Strategic cost reduction program rule number 1

Strategic Cost Reduction Program: Rule Number 1 – Don’t Wing It! 2022 is just around the corner, and improvement objectives are on everyone’s minds, especially as we are coming out of the pandemic. We are challenged more than ever with the timeless problem of improving cost and funding our growth. So, I plan to write several posts to highlight the usual gaps and share my thoughts on a strategic and structured cost reduction approach.  Like every year, we are in the season to establish next year’s budget, set aggressive targets, and define cost reduction projects. And many like always will wing it – some wishful thinking, adhoc list of projects, creative juggling of numbers, and just before Christmas, we will get the job done. The following year will start with lots of energy until reality shows its ugly face and we begin again.  Here I offer eight concrete steps to establish a strategic and sustainable cost reduction program to achieve competitive advantage: 0) Establish a team – its a team sport. Key word is cross-functional! 1) Understand the cost challenge – know where we are in terms of budget (efficiency gap), competition (competitiveness gap), and innovation (innovation potential). This is the starting point! 2) Know the 4 magic numbers – Understand, define, and communicate: conversion cost $, waste $ to attack, project portfolio $ and savings target $. This is the new lingo of cost reduction! 3) Get a deep understanding of losses – Define the BIG losses and stratify them to a granular level. This will bring clarity to cost reduction objectives. 4) Develop a project portfolio and savings target – Based on losses priority, develop a project portfolio and define savings target. 5) Allocate resources to realize projects – Know the resources and funding required to complete projects and realize savings. You snooze here; you lose. 6) Plan on developing competence – Understand the skills (technical, problem solving, and leadership) gaps and plan on building competence.  7) Establish a governance system – Set up a compass room and meeting cadence (quarterly, monthly, weekly, daily) to achieve saving targets. Don’t miss this boat! So this year, don’t wing it. Set the foundation of a strategic cost reduction program to achieve your stretch targets. Details to follow in upcoming posts. Cheers