Thursday, 1 November 2018

Cost Reduction Strategy for Facing the Global Economic Crisis

Cost Reduction Strategy: During this global economic crisis, the top leaders and policy holders in all companies must think hard to find a strategy. So that company profits do not decrease because the level of sales decreases due to declining market demand.

Profit as a function of the number of sales minus operational cost. It can increase in two ways, first is to increase the number of sales. While the second is to reduce operational cost. Operational cost itself is a function of all spending costs. Such as raw material costs, manpower costs, overhead costs, utility costs, space rent costs, and so on.

Introduction to cost reduction strategy

In the present conditions, where the average sales number starts to decline. The cost reduction strategy for operational cost is a mandatory step to save the company and increase the company's profit. Managers control costs in each department in collaboration with senior managers to make the framework reduce costs continuously.

With this approach, the senior manager will publish that this continuous cost reduction program. It is the main program, not just an additional element of the business process operation. Furthermore, this cost reduction program is target to be a core competency of the company compare to other competitor companies.

How to implement cost reduction program?

This cost reduction program will run smoothly if the senior manager in collaboration with all department managers. It makes this program a corporate culture by continuously campaigning programs ranging from managers to awareness at all levels of employees. With changes in corporate culture to carry out cost reduction continuously.

It will be very important to instill the meaning of the importance of cost reduction for all employees.  Make them understand what will happen if this program is not complete. How employees can help this program to succeed. This is because cost reduction is a change program and change requires full support from all employees. To understand the importance of change to achieve improvement.

Statistically, companies that successfully implement changes in cost reduction culture. It will get a 50% increase in profit from the annual profit from the cost reduction program. A number that is worth fighting for with hard work and cooperation of all employees.

This global economic crisis situation can actually be a positive trigger for implementing a cost reduction culture. Because the company leaders immediately felt the burning platform, namely the importance of the meaning of this program for the survival of the company.

When communicate to employees, they also immediately understand what happens. If the program is not immediately implement. A crisis situation like this is the right time to change one's mindset for those who previously lacked discipline in controlling costs. Now it has changed to make cost reduction a culture of the company.
In statistical data, the most frequent and the first thing a company does to implement a cost reduction program is by:

  • Eliminating waste (all things that do not add value)

  • Implementing best practices (things that have proven effective)

  • Eliminating waste and implementing best practice are two things that are easiest to implement by companies and require changes that do not require high technology. These two things can be achieved quickly and profits can be directly obtained in a matter of months.

After the top management supports the program for continuous cost reduction by eliminating waste and implementing best practice. What managers need to continually communicate is the emergencies of the importance of cost reduction. The direction of the cost reduction program to spur the growth of the company.

What these managers have to do is equip their employees with a method of improvement for continuous cost reduction. Do not let the embed mindset cost reduction not work just because they do not know what methods and tools are need to implement the program.

Improvement method of Lean Six Sigma

Now large companies have adopting a lot of Lean Six Sigma as a method for continuous cost reduction. There are countless numbers of companies. That feel the "sweet fruit" of implementing Lean Six Sigma to run a cost reduction program. Lean Six Sigma is an improvement method that uses a lot of tools such as Design of Experiment, Waste identification, Value Stream Mapping, Hypothesis testing, Rapid setup four steps, Heijunka, Statistical Process Control, Mistake proofing, Root cause analysis, and powerful tools countless others.

The improvement method of Lean Six Sigma has been proven successful in various types of industries. Such as manufacturing, telecommunications, banking, hotels, mining, oil and gas, electronics, packaging, semiconductors, molding, and so on. Famous companies such as General Electrics, Motorola, Toyota, Dell, American Express, and others as improvement methods in applying a culture of cost reduction in their companies and proven success.
Lean Six Sigma itself is a combination of two methods of improvement that are very extraordinary, namely Lean Enterprise and Six Sigma Methodology. 

Lean Enterprise was adopted from the Toyota Production System which was proven to have succeeded in increasing its profits beyond the previous larger automotive companies such as General Motors and Ford. The Lean Enterprise method succeeded in bringing Toyota to be the number one automotive company in the world in terms of automotive sales and profit. While the Six Sigma method that was first introduced by Motorola, achieved its greatest success when implemented by GE in the hands of the century's best CEO, Jack Welch, who managed to increase GE's market value from $ 14billion to $ 410billion and make GE one of the largest companies in the world .

Lean Six Sigma uses the DMAIC methodology (Define, Measure, Analyze, Improve, Control) in making improvements. This method guarantees that the cost reduction target has been identified at the beginning of the project and is known by the management sponsor so that the Lean Six Sigma project will receive full support from the top management to ensure the success of the project is completed on time and get cost reduction as targeted.

Critical to Quality (CTQ).

In general, the deployment (implementation) of Lean Six Sigma in a company begins with a preliminary study to identify the Voice of Customer and change it to Critical to Quality (CTQ).

CTQ is all quality characteristics desired by customers and can be quantified (to be specifications). The second stage is to determine what projects will be executed and choose Green Belt candidates as project implementers.

The next stage is to increase awareness on the part of sponsors and champions to understand the importance of business process improvement and ensure that top management will fully support this program by allocating the resources needed to run the project and giving rewards to the team that successfully completes the project and produces cost reduction.

The fourth stage is debriefing the project implementer with Lean Six Sigma training, here the participants are armed with tools (tools) improvement to work on the project, so that when they execute the project it can run smoothly and successfully.

Project & Cost relation

During the project, monitoring is carried out by champions and sponsors during the DMAIC gate review. The goal is to ensure the project runs smoothly according to the schedule, and overcomes obstacles when implementing the project.

If the project has been complete, the sponsor will see the financial results of the project. Duplicate best practice from the project to other areas. Give rewards to the project implementation team, and identify the next project.

The tracking system needs to be made to ascertain. How much money has been obtain with the improvement project and can be calculate as a whole for one year. This will be an ongoing program, so that from year to year. That is large cost reduction will accumulate to an extraordinary value. This is the key to success of a continuous cost reduction program that a company can adopt as a culture. So that in the end it will increase the company's profit and maintain the continuity of the company's business. So that the company will be more effective and efficient over time.

Company leaders will realize how great value creation is obtained from the project from year to year. The impact is not only felt by the company. But also a reward system that will be a driver for employees to complete the project.

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