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Cost Cutting in Organizations

Globalisation introduces intense competition; the changes in the global ecosystem brought a sea change in the way companies do business. Abundant labour and labour arbitrage opportunity offered by developing countries such as India and China gave the multinational corporations a run for their money. The instability of the economic factors such as that in the currency market added to the predicament of hitherto profitable companies. To remain competitive and to meet share holder expectations the companies are forced to reduce their direct costs and operational expenses without compromising on the quality of their products and services. Reduction in the cost was the only major alternative before the management to meet the changing demands.

The management has limited control over the direct costs. Going blindly for cheaper raw materials have a direct impact on the quality of the end products, thereby leading to customer dissatisfaction. One of the options in cutting direct costs effectively utilized by companies such as Benz was to source products from cheaper countries. They also implemented stringent quality control measures and a comprehensive supplier sourcing method. Companies that had low gross margins quickly started considering sourcing spare parts and components from countries such as India and China. Even with aggressive sourcing mechanisms, there is a limit to which one can improve one’s gross margin. One of the other parts that the companies turned to was to reduce their indirect costs or operational expenditure. Operational expenditures vary largely in nature. Tough cost cutting measures must be undertaken only with the assistance and support of the employees to make it successful. The employees must be educated about the need for such a measure and must be coaxed to provide suggestions for the reduction of the cost. During the time of the IT slump in 2000-2001, Mindtree Consulting was known to have taken most of its mid-level managers into confidence before implementing cost cutting measures (such as salary cut).

For cost reduction, the first step is to divide the work on the basis of criticality. The cost cutting measures must be made on those projects that are of lesser priority to improve the operating margins resulting in higher profitability. Some companies concentrate on the general overhead expenses like reduction of the air condition charges by optimising its usage, minimising travel expenses by approving only those journeys which are crucial to the business activities.

For the reduction of the expenses the companies can opt for certain techniques which yield the return on a long term basis. Outsourcing of secondary activities to low cost countries is a major development of the recent times. Outsourcing helps in spending the company’s resources to the core activities.

Identification of the cost centres that utilise a good amount of resources disproportionate to their yield is a continuous process. Methods like activity based costing system enables to track the costs to various processes related to a job. It helps to keep check over those activities that have a negative impact on the overall performance. Techniques like “lean six sigma” reduce the cost of production by regulating wastages without compromising the quality of the products manufactured and services rendered. It also facilitates the adoption of standardisation procedures which have a great impact on waste minimisation.

General overhead expenses add up to a huge amount to the cost of the product. It is said that a major share of the profits is utilised to meet the communication expenses. Studies made by companies like Airtel reveals that a huge concentration of telecom traffic is normally concentrated in a short distance. There is a high probability of this incurring in companies which are spread out in a huge expanse of land in industrial areas. If so, the companies will have to take drastic means of reducing cost of telecommunication within the campus. With competition growing severe among the telecom providers, the companies need to renegotiate their dealings for better deals.

Whatever be the method of approach, cost cutting measures should never impact the quality of the product or service produced or delivered by the company. It is prudent for an organization to be vigilant at all times to prevent the company from making unnecessary compromises.

Comments Listing
Posted: 04/10/2011 08:35:32

Good article

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