Ask the expert: Juergen Ziehfreund

Question: What is a sustainable way of cutting costs in a logistics company?

Expert: Juergen Ziehfreund, Senior associate, Booz & Company

The importance of cutting costs

In times of steadily increasing overheads arising from fuel costs, it is important for companies to increase transparency in the supply chain in order to remove unnecessary expenses.

This is especially so as businesses expand into different markets around the world and supply chain operations become more complicated. Taking a simple approach to cutting costs will also fail to yield results in the long term. When cutting costs it is therefore important to ensure that they stay cut.

Identifying the differences between structural cost-cutting and sustainable cost management

Structural cost-cutting are those measures that take out layers of the organisation, reduce workforce and cut budgets across the board. While these measures are valid and usually yield immediate results, the cost savings don't tend to last long.

Although they may be credited with addressing the superficial symptoms of organisational bloat, they do not treat the root causes of the problem.

Sustainable cost management goes beyond structural solutions and also addresses decision rights, information flows and motivators in an integrated approach. Therefore it aims to create savings in the business by changing the way people are empowered, informed and motivated.

Looking for transparency

The lack of transparency in terms of financial matters - from IT to manufacturing to distribution costs - typically lets business units and departments act as though they have a blank cheque.

This can quickly lead a business into financial trouble and can be dealt with by creating real transparency on the price of goods and services. In doing so, companies can force departments to make decisions by allocating services on the basis of fixed prices.

Alternatively this can be through competitive bidding between service providers. Once information on the real costs is available, companies can use this data to make better, more sustainable cost-cutting decisions.

Delegating decision-making responsibility as a means of cutting costs

Decision rights should neither be concentrated at a high, centralised level where they become inflexible, nor should they be too decentralised so that it makes the business chaotic.

To reach an optimal balance, senior managers should push decision rights further down the organisational chart. At the same time they should monitor the decisions that have been made in order to ensure accountability. This ensures a more effective decision-making process based on local knowledge. It will also lower the cost of the decision-making process.

The benefits of motivational incentives on improving productivity

Motivational incentives, whether financial or otherwise, can reinforce and help sustain cost-reduction efforts if properly applied. They work best when aligned with the achievement of specific targets.

It means creating a bonus system that rewards managers who meet specific cost targets, not just business targets, as well as developing a promotion strategy that goes beyond standard vertical promotion schemes.

Companies should develop strategies for top performers that emphasise lateral promotions - conferring more responsibility and higher salaries without a move up the management ladder. Such moves open up the channels of communication with the increased movement of managers between departments.

Showing the 'rate card'

The forces of supply and demand, which determine prices in the outside world, can also be leveraged inside a corporation using the rate card system. In essence, these rate cards spell out the costs of a standard level of service, as well as the incremental charges for added or special services.

For instance, in one company, distribution costs were a considerable expense as they were treated as fixed costs charged back to sales teams as a percentage of sales.

By introducing rate cards, distribution costs became transparent and eventually sales teams reduced their special requests substantially once they knew the high price of these requests.

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