Business renewal ___save_business_costs

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This white paper on business costs outlines key strategies to save business costs quickly and painlessly, taken from the introductory chapter of my book titled Business Renewal, 320 Tips to Save Business Costs by Reuben Sokol, Toronto Canada.

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Business renewal ___save_business_costs

  1. 1. Business renewal, tips to save business costs Rebirth by MemphisBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  2. 2. THE BUSINESS PROBLEMWhen you need to cut costs by 10%, where do you start? Perhaps you simply layoff 10% of your staff. That is a knee jerk reaction but it rarely works. As ananalogy, if your spouse lost a part time job, would you give up one of yourchildren for adoption? You can instead defer discretionary costs such as travel,training or research. You can quickly and painlessly trim 1% from 10 differentplaces of your budget. For these purposes, the 320 tips listed in this book willjump start the process. The book also outlines 10 key strategies to apply these tipsin a meaningful way. To add insight, it offers many case histories.Ideally, expense management occurs within the context of ongoing renewal,rather than as a one-time, unpleasant event. A bloated budget can really be asymptom that a company had long been stagnant since successful corporations,such as IBM, continuously buy new companies that are launching competing newproducts. These purchases happen long before such smaller organizations growlarge enough to take away significant sales. Small companies similarly renewthemselves continuously.As an example, local business associations in Toronto call themselves BusinessImprovement Associations, with the emphasis on improvement instead of the morestagnant term of association. Rather than simply re-labeling expense programs under the guise of "changemanagement," we should quickly admit our failures and immediately learn fromthem, then strive to create and share a turnaround vision. > next pageBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  3. 3. Birthing new energy, by Memphis General Strategies Below are several key themes that underlie many of the ways to trimexpenses.LABOUR & ENERGY Push for timeliness Studies show that companies that work quickly and have short sales cyclesend up with higher profits. Since operating costs usually precede revenues, if youcan reduce the lag between them; you can reduce costs as a percent of sales whileyou also increase cash flow. Other benefits include reduced inventory, a smallerplant size, and increased sales (since many customers prefer a faster service). As Mark Cuban, president of MicroSolutions, once said: "Were little;theyre IBM. We had to be faster. There are only two kinds of people who danceBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  4. 4. with elephants - the quick and the dead." 1 According to George Stalker, in traditional manufacturing during the 1980s,goods in process received value only 5% of the time. Most of the time, goods werewaiting for the next step or for completion of the next batch. If we can reducethese delays, we need less equipment and overhead for the same level ofproduction. A quality and effective product design at the start can reduce manufacturingcosts later. A powerful example of the benefits of timeliness comes from Federal Express.It revolutionized the courier industry, by offering faster delivery at lower cost. Themethod was low-tech in scope. Packages were sent by air plane to a central andlow-rent location in Memphis Tennessee where they were sorted overnight, thensent on the same air planes the next morning. The cost of air courier services wascut in half. This example shows that location can have a major impact uponoperations. This is also a classic example of process simplification, which was atthe heart of the business model. Let us look also at some high-tech ways to increase timeliness: • lasers can cut fabrics faster and more accurately than mechanical cutters • lasers can measure and guide tools more quickly and accurately than mechanical devices • CAD/CAM software programs convert laser impulses to produce three dimensional models that can be tested immediately • small sensors can indicate which pieces of equipment are most in need of repairs. More common opportunities to realize benefits of improved timeliness arewhen moving to a new location. If you can complete these projects quickly, fixedcosts such as rent or advertising are recovered sooner.2Keep your operations simple The more transactions you make, the more costs will increase. So "keep itsimple" or in the field of operations, "use process simplification." A more generalterm is “lean manufacturing” that looks at reducing waste in terms of time or raw1 nc. Magazine, November 1988, page 149.2 R. Sokol, "Time is of the Essence", CGA Magazine, December 1991.Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  5. 