Cost optimization, leaner corporate structure, cost efficiencies, cost cutting, resource optimization, right-sizing — whatever it’s called, CFOs and other C-suite executives are making cost management and reduction a 2024 priority for performance improvement.
There are many reasons companies are cutting costs — uncertainty over economic growth, the high cost of capital, supply chain challenges, inflationary price increases, and more. But it boils down to years of “unexpected disruption” in market conditions and customer shifts that companies have had to adapt to by adding cost and complexity to the business, said Paul Goydan, managing partner and global leader of Boston Consulting Group’s (BCG’s) accelerated cost advantage program.
“This is a holistic cost challenge — one that's built up over five years of very rapid adjustments that companies had to make,” Goydan said.
Supply chain a priority
While many companies lay off workers to shave overhead costs, nearly two-thirds of the 600 global executives surveyed by BCG are prioritizing supply chain and manufacturing costs over other historically popular cost management actions.
“There’s a very big focus on supply chain, manufacturing, and procurement,” said Goydan, a change from prior cost-cutting cycles. That makes sense given geopolitical tensions, and the rising costs of raw materials, manufacturing, and energy, he said.
To lower manufacturing and supply chain costs, companies can optimize procurement, logistics networks, and distribution and warehousing, and invest in digital lean manufacturing and advanced planning processes, said BCG.
Procurement leaders need to know what size price increases from suppliers are fair, and that means trying to understand a supplier’s true cost of inflation.
Paul Goydan
Boston Consulting Group
Goydan called it “building the least-cost network for today's realities.”
Goydan said he sees some companies rewiring their supply chains, adding sources of supply so they can avoid geopolitical tensions, cost increases, or shipping disruptions like the attacks on container ships occurring in the Red Sea. Changing the manufacturing location of source components, if necessary, renegotiating contract manufacturing deals, and analyzing shipping and transport costs are all a part of “rethinking supply chains while taking cost and inventory out,” said Goydan.
In procurement, sourcing strategies need to be examined in light of sales volume changes and cost inflation. Procurement leaders need to know what size price increases from suppliers are fair, and that means trying to understand a supplier’s true cost of inflation, Goydan said.
Shifting demand
In their own businesses, CFOs and CEOs must understand and forecast demand and how demand is shifting, said Goydan. Demand means sales volume.
As of February 20, S&P 500 companies had reported a revenue growth rate of 4% last quarter, below the 5-year average of 6.9% and the 10-year average of 5%, according to FactSet.
When a company understands the trends underlying sales volume, it can tie those back to the cost base and try to understand where demand is going, Goydan said. For certain products and product lines, where are there big fixed costs that sales volumes don’t justify?
Consumer buying patterns, for example, have changed, said Goydan. U.S. consumers are not buying as many high-end or luxury products, they’re not “taking as many trips to the high-end coffee shop or buying name brands” as they used to.
So to get growth back, companies “have to change their product mix, and they have to invest in that product mix,” said Goydan. That also means selling off product lines that don’t meet performance standards.
A sustainable approach
While many companies that launch cost programs meet or exceed their savings goals, “a strong start doesn’t guarantee lasting change,” said BCG. More than a third of executives in BCG’s cost survey said costs eventually creep back into the business.
So before launching a cost initiative, executives need to think about “bringing their employees along in managing costs” because doing so “leads to sustainable performance improvement,” said Goydan. He called out three “golden rules”:
- Demonstrate visible leadership and commitment from the top down.
- Provide real transparency about cost-cutting efforts, especially in employee communications about what and why moves are happening.
- Foster a culture of participation by breaking down barriers between management levels.
Successful organizations share with employees, when they can, where they are seeing costs, why they are seeing higher costs, and how the company is seeing demand and volume shift. “It’s sharing performance data deeper in the organization than was historically done,” Goydan said.
