital and operating cost.
• Working towards a Lean organisational structure through eliminating unnecessary jobs and delayering your organisation, as well as through multi-skilling and installing effective performance management systems, has huge benefits when carried out routinely. When done continuously, the impact on employees and redundancy costs can often be managed through natural attrition, re-skilling and early retirement programmes.

None of the above can be done if they are left to a time of a crisis.  As many ill-prepared companies are finding now, the only way to cut costs dramatically and quickly is to cut marketing spend, cut training programmes and cut headcount, all of which are seriously detrimental to effective recovery.

I’m sure you have plenty of other examples which apply across all industry and fields of business. All of which have the same theme – no matter how good things are looking, plan for success but always be prepared for the worst.

Good leaders know this and make sure it happens. Those are the people you need and who will help future-proof your company. 

They know that it’s too late to cut costs effectively after the crisis has hit. 

I’d be very happy to discuss!

Mike