Cost Savings at Any Cost
David Pastore on Thursday, August 30, 2012
Sometimes I like a nice flatbread sandwich for lunch. It’s at those times I will visit the local chain restaurant that specializes in making that type of sandwich. That makes sense. Within the last year or so –I’m not sure when, exactly- I noticed the cozy little restaurant no longer provided paper napkins that customers could access themselves and instead started providing only two napkins with your meal. Of course, I suppose if you have a mishap prior to receiving your meal, you could ask and they would give you more. No matter what, it always seems like what they give you with your meal is too little and too late. I am unsure if all of the chain has reversed this napkin rationing policy, but the one I most recently visited appears to have. I am also unsure if this policy was related to cost savings, but it seems to me like it could be. So in the spirit of hearsay and conjecture, I decided to utilize it as an examination of cost savings goals during strategic sourcing initiatives.
During costs savings initiatives, the focus is on the numbers: timeline, resource allocation, one-time and ongoing costs, etc. It is easy during this analysis to lose focus on what will actually work for the organization and more importantly, what can be sustained. This is particularly important the more granular you get. It’s simple to become pennywise and pound foolish, as they say. So saving that extra one percent of cost at the expense of quality or even usefulness is often not worth it. For example, sometimes I need more than two napkins. And sometimes I need napkins before my meal arrives (I can’t help it). And sometimes, I even need more than two napkins before my meal arrives (It was an accident!). So sometimes, being rationed napkins is annoying. In this case, probably not annoying enough that it decreased the frequency at which I visited the restaurant, but for some people it might have been.
So on paper napkin rationing seems great. Let’s say an average customer uses five napkins per meal and rationing limits consumption to two and a half. Fifty percent savings! But what if this new policy really is annoying enough to keep customers away, even a little bit? It is probably not worth it. In the same way, suppose there are corners to be cut, or quality requirements that can be overlooked in order to improve savings. The risk of foregoing those requirements is an unhappy internal customer (not enough napkins) or an internal customer who does not have what they need to be productive (no napkins before the meal). Not only can this impede process, it can bleed into other areas in a sort of “butterfly effect” manner, snowballing into a much bigger issue. Not only is there a potential for issues in process, the cost of change to adopt these changes along with the cost of change to “go back” or move to a different approach to solve the problem can sometimes negate savings or end up costing more in the long run.
A careful balance between quality and cost needs to be established during any strategic sourcing initiative. In order to ensure the initiative is successful, and that decisions around cost savings make sense for the organization, quality concerns and process changes need to be evaluated carefully and factored into the overall analysis for consideration before making a decision. For help identifying areas for potential cost savings, building requirements, and strategic sourcing to obtain savings and improve process, visit www.sourceoneinc.com
Posted by David Pastore at 9:54 AM