Daily Archives: August 26, 2009

Overhead Cost Cuts Don’t Provide Long Term Savings

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I was very pleased to see this recent article in Purchasing that noted that cost reduction efforts require more focus than sacrifice because all too often I see companies blindly focussing on fixed cost reduction, which, in fact, just costs them more in the long run.

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don’t happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff’s skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

  • transaction processing
  • supplier management
  • health care benefits
  • IT assets (hardware and software)
  • logistics

Assessing Risk

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

I live in South Florida, and for one half of each year we worry about hurricanes. Actually, we start worrying about one month before our six-month hurricane season begins on June 1st; hurricane season officially ends just after Thanksgiving on November 30th.

(At least with hurricanes we’ve got some warning which we’re very grateful for; earthquakes and twisters provide little advance notice, if at all.)

I use life in a hurricane zone when discussing risk analysis.

Let’s take a look at a risk analysis for hurricane season in South Florida based on some risk characteristics:

  • Occurrence: Hurricane season is guaranteed to happen once per year (frequency), though the likelihood of a hurricane strike is unknown.
  • Control: We can’t control the weather, but we can control other things that create risk.
  • Severity: We cannot mitigate the strength of a hurricane but we may be able to reduce the impact it has to our lives and businesses through various preparations.
  • Interruption: Can we continue through a hurricane strike or will we be forced to recover after a period of downtime?

Once the characteristics of a risk are determined, risks can be plotted on a chart or given a numerical ranking, allowing us to determine which risks should be addressed in an order of priority. This analysis can also be used to determine the cost of the risk versus the value of addressing it.

The exercise of performing a risk analysis has the benefit of uncovering risks to your organization that you may have previously not considered. The Risk Assessment is part of the COSO framework used for Sarbanes-Oxley compliance, so for public companies this is a requirement.

The failure to identify risks is a risk in-and-of itself. I would submit that knowing about a risk and knowing that something could be done about it is pretty much just as bad as not bothering to identify risks in the first place.

Norman Katz, Katzscan