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Cash flow vs cost reduction.

The scramble is on. Every recession brings it on. It's management's mad rush to reduce costs and probably has been going on in your shop for some months. The problem is, as one pundit so aptly puts it, executives don't know what real cost reduction is, so they resort to putting counters on the copying machines.

Harvey Gittler, my retired manufacturing executive friend who now does some writing for us on occasion, has about as good a description as we've heard:" A permanent reduction in cost without a loss in performance, control, or in the quality of the product." Anything short of that is ludicrous.

There are times when a company has to cut back spending in order to protect its cash flow. That can even lead to higher costs. Harvey points to the company touting the money it's saving because a purchasing manager cut all orders for materials in half. The standing order for four barrels of cutting fluid was halved. Great! Forgotten is the higher rate paid per barrel and the ballooned shipping costs. Cash-flow curtailment may well be the prudent thing to do at any particular time. But don't confuse it with cost reduction.

Then there is the electronic key each department has to insert in the central copying machine to record use. There is no doubt that use of copy machines is abused. Some even see them as an employee benefit. Result: now there are meetings, records being kept, reports being written, and employees being grilled. The added cost, not to mention employee morale, has to exceed any savings. Harvey's approach: Try treating the employees as adults and simply explain to them their responsibility to reduce copying costs.

How about the company that raised the reward to employees to stimulate cost-saving ideas but then laid off, in the name of cost reduction, the methods engineers responsible for implementing them. Talk about a Catch 22.

Harvey contends that the time to worry about costs is not when business is bad. Cost reduction should not be a program that comes and goes with bad times. Rather, cost reduction should be a constant way of life. When things go sour is perhaps the time when you should start looking for revenue-enhancing opportunities.

Rather than starting with minutia, managements should start with the big picture. Examine the work that needs to be done and then institute permanent solutions that result in improvement, rather than desecration, of the operation. Only then will true cost reduction come into play.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:management during recessions
Author:Modic, Stanley J.
Publication:Tooling & Production
Article Type:editorial
Date:May 1, 1991
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