Robert T. Yokl, Chief Value Strategist
Incremental savings are fine, but if you are looking for breakthrough triple-digit savings results, you need a cost management system.
No corporation in the 21st century can continue to do the same things and get the same so-so results related to their cost management efforts without questioning their commitment to building a “Savings Factory”. Only through massive savings innovations will corporations survive and thrive in the new healthcare era. Drip, drip, drip isn’t going to make a dent in your bottom line! Even non-profits are finding they need at least a 6% to 8% bottom line for sustainability.
Just good enough isn’t good enough any longer!
We must do better than just good, grinding out a few percentage points each year in profits just to keep our heads above water. If you are sitting back comfortably and hoping that the “winds of change” will blow in your favor, think again! New competitors are on the horizon, and you are losing customers to rivals that you didn’t even know about. Brash new startups with better ideas than yours are breathing down your neck.
Where are your new profit margins coming from?
If you think your new profit margins are coming from new products and services, you are missing the point, since 80% of new product and service launches fail. If you think they are coming from increased sales of your existing products or services, you must be counting on your competition to be asleep at the wheel.
There is a much better way! Since it requires almost $2 in revenue to generate $1 in profits vs. only $1 in savings to have the same effect on your bottom line, focusing on savings innovations is a much better way to quickly increase your profit margins.
Case in point: By simplifying, consolidating, and re-specifying their parts, Toyota saved 30% of their procurement costs that went right to their bottom line.
The Law Of Diminishing Returns
If you want to be smart about saving money, you need to understand the effects of “The Law of Diminishing Returns” on your organization’s efforts to save money. This law states that the more resources you expend on a specific target the quicker your overall return-on-investment will decline in effectiveness after a certain level of results have been achieved.
In fact, our studies show that organizations that are targeting their price-oriented costs save less than 1% annually, while progressive organizations that target their products, services, and technologies’ utilization, conformance to requirements, and value mismatches are averaging 3%, 6% or even 9% savings annually.
The bottom line: You need to refocus your efforts with new innovative savings solutions and eliminate what we call your “invisible costs.” As Jerry Seinfeld would say, “Not that there is anything wrong with (price-oriented savings)” but you should only be spending 20% of your time on price- oriented projects to obtain acceptable ROIs for your organization.
Breakthrough Savings Innovation Is All About System
Amazon, Starbucks, Proctor and Gamble, E-Bay, Walmart, and IBM don’t wait for new savings innovations to just happen, they have a management system in place to connect and develop new savings ideas by design. So, too, should your corporation have a system in place that holds fast to these five basic rules:
1. Risky Goals Matter
You must be able to think big and tackle risky goals that will set your corporation light-years apart from your competitors. For example, setting a financial goal, as one of our clients has, to have a 4% increase in their profit margin within two years. This will certainly stimulate your management team’s juices to start innovating, because very few corporations have ever managed to meet this goal.
2. Size Matters
When establishing teams to search for innovative savings ideas, Amazon’s President, Jeffrey Bezon says, “To the degree that you can get people in teams small enough that they can be fed on two pizzas, you’ll get a lot more productivity,” and savings ideas too! Large teams stifle innovation, hold back needed change, and are risk adverse.
3. Discontent Matters
The most successful innovative organizations like General Electric have promoted a “culture of discontent” or a restless desire that there is always something better than what they are doing now. They are always striving to find faster, better, and more cost-effective ways to revolutionize, reinvent, and modernize their work and their products, services, and technologies. You need to be discontent, too!
4. Diversity Matters
Establishing homogeneous teams with like-minded members won’t give you the diversity or heterogeneous atmosphere that is necessary to connect and develop new savings innovations. Successful savings innovation teams look like a well-made “salad” with a mixture of dissimilar and varied ingredients served with an appetizing dressing.
5. Creative Friction Matters
Consensus is good when resolving routine operational issues, but if you want to produce breakthrough innovative savings ideas you need creative friction to do so. By creative friction I mean employing new rules and new ways of doing things to stimulate original, inventive, and imaginative thinking patterns.
For example, one new rule that we bring into play with our clients’ value analysis teams is that their project managers cannot have any ownership on the savings project they have been assigned. This then virtually eliminates, “We’ve always done it this way.” This rule, among many others, gets our clients’ creative friction machine humming.
