To some professionals, when a continuous list of cost-cutting initiatives hits a company, it means the firm has entered "crisis mode."
The strategic approach
First off, endeavors designed to reduce expenses shouldn't be associated with a time in which a business may face bankruptcy, although this may be the fear among the particularly anxious. What's more frightening to business leaders is that cost-cutting often results in poor employee morale and resource deficiencies - i.e. people are not given the capital or time they require to conduct operations efficiently.
Believe it or not, putting a positive spin on cost-cutting endeavors can go a long way in helping the professionals within your business identify potential opportunities to create operational advantages. As opposed to sending out an email to personnel offering "helpful tips" for reducing expenses, taking a step back and assessing how a company is putting its money and other resources to use is a best practice.
The real value of spend management comes not from creating an accurate monthly expense report, but from assigning worth to purchased resources. For instance, suppose a purchasing officer at a manufacturing firm can see that materials produced by a particular supplier are negatively impacting the company's sales figures. Where's the connection? The supplier's goods are quite cheap - in every sense of the word. Therefore, the business' finished products made with those substandard materials have lost their quality, meaning fewer people are buying those items.
The black hole of cost-cutting
Given the example mentioned above, it's clear to see how spend management can be leveraged to not only reduce expenses, but actually improve a company's bottom line as a result of making changes in investment. The strategy differs from cost-cutting in that the latter approach doesn't involve any thorough scrutiny - a cost is identified and those in charge implement any changes they deem necessary to mitigate it.
This is where businesses can get into trouble. John Dyer, president of JD&A and contributor to IndustryWeek, identified what he calls a "death spiral" of cost-cutting:
- Demand exceeds capacity
- Customer experience suffers
- Sales orders begin to drop
- Prices are lowered to keep sales orders up
- Costs are reduced to meet profit goals
- Spending cuts lower capacity
And so the cycle continues, with resources cut to the bare minimum. When it comes to workflow and operations, seeking the least amount of money or resources a person needs into order to perform his or her duties can lower job performance, which ultimately negatively impacts the business.
Good spend management practices to keep in mind
In this respect, the mere attitude with which companies employ spend management in contrast to how they tackle cost-cutting is, in many mays, what distinguishes the two. What are some spend management practices that make this approach a viable alternative to cost-cutting? Digi-Key contributor Bridget McCrea named a few, which are listed below:
- Make educated purchases: This should go without saying, but knowing what you're buying is a key component of what helps a company derive full value from its assets. This type of analysis can be conducted at the supplier relationship management level when procurement officers speak with representatives about their products, services or unfinished goods.
- Scrutinize indirect expenses: Offices, factories and other facilities require upkeep and maintenance, which requires budget allocation. Maybe there are ways in which personnel are approaching this responsibility that make repairs more expensive than they need to be.
- Audit your suppliers: Product quality can suffer if suppliers are not consistently made accountable for holding up their end of the bargain. It's not about these partners growing lazy or careless - sometimes management implements a new process that changes production.
With these considerations in mind, companies will be well positioned to reduce expenses while maintaining quality control.