When Cost Reduction Is Profit Reduction

by BILL WADDELL

A story in the LA Times the other day discussed "greenwashing" – cloaking something in dubious claims  of environmental friendliness to make it more appealing to customers.  An example most of us are familiar with is the note in the hotel bathroom to reuse towels in order to save water.  You have to wonder just how committed the hotel is to environmental protection, or whether the real motive is to save on laundry expense.  In any event, the bottom line is the hotel's costs are a little lower, and so is the value of the hotel stay as the guest has slightly less clean towels.

Cutting costs by reducing the value of the product is a dangerous game. No big surprise that GM would jump on board the greenwashing bandwagon.  Cost reduction at the expense of customers has been their game for as long as there has been a GM.  They just don't seem to be able to wrap their minds around the idea that their competitors are not eating GM's lunch by being cheaper, but by offering better value.  It takes a very healthy disregard for customer value to eliminate spare tires in the name of the environment – gas mileage to be specific – and to the have the hubris to proclaim that it really isn't a big deal because customers can eliminate any worries about being stuck by the side of the road with a flat tire by simply paying for OnStar and having someone come out to fix the tire.

The reality is that a customer will pay a little less for a hotel room without clean towels, and for a car without a spare tire.  Hyping the product with a tad less value – attempting to convince customers that the loss of value was somehow in their altruistic best interests – is a strategy for losers.  Whether it is with assertions that the planet is somehow better off by having them pay the same price for less value, or the customer will benefit from sporting a prestigious brand even though the product is not as good, cannot succeed.

A few weeks ago I conducted a lean management seminar – value driven manufacturing, lean accounting, and aiming the organization squarely at clearly defining and eliminating true waste were the crux of my spiel.  During a break I was talking to the two top financial folks from a particular manufacturer – the only two people in the company empowered to make customer credit decisions as it turned out.  While we were talking the company's top operations manager came up and interrupted us with an emergency.  It seems a potential new customer had called and wanted to buy something in a big hurry.  The product the customer wanted was on the shelf and available for shipment, but there was no one who could approve the new customer's credit.  The customer was willing to pay with a credit card, but the customer only had a VISA card, and the company only took American Express.  It turned out that they used to accept multiple credit cards, but a kaizen event had led them to determine that accepting and processing credit cards was 'wasteful', so they eliminated all but AMEX in the name of becoming leaner.  Bottom line – they lost the sale.  The potential customer couldn't wait for anyone to get back to the plant to review the credit, and their purchasing folks didn't have a company AMEX card.  Reducing accounting costs at the expense of sales and customer requirements was hardly an improvement.

If the organization does not have a clear understanding of value, and if improvement is defined as 'cost reduction' rather than enhancement of value relative to the total cost, it is not only easy but quite common to end up nicking the bone when people attempt to cut out the fat.  Reducing waste and cutting costs are not one and the same, and only reducting the cost of actual waste will help the bottom line.  Too many companies have seen their cost reduction strategies generate price reduction necessities, and market share losses, as their product quality, availability and value have deteriorated.