The Invisible Hand of Cost Reduction

Many companies are still at the mercy of the “COVID Situation.” COVID has created chaos with business operations and supply chains globally. Most companies are under extreme pressure to reduce costs to remain competitive. The hidden cost associated with extreme cost-cutting measures. Some are service reduction, increase time, and market consolidation.   Let’s start with a decrease in service. Modification of service typically comes when sales teams are told to sharpen their pencils or get aggressive with cutting the price by taking out components to products or reducing human resources to eliminate overhead costs. It is safe to say that all companies have products or services that have lower margins. However,  when market conditions such as inflation or pandemics like COVID  occur, these organizations struggle with sustainability because of limited funds. The lack of funds and resources limits a firm’s ability to respond to challenges quickly and can lead to compounding effects such as lost revenue, damage brands, or bankruptcy.

Besides the reduction of service, extreme cost-cutting typically cost organizations indirectly with the amount of time it takes to complete a task. Sometimes this is reflected in quality metrics, and other times it is capture as the amount of time spent tracking and following up on the job.  For example, your buyer must baby the supplier by regularly ask for status updates and have multiple calls, emails, and meetings about the same items. Or your engineering team has to spend considerable time re-engineering the design to make the cheaper part work. The final impact is market consolidation. The saying that companies are in business to make money is true, so when margins get compressed, so do the adequate amounts of suppliers. 

Instead of only thinking about cost savings as reduced pricing, companies should think about cost flexibility. Cost flexibility is leveraging a product or service offerings with multiple adaptations. Finally, items such as new product development and digital transformation will also sure firms are able to sustain and capture new market shares.