As you can see by learning these five basic rules for savings innovation, when it comes to building a “Savings Factory” having the desire to do so is only the starting point. What really works is having a defined management system that consistently produces unique and unusual savings ideas that produce huge savings for you.
Measure Almost Everything!
Decisions on where to find supply or purchased service savings opportunities are easy when you measure almost everything you do. Conversely, they are the most difficult and fraught with errors when you don’t have a culture of data!
For example, a client of ours thought that there were big savings in his boiler room chemicals because his chemical purchases had increased $129,000 over the last year. But when we benchmarked his chemical usage we found that his actual utilization (adjusted by volume and intensity) savings opportunity was only $4,000 compared to his prior year’s usage.
This example should demonstrate why you need to measure almost everything so you won’t be misinformed or mistaken when making those big (and little) savings decisions. Otherwise, you will expend a lot of unnecessary energy and resources pursuing savings opportunities that don’t exist.
What this means to you is that you must have a culture of never-ending benchmarking so you can identify the best savings opportunities with the highest ROIs, before you ever consider assigning a value analysis team to investigate savings opportunities. The one message that I’m hearing loud and clear from CEOs, COOs, and CFOs is that they don’t have the time, money or resources to burn up on wasteful and inefficient exercises, or savings opportunities that are dry holes.
Tearing Down Your Corporate Walls
I have found that one of the critical tasks that an executive management team has to do as a fundamental requirement to stimulate innovative savings is to tear down existing corporate walls that have been holding back new innovative savings ideas for decades.
I ran into this same challenge when we installed a Strategic Value Analysis® System (VAS) for one of our clients. We found out later that a senior management executive (who had gained power by isolating his division from the company’s other four divisions) had incorporated his old methods and practices into our new VAS system. This happened because management was afraid to tell this executive that times had changed and he needed to abandon his old ways for the new ways that were being introduced in order to produce better results. In time, this executive saw our way of thinking, but the process would have gone quicker had management torn down his walls before we arrived on the scene.
If your corporation isn’t up to the challenge of tearing down your corporate walls of resistance and opposition to change, then no innovative savings solutions are possible. Your corporation will just keep on operating with old ways and old traditions that they have been employing for decades and hope that no one will notice that they are operating with aging and tired methods.
Preparing the Way for Your Own “Savings Factory”
To achieve a state where savings innovation becomes a natural way for your organization to do business, you need to prepare your organization by:
1. Creating a Business Case for Change
I recently spoke with a client who is trying to convince his board of directors that they need to change their operating practices before their revenues shrink or dry up altogether. I told my client that he needed to create a “business case” to convince his board that now is the time for change, not next month, not next quarter, not next year. I told him that a good theme for his presentation would be, “It wasn’t raining when Noah built his ark,” to get his board focused on the future, not just today.
You need to do the same thing before you launch or re-launch your own innovative savings program. Build a “business case” for change with your senior management or you will never get your program off the launching pad.
2. Developing a Shared Vision That’s Logical
You need to develop a mental picture or visualization for your senior management that is logical and makes sense to them if you want to have a sustainable innovative savings program. For example, you could ask them to imagine how it would look 18 months from now when their value analysis team has “wrung the towel dry” in savings for their organization.
3. Building Your Foundation on Teamwork
Innovative savings is everyone’s business, not just a supply chain or performance improvement manager’s business. Therefore, you must organize your department heads and managers in teams to make meaningful and significant savings happen. This then would give you a foundation of teamwork that would share the workload with many at your organization.
4. Arming Project Managers with the Right Tools and Training to Manage Change
You wouldn’t send an army to fight a battle without the right equipment and training. It’s the same with saving money! You don’t want to send your project managers into battle to save money without the right tools and training to manage change. If you do, you can expect a lot of lost battles because your department heads and managers will be better prepared to hold on to their old practices than your team members are to fight change.
We are all looking for the magic bullet that will make our savings program successful right from the get-go, but in reality there is no magic bullet, just well thought-out strategies that will prepare your senior management and department heads for the journey you will be taking them on when you launch your own innovative savings program.
Building a “Savings Factory” Isn’t a Sometime Thing!
Building a “Savings Factory” that can generate thousands or even millions of dollars in savings every month, quarter, and year, won’t happen unless you have a defined management system in place. Saving money isn’t a one-time event, it is an ongoing management system to “wring the towel dry” on all of your expenses (salary and non-salary) every day, every week, and every year. Never stop believing that there is still more money to be saved in your corporation!