The one thing to keep in mind when cutting costs

written by IFCO SYSTEMS, 2nd marzo 2018, in Historias

Cutting costs will never go out of fashion in business. It endures as a convenient approach to improving short-term financial results. Some companies systematically look for percentage annual cost decreases, year after year. Others are motivated by the onset of profitability pressures to start turning over new rocks in pursuit of savings. And with supply chain often accounting for half of company costs, it is normally the place where fresh produce companies start tightening their belts. But cost cutting will not be effective for your company if you don’t keep one important thing in mind: your customers.

In severe cases, cost-cutting can even trigger a "death spiral." As one white paper by Customer Centricity, Inc. describes:

If costs are cut in a way that negatively impacts the customer, then you may very well enter a "death spiral." That is, you cut costs, the customer is negatively impacted, and you have defections. Your next quarter’s revenue numbers are off again. This results from the current economic environment (e.g., you are unable to sign new customers) PLUS the fact that you have fewer customers than last quarter. You again cut costs, the customer is negatively impacted and you have more defections. It’s a vicious cycle.

"Focus your efforts on where you can add the greatest value for your existing and future customers," one expert advises in Forbes. "If you focus on delivering exceptional value, your employee and customer loyalty will help you reach new heights."

Recent research by Accenture, as reported by Global Manufacturing determined that "many organizations work in functional and geographical silos," making it difficult to determine the who, what and why of spending, as well as inefficiencies created elsewhere by taking advantage of random cost cutting opportunities. Simply put, when cost reduction projects are too narrowly targeted in complex supply chains, they can inadvertently result in unwanted outcomes.

How initiatives to reduce packaging costs backfire

Cost cutting efforts help save money in one silo, but they might be to the detriment of the overall supply chain and ultimately, your customers. Oftentimes the lowest price, looked at narrowly, results in a higher cost. Initiatives to reduce packaging cost through light weighting, less stretch wrap or less expensive pallets can result in decreased load stability and more product damage.

Low price doesn’t necessarily equate to best value. One example of a supply chain approach to value creation is RPCs. They provide a steady stream of benefits throughout the supply chain, ranging from better cooling and product protection to ease of handling and stocking, to the elimination of solid waste. The comparison between the price of renting an RPC and that of purchasing a corrugate container is just the start of the story.

Many cost reduction exercises, however, can and do achieve meaningful savings that boost supply chain performance. To achieve sustainable cost reductions, experts recommend approaches such as taking a broader approach to assessing the potential impacts of cost reduction ideas and engaging employees and stakeholders in the process. Ultimately, cost reduction ideas only work if they contribute to better value for the customer.

Is cutting costs a priority for you? Let IFCO help you explore ways to cut costs while keeping your customers top of mind. Contact us to learn more!

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