Monthly Archives: July 2010

When You’ve Got to Cut Costs

You can follow the advice in the HBR article that outlines some things you can do “when you’ve got to cut costs”, but only if you do it very carefully. In short, the practical guide to reducing overhead offers up six tips that will reduce your costs, but only if implemented properly as a couple of them will actually increase costs if implemented incorrectly. This post will discuss the six cost savings ideas offered up by the article and the right way to go about them.

  1. Consolidate IncidentalsBy the time cost-cutting becomes a must, the company has already done away with most discretionary spending and non-critical perks and activities and further cuts would be difficult, if not dangerous. (Such as slashing the training budget when you need highly capable staff.) In this situation, look for further savings through the consolidation of incidental spending. For example, hold training events and trade shows on the same day(s) and cross-schedule the use of outside resources across departments.
  2. Take Overdue Personnel ActionsRestructure the jobs of any individuals who are not fully engaged, confront under-performers, and eliminate the dead-weight or problem personnel. Be careful not to overburden already fully engaged resources, assign responsibilities that the resource isn’t trained for, or eliminate too many positions at once. Not only can each of these actions can cause resentment, but the latter can have those who remain fearing for their job security and looking elsewhere.
  3. Reduce Spending on Department ManagementMany administrative departments will use as much as 20% of their budgets on supervision and coordination. If staff are competent and capable, and if responsibilities haven’t changed much in a year, supervision and coordination is probably costing more than it’s saving. In this case, supervision can be reduced by at least 10%, if not more. Just be careful to appropriately re-assign duties or confusion will set in.
  4. Gain Control of “Miscellaneous” SpendingGiven that even the best organizations tend to max out at 75% to 80% of Spend Under Management, it’s almost always possible to find 15% to 20% of spending that hasn’t been managed closely which is ripe with savings opportunities. It could be supplies, telecom, or electronics devices.
  5. Hold Down Pay IncreasesSpecifically, limit pay increases to top performers and award additional compensation based on performance, giving the top performers the bigger cut. Cutting pay increases across the board or eliminating bonuses will alienate top performers, the 20% of staff who are responsible for 80% of the bottom line contribution.
  6. Repropose Rejected Cost-Savings IdeasChances are that a number of good cost savings ideas were rejected over the past few years because of constraints, other priorities, or required investment. Review them and select those with a short-term ROI.

Share This on Linked In

The Hammer Will Fall!

Remember that before you take the summer off and spend yet another quarter in a holding pattern … you can prepare for it, or join your colleagues in bankruptcy and unemployment.

While you ponder that, here’s a classic from Queen:

Are Chinese Christians Buying Themselves a New Vacation Home on the Aegean Sea?

While many people may still think that the majority of Chinese are Buddhist or Taoist, a large number of Chinese actually follow the “minority” religions of Islam or Christianity — and the number of people who follow the minority religions are significant as estimates put the number of followers of Islam at 20 Million to 30 Million and the number of followers of Christianity at 40 Million to 55 Million, or 3% to 4% of the population.

This is a very significant number, as it’s roughly four times the number of orthodox Christians in Greece (which account for roughly 97% of the population) — a country that China is in the process of buying piece by piece. According to this recent article in the Washington Post on how Greece is tapping China’s deep pockets to help rebuild it’s economy. Greece, which had to turn to the European Union and the IMF in April for a 140 Billion payout to stay afloat, is taking on the powerful unions in an effort to ensure that the Chinese can introduce dramatic changes as they invest in major projects, such as the 700 Million transformation of the Mediterranean port of Piraeus that will create a modern gateway that links Chinese factories with consumers across Europe and North Africa.

Greece is courting China for a bevy of other projects, including a sprawling new distribution centre in the industrial wastelands west of Athens, a monorail line, five-star hotels and a new maritime theme park — everything you’d want in a vacation home — or a wedding location! (The island of Santorini has started selling itself as the perfect location for “Big Fat Mandarin Weddings”.) And China is buying.

This will obviously improve port productivity and give those who are shipping into Europe more options, but is there a downside from the Chinese turning Greece into their vacation home?

China (Kinda) Loosens Controls on the Yuan

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

China announced last week that they will no longer peg the yuan to the US dollar. Instead, they are going to control the currency against a market basket of the currencies of countries they trade with. This is what Singapore did a decade or two ago.

This is at best a stop gap measure. It complicates the task of the Chinese government in setting exchange rates. Just because it’s more complex, it increases the credibility of those who call the Chinese currency controls “manipulation”.

China really should just let the currency float. Apparently internal pressures from their business community are stopping them from doing that.

So what does this mean for people sourcing in China? It’s probable that the Chinese currency will get stronger against US dollar. But even that isn’t certain. They tied the value of the yuan partially to the value of the euro. If the euro were due to collapse due to fiscal problems in its “club med” (Spain, Italy, Greece) countries, the yuan could actually weaken against the dollar.

So, what happens to your costs if the yuan were to appreciate, say 10%? Would the price for your Chinese product go up 10%? Probably not. The answer depends on two things. First, what fraction of the manufacturing cost of the product is Chinese? You do know the answer to that question, don’t you? You should.

In assembled products, it’s rarely 100%, because a lot of the components are imported.

Second, how competitive is the market for the product you are buying? If there’s a lot of competition, sellers can’t always pass on cost increases to buyers.

I also expect change will be slow. It’s more likely that the recent labor militancy will have a larger and more immediate effect, particularly on the price of higher-technology products. More on that in my next post.

Thanks, Dick. (Global Supply Training)

Share This on Linked In