Costs do not exist to be calculated. Cost exist to be reduced.
The good news is that, a large-scale company overhaul is not necessary. By and large, in most cases, it has been observed that it is short, often done, and simple improvement steps improve the bottom-line.
However, to calculate, manage or reduce cost, a critical understanding of all the tasks or activities that generate such costs is essential.
Cost, in accounting language are of various types- fixed cost, variable cost, controllable cost, uncontrollable cost etc. But in Kaizen parlance, costs are basically of 2 types-
- Obvious cost.
- Hidden cost.
The good thing is that, both ‘obvious’ cost and ‘hidden’ cost provide us with areas of opportunities for doing cost reduction.
Hidden cost on the other hand are like a leaking faucet that drains out water from a storage tank. I would say that a ‘hidden’ cost situation is grave and should be a huge area of concern in any company- be it big or small.
‘Hidden’ costs if not eliminated can actually toss out a company’s balance sheet out of the window. ‘Hidden’ cost therefore must be completely eliminated- just fix it!
A point to note is that Kaizen can be applied to achieve cost reduction initiatives that control ‘obvious’ cost and fix ‘hidden’ cost.
- Cost due to ‘Variability’
- Cost due to ‘Waste’ and
- Cost due to ‘Inflexibility’
Addressing these three categories will open-up numerous areas of opportunities for cost reduction.
And Kaizen methodology can be used to identify areas of opportunity for cost reduction that would ‘control’ the obvious cost and ‘fix’ hidden cost, find favorable solutions to sort out the cost-problems and sustain results.
But most businesses do cost-reduction ad-hoc. What do I mean by that? Let me narrate you an incident-
Imagine Quarter 1 results have come-in and you notice that profit figures are not as targeted, they have dipped. The reasons for this could be many, for example- the new product scheduled launch didn’t happen on time or a critical raw material’s procurement cost had suddenly risen due to a shortage or the manufacturing over heads became higher than what was budgeted, or sales didn’t happen as planned …
The cause factor(s) may be one or many, but the first or most-likely comment by decision-makers is- "We must contain costs” and then there's a hiring freeze!
In my view this is an ad-hoc cost-reduction decision.
Best and effective cost-reduction happens when it is done using a strategic and structured approach.
However, to apply Lean Kaizen methodology accurately, it is vital to understand its underlying principles, advantages and implementation challenges. You may read more on Lean Kaizen here.
Is your organization cutting costs correctly? To know more on how you can strategically cut costs at your workplace contact us for a free preliminary online consultation.