01 # Cost Saving – 5 Cost budgeting traps in the enterprise

Bad habits – how not to save

 

I do not think there is a company that does not want to function more effectively, while maintaining optimal (not to say as low) operating costs.

There are a lot of ways to save, and many of them are (unfortunately) brutally cut costs. In some cases it is difficult to avoid it – especially when the financial situation of the company is in a bad condition.

In such cases, it usually starts typically, ie from saving on: office supplies, media, training and employee benefits, and finally on headcounts and the quality of manufactured goods or services.

 

The effect – very fast, you can see at once that more money is left in the box office. But will it help in rebuilding the company’s condition in the long run? Does it pay off?

Below are some examples of what happens when a company has no idea for a long-term cost-saving strategy or the actions taken are not carefully thought out.

 

The article contains data from a survey carried out by me in October 2018, in which 37 people from the automotive, aviation, household and service industries took part, performing the following roles in the organization: process engineer, specialist for continuous improvement, lean manager, manager, cnc operator, administration employee.

I would like to emphasize that all answers are a subjective feeling and opinion of the respondents, they are not confirmed by any statistical data.

5 traps of the lack of cost saving strategy in the enterprise

Trap # 1: “Errant in the Mist”

Organizations that do not undertake activities aimed at continuous improvement or are only at the beginning of this path often get lost when it becomes necessary to reduce operating costs.

Dear Lean people – hand up, who among you has not received the goal to generate a certain savings through savings projects?

Sometimes this is the perception of cost saving – only through savings projects (ideas), dropped on the shoulders of continuous improvement teams.

Of course, this is one of the ways to reduce the costs of a given process, but it should be an additional rather than the main solution.

The effects of this action are:

  • lack of TOP Management’s involvement in the process of continuous improvement
  • low awareness of management about the costs generated in a given business are
  • resistance of employees against change – fear of increasing the number of activities / tasks to be performed at a given time, so-called screwing
  • high “stress factor” declared by persons designated to propose and implement savings projects
  • savings generated for the need of the moment, “from holidays to holidays”, lack of taxonomy

 

And now some data …

The survey shows that the so-called the stress factor resulting from the introduction of austerity measures in a non-systematised manner, among employees varies depending on the function performed. The most stressful is for people directly involved in the cost saving process, ie specialists for continuous improvement.

 

 

Trap No. 2: “Sinking razor is catching”

 

Another negative example of saving, and at the same time one of the simplest, is the cutting of direct and indirect costs. Such an action in the short term allows you to keep more funds in the company’s cash register, but it is more of a collapse than the development of the organization.

The respondents indicate the following elements, which most often are saved in the companies in which they work (more than one answer could be indicated).

 

 

Trap no. 3: “Cutting costs = cutting heads”

 

If we analyzed the structure of costs in a production company, it will turn out that the first three items cover the costs of: materials, energy and labor. In the service industries, labor costs constitute the largest share.

 

Looking closer, labor costs include expenses for:

  • wages and its taxation
  • prizes, bonuses and compensation
  • insurance premium
  • business travels
  • commuting to work
  • health and safety at work
  • training and all kinds of initiatives aimed at improving staff
  • recruitment and selection of candidates for employment,
  • social and living activity

 

It is not surprising then that in the first place companies focus on these factors if they undertake cost-saving activities.

The most common temptation of the employer is the reduction of the crew, but who will do the job then? By tightening the proverbial bolt, employees themselves will eventually leave, disregarding such conditions and work environment.

Another option is to employ less experienced, and hence, cheaper employees, which, of course, translates into the quality and efficiency of their work. It’s cheaper, but is it better?

 

To the question: “Do you feel that your company has reduced or stopped employment in connection with the costaving program?”, the respondents answered …

By asking: “Has your company reduced / reduced employment as part of the cost saving?”, it was answered ..

Trap No. 4: “Quality (not) the most important”

By lowering the quality of used, manufactured or delivered materials and services, costs can also be significantly reduced. Sometimes equivalents (as in the Pharmacy), despite a much lower price, do not differ in quality from the materials used initially. However, these are usually exceptions.

The facts are:

Lower quality of materials = lower quality of products = reduced customer satisfaction and trust

Trap no. 5: “The basis is the basis”

 

The labor market has already accustomed us to the fact that it tempts potential candidates with numerous benefits and benefits guaranteed as part of taking up employment.

I am talking here about:

  • bonuses and other financial allowances
  • training
  • sports cards
  • co-financing for additional education, eg studies, foreign language education
  • e.t.c.

 

What kind of employee reaction can be expected if, as part of austerity programs, these additions are one of the first elements to reduce?

A dissatisfied employee is not a very effective and committed employee. Everything translates in consequence to the quality of work and the final product. This in turn is the dissatisfaction of the internal and external customer. And this is how we cycle a certain cycle.

 

 

In conclusion, it is not worth choosing the shortest way to generate savings. Consequently, in the long-term, such actions bring more harm than good.

People are the most important and you have to invest in them regardless of everything. They are the foundation of every organization, and the quality of their work determines the future and condition of the company.

If we do not improve, we do not raise our qualifications, we go backwards and reduce our competitiveness as a company.

Leave a Reply

Your email address will not be published. Required fields are marked *