5. materials. Toyota and Beoing are examples of companies that use this lattermethod. Costs tend to increase with the number of transactions. In Managing forResults, Peter Drucker notes that costs increase according to the number oftransactions, not just by sales volume. As an example, if you can bundle servicesinto one shipment or invoice, administrative costs should drop since the costs toprocess a small order are about the same as with a large one.Increase energy and vitality Studies show that a comfortable and healthy work environment can increasestaff productivity by 15%. Thus ensure clean and fresh air in your building. Checkfor even, bright lighting to reduce eye fatigue. Cut noise, through use of clothdividers, wall coverings or carpets. Provide comfortable ergonomic chairs foremployees to avoid back problems, a major cause of absenteeism. Encourage staff to walk or exercise during working hours to increase theircirculation and thus alertness. Subsidize company sports teams or memberships insports clubs to improve employee health and vitality. Sponsor treatment to stop smoking. Smoking breaks not only waste timeduring working hours, but smoke also fouls the air and damages furniture ordelicate equipment. Similarly increase the energy and vitality of equipment. As indicated, a keysource of wasted energy in lighting arises simply from dirty light bulbs. Thus,clean bulbs periodically to save lighting costs by as much as 40%. Reducingvibration on equipment can extend their useful life. Extend the duration ofequipment by ongoing maintenance. In some applications such as electronics,electrostatic charges can be more damaging than dirt or dust. Keeping a lean staff can work if employees are gradually cross-trained in avariety of tasks or jobs. Let us say, that two employees are trained to do three jobs.During peak periods or vacations they can temporarily help each other, instead ofhiring temporary staff with lower productivity.LAND & MATERIALSConsider creative sources of supply Consider sub-contracting portions of your production offshore. The termbeing used by the IT sector is “outsourcing” since bits and bytes are readilyBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  6. 6. transferred quickly across international boundaries. Yet this outsourcing processhas been going on for decades and there are ways to proceed without movingentire factories to new countries. Printed books have been sourced internationally for the past thirty yearsfrom many different locations. The idea for the book may originate by a publisherin New York, printed on paper processed in the northeastern U.S. states, made inturn from pulp imported from Canada. The printing may be on German pressesusing ink developed in Japan. The book may be shipped to Mexico for binding andthen returned to Chicago and New York for distribution throughout NorthAmerica. Locally, consider focusing more on your core competencies whilesubcontracting secondary operations such as printing or office management toyour suppliers. Managers should work with staff or labor more as partners andsimultaneously emphasize performance-based compensation. Forge closer ties with educational institutions, trade associations andrelated industries, especially in the area of information or development of newtechnology. As an example, community colleges license their course modules toother colleges. Many colleges are moving classes within the offices of largecorporations to reduce student travel time. You can often save by pooling costs or sharing services with otherorganizations. Employee health benefits are reduced by as much as 40% if smallfirms pool resourcesAvoid Waste Looking at major expense categories of labor, energy, space and materials,some sample ways to reduce waste include:• looking at all recycling opportunities such as refurbishing equipment or even transferring waste heat from plant equipment to warm nearby offices• a more efficient office or factory layout can reduce space by 25%• reducing the number and length of replies that you make to emails since back and forth discussions can increase time spent exponentially.Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  7. 7. You can recycle more that you use. Thinking even more creatively, you canturn scrap into revenue-producing products. Instead of throwing out meat from a$2 dollar hamburger, a major restaurant chain continues to cook the meat into chili,which it then sells for $2 a bowl. The company likely makes more profit from theby-product than from the initial raw material. As a more otherworldly example, universities access spare space on homecomputers for unusual projects, such as looking for signs of life in distant galaxies. As another example, the recent trend to apartment or office lofts is veryimpressive. Rather than tearing down old warehouses, these buildings arereinforced and turned into trendy lofts.Land Land is being defined in new ways. It can now include virtual space. A highrent district used to be situated on Wall Street in New York or Fleet Street inLondon. Now we pay high process to be situated at the center of Google. As desksbecome digitally wired and portable, we find office workers sharing physical spacein offices, a process called “hotelling.” Looking at the macro world, firms willsoon build small computer chips that are three-dimensional cubes rather than thinwafers and use less power. Small sensors will be placed almost everywhere,communicating trends on weather or humidity.MANAGEMENTFocus your marketing efforts A company needs to balance in its marketing focus. If you have too manyproducts, locations or businesses, you cannot devote sufficient attention to finetuning your operations in each area. A company should also not have too narrow afocus. As margins on a mature product decrease, you should launch new high-margin products or services, or find new ways to cut costs drastically on existingones. As an example, when gross margins on video sales fell, some video storessurvived by diversifying into related entertainment products such as compact disksor DVD’s. Others automated their sales process using vending machines to loweroperating costs.3 Today, firms have launched video-on-demand through computernetworks.3 R. Sokol, "Financial Tips for Effective Cost Cutting", York Region Business Journal, summer 1992Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  8. 