No matter what cost-optimizing measures a company undertakes, they should remain a constant goal for people managing the company - both in good and bad times. This is because it is one of the tools for a company to achieve its business goals - not only in terms of generating financial profits, but also maintaining financial liquidity.
Optimization can reduce costs by up to 25% and help to develop practices which stop their uncontrolled growth. Well conducted activities allow releasing, on average, from a few to a dozen jobs, which do not always affect cost reduction, but provide additional resources for the implementation of new projects and operations.
To begin with, it is worth explaining what exactly cost optimization is. This concept is quite often confused with cost reduction, but it does not mean the same thing. Cost optimization is a kind of investment in your own company. Cost reduction is a much narrower term. As its name suggests, it is a reduction, a limitation of incurred expenses, often accompanied by giving up certain projects, operations or corporate functions. Cost reduction is one of the tools to optimize costs, but not the only one. It is used as the last possible way if the financial situation of a company is bad or if there is an excessive cost increase and its reduction will not affect the planned actions, budget implementation and the quality of goods and services offered. Another term worth mentioning is cost flexibility, which is particularly important in the current uncertain situation. It is nothing else but the ability of an organisation - depending on the market situation - to temporarily reduce or increase costs (quickly, efficiently, without much impact on the functioning of a company) or efficiently transfer them between functions and operational processes. The organisation's expertise in this area allows it to survive harder times - such as those caused by the COVID-19 pandemic. At the same time, it ensures its ability to operate in the long term regardless of the market situation.
Every organisation, regardless of its financial standing, should carry out systematic optimization actions allowing for the most flexible cost structure to be built so that cost reduction - particularly sudden and unplanned - becomes unnecessary.
The major benefits of improvement actions in terms of business operations are:
Optimizing and making costs more flexible is a complex issue, requiring competence, commitment and systematic approach. However, the first actions will give measurable effects and increase motivation for further work.
There are different practical approaches to this issue. Two main streams focus on looking at costs and their categories and on making the analyses of business processes. Both approaches are good and depend on the size, structure and complexity of a company. When starting from cost categories, a list and appropriate categories should be created, such as personnel costs, production costs, material costs, operating costs, telecommunication costs, etc. - The list will be long, depending on how large the categories of costs are. Based on this, it would be appropriate to start analyses for each of the categories - validity, utilisation level, reduction, replacement, change of supplier. We should also not forget that the particular costs are used for different functions and company's departments - so it is necessary to combine them properly and ensure the use of economies of scale, which will help to reduce the number of suppliers and strengthen the company's negotiating position.
The second approach is to start with business processes analysis - it is closer to me personally because it shows the costs from the point of view of a whole company, the relations between processes and operations as well as the related costs. This approach also makes it much easier to ensure the flexibility of our costs - we know where the costs are indispensable and where they are only useful, we know what priorities the individual processes have. Moreover, we should remember that the process itself, as a sequence of activities aimed at achieving a given goal, is inseparably connected with:
In this case, we will also come to an analysis of the categories and costs incurred, but with a broader reference picture and, at the same time, the possibility to work on optimizing the manner and time of the business process implementation. Furthermore, if we look at the processes, we will be able to provide (build, change) controlling processes, which will ensure proper allocation and analysis of all costs related to day-to-day operations (great facilitation for further optimization).
At the same time, no matter which path we choose, these actions should be carried out systematically and regularly monitored - whether the introduced changes bring results, whether new opportunities for cost optimisation have emerged, new market situation does not change our approach or whether new market opportunities have opened up, such as new technologies, new suppliers, or the possibility of conducting a new purchasing procedure.
Basing on the process approach I will present the next steps, which are worth keeping in mind when considering a holistic approach to the optimization of costs:
Optimization activities are a continuous, gradual and systematic process - only then will it produce the right results. The most important thing is to start this process and then systematically implement and monitor it. If an organisation is able to do this itself, it is in a very comfortable situation. However, looking at the vast array of possibilities and potential actions, it often happens that there are not enough resources, knowledge or data inside the organisation to carry out the right actions. Then companies shall benefit from the support of external companies, which can also be used as a motivation to take action, set directions and take further optimization steps. Regardless of the chosen approach, cost optimization is an investment that will bring long-term measurable cost benefits and increase the flexibility of the organization. If possible, cost optimization activities should also become a part of management by objectives and bonus schemes for employees of different levels.
Creating a cost structure which, on the one hand, will be optimal for the company's operations and, on the other hand, so flexible that the organization will be able to adapt it to the changing market conditions, will become an important part of its competitive advantage.
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