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Focus on cost reduction can be detrimental to business growth.
I have come across several Supply Chain teams which focus a significant portion of their effort on cost reduction programs. Some are even obsessed about it. Does it work? Can it catapult a business to excellence?
There are two pitfalls in such an approach. Firstly, cost captured in books of accounts doesn’t reflect reality. Cost accounting talks about Total cost, Fixed cost, Variable cost, Marginal cost, Opportunity cost, Unit cost. Which measure are we using to track our results? If you track the wrong measure, you could even chop off young shoots of promising business growth.
Secondly, cost as a concept is linked to revenue in several ways. While formulating cost reduction initiatives, do we explicitly consider its impact on revenue? We can’t shrink ourselves to glory!
If cost reduction is not the right approach, what should we adopt?
In my opinion, we should go for profit maximisation. If higher cost (as measured, which could be wrong) leads to profit expansion, why not? This approach opens up many more avenues to pursue for a profitable business growth.
TOC has an excellent approach for this endeavour. Maximise Throughput (T) while maintaining or reducing Investment (I) and Operating Expenses (OE).