Reducing costs can seriously damage your profits
The response of most companies to survive an economic downturn is to make savings.
What appears to be common sense, however, should be treated with caution, according to Paul Forsythe of Alemare Solutions, a Northamptonshire-based business advisor.
He takes the view that even the natural target – turning off heating and lighting – can cost a company more than it saves.
Paul explains : “ It's not unusual to find that a retail store will turn off the air-conditioning as a cost-saving measure. A likely consequence is that customers will no longer stay and browse. The loss of business will be put down to the economy”
Paul adds : “Other common examples are the use of inferior but cheaper raw materials that are more difficult to process or affect the quality of the product.”
According to Paul, there are better approaches that will not only reduce cost but strengthen a business to meet the eventual upturn in the economy. One technique that is often misunderstood is “Lean Manufacturing”.
Paul explains : “In a typical factory, a raw material will spend no less than 95% of its time sitting on a shelf or waiting in a queue. All this time you're paying interest on it. 'Lean' is about cutting delivery times and improving cash-flow”
He also points out that a number of Government subsidies are available to companies that want to “transform” their business through manufacturing and marketing improvements.
For those who question the wisdom of Alemare's attitude to cost reduction during a recession, Paul has a response :
“At the start of a previous recession the two leaders in the running shoe market, Nike and Adidas, had a very similar share. Adidas cut their expenditure on development and marketing while Nike increased it. Who talks about Adidas now ?”
Alemare Solutions Ltd are members of the Initiatives in Business Development network of consultants and the Chemical and Industrial Consultants Association.
Paul Forsythe was the winner of the “Spirit of Innovation 2008” award presented by Trevor Baylis, inventor of the clockwork radio, at the Partners4Innovation event held by the University of Northampton.