8. Returning to the case of the distributor of surplus goods, one can say thatthis distributors fortune arose as much from a well defined and focused marketingniche, than from any fancy cost control system. This case showed that an effectiveinitial marketing strategy can save you more costs than highly efficient operationsfor the wrong product or market, or what some experts call "making yesterdaysmistakes faster than before."Test and retest Testing advertising materials in a variety of ways is standard practice in themedia sector. Advertising professionals use focus groups in different regions togauge subtle responses in great depth. The same principle applies to many otherfunctions. Test printing samples carefully before launching a large printing run.Similarly, test new enterprise software on a small division before launching itnationally.Communicate and measure your goals Lead your company into the future by motivating staff to work towards acommon strategic goal. Any cost reduction program should tie into yourstrategic goals. Common sense suggests that you involve all your staff in thedecision making process since they can come up with many new ideas. Be consistent. Dont make the same mistake that GM once did, increasingexecutive salaries while closing plants and asking workers for wage concessions. Dont make across-the-board cuts since you quickly dilute your vision andleadership while trimming key parts of the company. Do set symbolic actions bytrimming management luxuries, such as first-class travel or entertainmentexpenses. At the outset, consider how you will later measure progress achieved. Yourstandard should not just be an improvement over past performance or settingcomparisons to efficiencies of other firms in your industry. Occasionallybenchmark your cost performance with similar functions or tasks in otherindustries. Take the example of premises costs. Law firms typically rent luxuriousoffices in prestigious locations; an expense justified to present a professional imageenabling them to charge high level fees. The argument for prestigious premisesmay be completely valid for professional level staff but much weaker for backoffice functions such as accounting and printing that do not deal directly withclients. Banks, for example, keep their marketing staff in downtown locationsBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  9. 9. while moving many administrative tasks to administrative and computer centers inlow rent areas. Consider then moving some of your operations to lower rent areas.Look at timing Your business can be affected by several natural cycles in which businessvolumes will ebb and flow. Cost control becomes more important: • during the recession phase of an economic cycle • at the end of product life when prices decrease • according to the volatility of temporary fads • during a slow season of the year. The length of these series range as follows. Cycle Duration ______________________________________ economic 4 to 8 years product life 2 to 20 years social fads 1 to 4 years seasonality 2 to 6 months If the low points of several of these cycles happen simultaneously and youare not prepared, you could get into serious trouble. Campeau Corporations retaildivision ran into serious difficulty after the summer of 1990, as the recession beganand retail sales slowed - just when it needed to fund inventories before theChristmas season. For these reasons, leading firms who plan far ahead such as Dutch Shell,assume two recessions during a ten-year planning horizon. This frequency isalmost a certainty although the exact timing may vary by a year or two. Take a more strategic focus on the profitability of each stage of value-added production in your industry. Companies in smaller countries have tendedto export raw materials at a low stage of value-added production instead ofprocessing these materials further. A case in point is the pulp and paper industry inCanada. Canadian producers have been major exporters of pulp but they processvery little of it into fine papers. Thus track your market share of value-addedoutputs through the entire industry chain of supply.Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  10. 10. ECONOMIC PRINCIPLES In an interview at a Toronto radio show Joe Canon asked Sokol whether thebook was fair to other businesses. If we found ways to reduce our supplier costs,we were only taking away profits from our suppliers; it was our gain at theirexpense. His question was intended to be rhetorical to stimulate discussion but inretrospect it was insightful. One can answer that if we chose the highest cost suppliers; we would loseout to competitors or that some companies make this process a win-win process,working with their suppliers to reduce costs; both companies end up morecompetitive internationally. Sometimes, such wider thinking can help us formulate principles for refiningour cost strategies. Taking a wider view, we look at some micro-economicprinciples.Tradeoffs Using this book, you cannot apply all 320 tips. Use judgment in balancingmany implicit or hidden tradeoffs. For example: • You can reduce selling costs in overseas markets by using agents but at the loss of control of the pace of sales. • Seasonal discounts smooth the flow of production and thus lower operating costs but this is offset in part by a lower price. • Greater use of part-time staff reduces benefit costs and provides flexibility to meet peak customer demand, yet can result in lower productivity or customer service.Switching costs You can save $10 a month by switching cell phone or internet companies butyou may waste several hours in learning the new systems. These indirect costs ofchanging vendors are called “switching costs.”Size You can save operating costs by investing in equipment to increase volume,a process sometimes called economies of scale. Yet sometimes the ideal size is notalways known. Some products or services tend to be personal and small firms seemBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  11. 