Cost Containment Culture

You don't have to scan the business section for very long to read about companies taking on cost cutting initiatives. On a given day I found articles on Canada's Molson Breweries, US based United Airlines and NatWest Bank in the UK. Each was reported as adopting significant cost cutting measures.

However, large global organizations do not have the monopoly on shrinking profits. It is an unavoidable part of the business cycle for almost every organization. Those mentioned above I suspect are taking some drastic measures for very different, individual reasons. Decreasing market share, inefficiencies created by growth through acquisition or maybe they are making themselves attractive for a buyer. Whatever the reason, wouldn't it make sense to always have a cost containment culture in your company?

Well that is why I have designated people such as a controller or purchasing manager, you may answer. Isn't it their job to make sure we aren't overpaying and that we are obtaining the greatest value from our suppliers? Yes, but are they doing everything you need to control costs? Only you and your management team will know the answer.

If you wish to instill a cost containment culture in your company it has to start at the top. I'm not saying you need to be ruthless. But you should implement some initiatives and reward all staff for suggestions that positively affect your profitability. Let your people and your suppliers know that you are very cost conscious. It will be contagious.

Below I have offered a few tips on supplier relations. This is a good place to start.

1. React sharply to supplier price increases. Don't accept increases without questioning and understanding the reasons for the increase. Once you have done this, unless it is obviously understandable why prices have increased, don't accept their answer. Let your supplier know that you will be entertaining other offers from his competitors. A simple and basic negotiating tactic, but it still works. Small and incremental increases from your supplier add up and soon you are paying higher than market prices for the good or service

2. Be aware of who is negotiating price with suppliers on behalf of your company. In many cases your purchasing staff is doing this. Can they be expected to get the best price and terms? They may be some of your greatest human resources but let us not forget that they are human. What this means is that there will always be some personal connection with the suppliers they routinely buy from and it may be their human nature that won't always allow them to be objective. Instead, have an executive team member negotiate price.

3. Remove 'back door' selling by suppliers. Often sales representatives will directly approach the people who use their products. By doing this they sometimes bypass purchasing controls and might secure an order from someone in your company that does not have a cost containment mindset. Allow those employees that use the products to specify them to the purchaser, but put the onus on the supplier that 'back door' selling will not be tolerated. Tell him whom he must deal with in your organization.

4. Leverage suppliers' value-added capabilities for design, delivery and handling of your purchases. The general rule should be that if a supplier is offering you a service that you currently perform yourself, take it. Of course you must be aware that it is a true value-added service and that no up charge exists. Sometimes eliminating the soft costs that go along with processing your orders can mean savings or an opportunity for you to reallocate resources where they are most productive.

Of course, there are experts available to help your organization develop a cost containment culture. And good experts can be contracted to make sure you win when it comes to cost reductions or you don't pay.

Greg Lathem is an expense reduction consultant with Expense Reduction Analysts International. Greg is a regular contributor to businessmatch-maker.com.