Cost management and reduction have emerged as top priorities for CFOs and CEOs in 2024, with a focus on strategies such as cost optimization, leaner corporate structures, and resource optimization. This heightened emphasis stems from various factors, including economic uncertainty, high capital costs, supply chain disruptions, and inflationary pressures. According to a recent survey from Boston Consulting Group (BCG), companies are facing a holistic cost challenge resulting from years of market volatility and shifts in customer behavior, necessitating adjustments to mitigate complexity and enhance efficiency.
While many companies resort to layoffs as a means of reducing overhead costs, nearly two-thirds of the 600 global executives surveyed by BCG are placing greater emphasis on trimming supply chain and manufacturing expenses compared to other traditionally favored cost management measures.
According to the survey, there is a notable shift in focus towards supply chain, manufacturing, and procurement, marking a departure from previous cost-cutting strategies. This shift is driven by geopolitical tensions and the escalating costs of raw materials, manufacturing, and energy.
To mitigate manufacturing and supply chain expenses, companies can leverage strategies such as optimizing procurement processes, enhancing logistics networks, and streamlining distribution and warehousing operations. Additionally, investing in digital lean manufacturing and advanced planning processes can further contribute to cost reduction efforts, as suggested by BCG.
Paul Goydan, Managing Partner, from BCG, described it as "creating the most cost-effective network to adapt to present circumstances."
According to Goydan, some companies are restructuring their supply chains by diversifying their sources of supply to mitigate risks associated with geopolitical tensions, rising costs, and disruptions in shipping, such as those caused by attacks on container ships in the Red Sea. This restructuring involves reassessing the location of manufacturing for sourced components, renegotiating contract manufacturing agreements, and analyzing shipping and transportation costs as part of a broader effort to optimize supply chains and reduce costs.
In procurement, sourcing strategies must be reassessed in light of changes in sales volume and cost inflation. Procurement leaders must accurately gauge fair price increases from suppliers by understanding the true cost of inflation for suppliers.
In their respective roles, CFOs and CEOs must grasp and predict demand fluctuations. This understanding revolves around sales volume, which can be indicative of demand trends.
As of February 20, S&P 500 companies had reported a slower revenue growth rate of 4 percent last quarter, a figure lower than the 5-year average of 6.9 percent and the 10-year average of 5 percent, as per FactSet data.
Goydan emphasized the importance of tying demand trends to the cost structure to anticipate future shifts in demand. For instance, companies must assess if there are substantial fixed costs associated with certain products or product lines that do not align with sales volumes.
Consumer preferences have evolved significantly, U.S. consumers are now less inclined to purchase high-end or luxury items and are scaling back on expenses such as visits to upscale coffee shops or purchases of branded products.
To reinvigorate growth, companies need to adjust their product mix and invest in areas that show promise. This may involve divesting product lines that fail to meet performance benchmarks. Strategically adjusting the right balance between growing volume and optimizing profit margins is also critically important.
Despite many companies achieving their cost-saving objectives during cost programs' initial phases, sustaining these savings over time remains a challenge. Over a third of executives in BCG's cost survey expressed concerns about costs gradually resurfacing in their businesses.
Thus, before embarking on cost initiatives, executives must focus on involving employees in cost management efforts to foster lasting performance improvements, Goydan suggested. He outlined three essential principles:
Demonstrate visible leadership and commitment from top management.
Ensure transparency in communicating cost-saving endeavors, particularly in employee communications.
Cultivate a culture of engagement by breaking down hierarchical barriers within the organization.
Successful organizations share performance data with employees to provide insights into cost dynamics, demand shifts, and volume trends. This practice promotes transparency and empowers employees to contribute effectively to cost management efforts.
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