11. to thrive, examples being hairdressers or gardeners.Marginal revenue Some managers highlight cost savings by focusing on visible but small itemssuch as paper clips but the savings are often not worth the effort. Keep in mind that every thousand dollars saved in expenses is equivalent togenerating ten times that amount in sales if your firm has an operating margin of10%.Cost Drivers Marketing or operations strategies can affect many other costs and are thuscalled cost drivers. Examples would be new distribution channels or changes inautomation.4 Increases in salaries drive fixed overhead costs such as rent andoffice expenses.International Competition In global markets, ongoing cost reduction is a key to compete with cheaperlabor in emerging economies such as China, India and Mexico. This objectiveapplies even in high-tech industries. Complex optical components that used to bemanufactured only in Silicon Valley or Ottawa are often now built in largefoundries in China at lower cost. Look up objective sources of international costdata to make informed decisions.5FINAL COMMENTS There are company-wide techniques that can provide significant costsavings. Some of them have a mystical appeal and many do work well. But do notethat some of these approaches have subtle functional biases: • Six Sigma is an operations technique that simplifies processes to save time and labour. • Building Enterprise Reporting Systems is an IT or financially based approach that assumes information is the foundation on which4 Michael Hill, R. Duane Ireland and Robert Hoskisson, Business Level Strategy, Southwest Publishing, 20035 See for example, Competitive Alternatives to CEOs Guide to International Business Costs, KPMG 2003 or Dr. Kenneth Humphrey, Sources of International Cost Data, International Cost Engineering Council, Nov. 2003Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  12. 12. management decisions on costs are built. • Expense control systems and budgets assume that if we monitor expenditures, employees will then be able to find creative and low cost ways to run the business. • Economic Valued Added is a marketing approach that can justify expenditures whose cash benefit is negative but which adds increased value to the company’s stock price. In this important though to take a balanced perspective when cutting costs.We can indeed look at specific tasks or objects such as cleaning light bulbs to saveon energy costs. Sometimes looking at this level of detail, we miss importanttrends. We can put in new energy efficient windows in a building but this changeonly provides cost savings if there are no leaks in the roof and the furnace is not seton high for many hours during the day. We can thus look at a higher level atspecific systems such as energy control, for example automatically turning off halllights when people are not in the area.6 We can aggregate costs by specificfunctions, departments or regions. We might set up regional customer servicebranches to reduce travel costs and provide faster service.ABOUT THE AUTHOR Reuben Sokol specializes in strategic planning and cost management. His experience includes coordinating the strategic plan in 1988 for the Toronto Dominion Bank, at the time one of the 100 largest banks in the world. He has worked or consulted for large and small companies in a variety of industries, including high-tech, banking, manufacturing, retail, professional services, real estate and non-profit.` The past ten years, he has worked in the high-tech Sector serving as an executive of6 Gerrit Reinders, Optimizing Energy Management, Real Estate Management, March 2004Business renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol
  13. 13. several business startups. Reuben has written several articles on expense management in leadingbusiness journals in Canada and abroad. He has lectured at several collegesincluding Humber College and also conducted custom on-site seminars. A previous version of this book was published in 1994 by CCH Internationalunder the title 180+ Ways to Save Business Costs. The process started with a list of140 costs supplemented with another 40 selected from a large list of 400 tipsaccumulated by the Montreal Board of Trade. The focus of this new edition isadding more strategic insights while updating the list. Reuben is open forsuggestions by readers. So if you have comments, please email Reuben below. Hewill reply to each comment and credit suggestions of new tips in the next edition ofthis article and his book.Contact Reuben Sokol: reubensokol@gmail.comBusiness renewal, 320 tips to save business costs by Reuben Sokol MBA,Email: plan_strategy@yahoo.ca Dec. 1/06 copyrighted R. Sokol

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