I was pleased to see that this recent article over on ChiefExecutive.Net on why businesses should shift from cost management to cost leadership, that emphasized the need to control cost in the current economy, clearly stated that cost leaders do not compromise quality or customer focus. Every time I see a headline or article on cost management that emphasizes the need to identify low-cost producers, I get worried because, as many manufacturers who jumped on the outsourcing bandwagon have learned, low cost does not always translate into cost savings if quality is not maintained.
The article defines cost leadership as the:
- recognition as the lowest cost producer in one’s industry, without compromise in quality or customer focus
- realization of a long-term cost-centric culture where cost consciousness is a strategic and leadership preoccupation across functional lines
- dissemination of cost information with regard to customer, product, distribution channel, and the like that is timely, understandable, credible, and actionable to fuel continuous improvement
- establishment of aggressive and balanced performance targets across the value chain
And it’s a good definition. With costs rising across the board, cost control is very important, but cost control must take into account quality, customer needs, and continuous innovation. If quality is bad, costs will add up in repairs and returns and profits will drop as customers leave for your competitor. If the focus is not on the customer, market share will slowly decrease as your competitors begin to offer products and services that better serve the customer. And if continuous innovation is not employed, costs will creep back up.
The article also noted three practices of costs leaders that are worth diving into:
- Less Is More
Simplified products and services, even if they cost a little more up front, will usually cost a lot less over the lifetime of that product or service.
- Customer Profitability
Each customer should be profitable, and, more importantly, if you deliver a product or service to businesses, it should make them profitable.
- New Formula
If a product requires costly raw materials, or contains raw materials that are heavily regulated, or produces hazardous waste in its manufacturing, reengineering the product to use less costly raw materials, less regulated raw materials, or production processes that do not produce hazardous waste will significantly reduce costs while maintaining, or improving, quality in the process.
The article also highlighted a number of cost leadership initiative killers that you need to watch out for and address as soon as they are encountered. But that’s the subject of Part II.