Thursday, June 05, 2008

Emergency Cost Cutting Mode


It appears that 2008 is going to be a tough financial year for many companies due to economic woes, housing bubble busts, rising prices (oil and metal to just name a couple) and rapid consumer/market swings. When we go through these business cycles, it can be rough going as companies jump into their emergency cost cutting mode.

As a lean thinker, I try to learn from these cycles and try to act in a manner that is consistent with the lean philosophy. I also scan across the news reports to see what other business leaders are doing to add to my knowledge both the good and the bad strategies.

My first thought is that we should not be surprised by downturns in the economy. The economy is a cycle and we will always experience ups and downs. I find it mildly amusing and a little discouraging when I read about company leaders that publicly admit to be surprised by this downturn. Like a deer in the headlights, they proclaim that they didn’t see it coming.

Second thought, we face major business challenges every year, although they can and do change year to year. No big news here.

Third thought, we are expected to improve year over year to be successful or even just to survive. Continuous improvement should be a given. Again, no surprise for most of us.

So what actions should we take?

Looking across the business community, we can read plenty of announcements from company CEO’s declaring their action plans to deal with the economic crisis. Here is a list of what seems to be the most popular actions from mainly American companies.

1. Layoffs
2. Plant closings
3. Selloffs
4. Mergers (Under the theory that two poorly operating companies combine to make one better performing company)
5. Outsourcing
6. Re-organize
7. File bankruptcy

We can add to this list with more internal actions that don’t always make the headlines like:
8. Cutting travel
9. Cutting capital spending
10. Delay paying invoices
11. Hiring freeze
12. Cutting or eliminating bonus
13. Wage freeze
14. Cutting R&D budget and projects
15. Increase marketing
16. Cutting the IT budget
17. Across the board budget cuts (the lazy management choice disguised as sharing the pain)

The sad part in the last several decades of my business life is that many of these popular actions do not require an economic crisis to execute them. Even during the upswings in our business cycle, many of the same items list above are regularly used to increase profits.

But do they work? Are there other options?

According to the Daily Yomiuri, when asked “What will Toyota do to cut costs?” Toyota Motor President, Katsuaki Watanabe answered, “We’ve started what we call “Emergency Value Analysis Activities”. We’ve formed teams to review every single part and component over the next six months to determine how to improve design to reduce production costs further.” He also added,”Some employees still lack awareness of these activities, but we plan to develop our human resources in tandem with this effort.”

Hummm…Dramatically increase kaizen activities through design and develop people.

Which actions are short term thinking and which are long term thinking? Which emergency cost cutting mode do you think is the best choice? Would some combination of both short term and long term actions be better?

3 comments:

Pete Abilla said...

That's classic Toyota -- people are viewed as the ones that will improve the firm, so increasing their problem-finding and problem-solving capabilities is always the right thing to do.

Moreover, Hoshin Kanri, while I was at Toyota, was always 2-5-10 years out; very long-term thinking, not quarterly thinking like we have in most U.S. companies.

Mike Wroblewski said...

Pete, I agree. I seems that we in the United States have difficulty thinking beyond meeting the quarterly goals.

Mark Graban said...

Nice example Toyota is setting. Thanks for finding and sharing that article. I wish that could be front page WSJ.