Cost reduction is an eternal theme in business operations, but this issue is now extremely important and urgent, especially for China's manufacturing industry which has entered an era of meager profits.
According to relevant reports, if the manufacturing cost in the United States is set at 1, China's manufacturing cost reaches 0.96, which is quite close to that of the United States. In some industries, such as the light textile industry, the manufacturing cost is even higher than that of the United States. In actual operation, blindly understanding the pursuit of efficiency through management as cutting expenses and reducing costs is very likely to harm the enterprise.
The principle by which enterprises measure cost advantage is: under the premise of providing the same product value as competitors, reduce the cost of the enterprise relative to competitors, that is, try to cut costs that do not increase the differentiation of products or services.
Blindly cutting costs without considering the value of the product or service can never create a cost advantage for the enterprise. Sometimes, it may even be counterproductive and backfire.
In cost reduction management, enterprises often encounter phenomena such as neglecting one aspect for another, settling accounts after the fact, overly relying on finance, lacking quality commitment, ignoring the interests of suppliers, and pursuing superficial trends. These can weaken the effectiveness of cost reduction and even lead it into a misunderstanding.
In China's manufacturing industry, as the overall economic environment has entered a new normal of medium-high growth, the increase in production factors such as labor, raw materials and energy is greater than the improvement in enterprise production efficiency, making business operations increasingly difficult. Therefore, constantly exploring ways to reduce costs is undoubtedly a controllable approach for enterprises to save themselves.
However, in the actual process of cost reduction, enterprises sometimes exhibit the phenomenon of seeking quick success and instant benefits and killing the goose that lays the golden eggs. This must arouse our vigilance. The main misunderstandings in enterprise cost reduction are as follows.
Misconception One: Taking advantage of the strong position in the buyer's market, blindly lowering the procurement cost leads to a decline in the quality of raw materials
To reduce the cost of raw materials, they often gather a large number of suppliers together and demand price cuts from them. If the suppliers do not comply with the demands of the enterprise, the cooperative relationship will be immediately terminated. In fact, this is a misunderstanding that enterprises are very likely to fall into when it comes to cost reduction.
Faced with this situation, many suppliers had no choice but to reluctantly accept it. However, their next step was to put forward such unreasonable demands to their upstream suppliers. Eventually, a deluging of price cuts emerged throughout the entire industry chain.
In the entire value chain of an enterprise, there is interdependence among each link. The cost management of the next link must be based on that of the previous link. Minimizing the cost of the previous link does not mean that the cost of the next link will also be minimized, nor does it mean that the cost of the entire value chain will be minimized accordingly.
Some enterprises blindly pursue the lowest cost expenditure in the procurement process, and as a result, the raw materials they purchase are of low quality and low price. If we only consider the procurement process, cost optimization has indeed been achieved. However, due to poor-quality raw materials, the cost in the production process has risen, the expenses of the sales department have increased, and customer satisfaction has decreased. When all these issues are summarized, it will be found that the cost of the entire value chain is increasing.
What's more, due to the decline in procurement prices, there are cases of inferior raw materials being passed off as good ones, which leads to quality accidents and damages the company's brand. This is truly not worth it, as the saying goes, "There is no wrong selling, only wrong buying."
Misconception Two: One-sidedly believing that cost advantage is merely about reducing production costs
Most managers tend to naturally understand cost as production cost and limit cost reduction to the production process, paying no attention to anything else.
In fact, in traditional manufacturing industries, production costs only account for about 50-70% of the total costs. A considerable portion of the costs are generated in areas such as technology research and development, marketing, and consumer services, but they are often rarely given due attention in cost analysis.
Therefore, while emphasizing the reduction of production costs, it is necessary to seek ways to lower costs from the perspective of the entire supply chain. Otherwise, if production costs are overly limited, not only will the effect not be prominent enough, but sometimes it may backfire.
Misconception Three: Regarding cost reduction as the lowest cost at all links of the entire supply chain
The supply chain, centered around the core enterprise, controls the flow of information, logistics and capital, starting from the procurement of raw materials, the production of intermediate products and final products, and finally delivering the products to consumers through the sales network. Some managers believe that enterprises should strive to minimize the cost of all links.
The supply chain is a system composed of a series of interdependent value-added activities within an enterprise. The costs among each link influence each other, and sometimes even rise and fall. Therefore, opportunities for cost reduction should be brought about through the mutual coordination and optimization among various supply chain links, and the pursuit of total cost optimization should be made.
Misconception Four: Interpreting cost reduction as radical cuts in institutions, staff reduction, and welfare cuts, and taking this as a sign of reform boldness
Management in Chinese enterprises is usually rather rough and the efficiency of resource utilization is relatively low. Therefore, strengthening cost management is of vital importance to the profitability of enterprises.
However, the essence of cost reduction lies in enhancing the input-output ratio measured in monetary terms, rather than merely increasing the input-output coefficient or simply cutting costs. But it is a pity that many enterprises have fallen into misunderstandings in cost management, especially in the aspect of human resource cost management. They want their horses to run fast and eat less grass at the same time. Is this possible? The result can only be reverse elimination, with the bad driving out the good, and becoming a talent cultivation base for peers.
What is an appropriate cost? Anyone with a little economic knowledge should understand: the higher the return obtained by paying a certain fee, the lower the cost. If the fee paid does not bring a return, it is a waste. The cost of labor is not judged by the level of wages paid by the enterprise, but by the value contributed by the employees to the enterprise.
Misconception Five: Ignoring the significant impact of product development and technological research and development on the design of product costs
Product design often takes into account the influence of factors such as market competition situation, consumer demand, factory production capacity, and raw material costs. Once the finished product is finalized, 60% of its cost is locked in. In specific operation, costs can only be reduced by improving efficiency and the input-output ratio, but the effect is rather limited.
Therefore, enterprises should take R&D costs as the primary link in reducing supply chain costs. They should comprehensively consider design costs from aspects such as the easy availability of raw materials, the maturity of production processes, the stability of production efficiency, and the convenience of product distribution, and take all aspects into account to ensure that the enterprise's cost leadership strategy wins at the starting line.
Misconception 6: Lack of a dynamic and comprehensive perspective and planning for cost analysis
In addition to conducting cost behavior analysis at a certain point in time, enterprises must also consider the changes in the absolute and relative costs of value activities over time. Some improvement measures have a significant effect on cost reduction at a certain point in time, but as time goes by, the effect shows a rapid decline. For instance, some enterprises make their equipment operate beyond the designed speed in order to increase production efficiency, resulting in premature deterioration of the equipment until it is scrapped.
Enterprises can dynamically analyze costs, predict possible changes in the cost drivers of value activities, and promptly take corresponding actions to position themselves in a cost advantage position. Ensuring the sustainability of cost advantages and preventing competitors from imitating them depends on the combined effect of multiple factors that reduce costs. Product scale, the systematicness of advantages, and the cost of proprietary technology are more sustainable than other cost drivers.
The competitive advantage gained through the interaction of multiple links in the value chain can make it difficult for competitors to imitate and enable enterprises to maintain a lasting cost advantage. Therefore, the effect of cost reduction should not be limited to a certain time point only.
Misconception 7: The mutual contradictions and cross-influences of cost reduction factors
When enterprises are cutting costs, due to the lack of overall planning and prior planning, they often lead to reducing costs at different links in contradictory ways.
They attempted to increase their market share and benefit from economies of scale, but they produced a wide variety of products in different specifications. As a result, they increased management costs and reduced economies of scale instead. They set up the factory close to consumers to save on transportation costs, but due to the dispersion of production volume, the production cost increased instead.
At the same time, due to the fact that the cost differences of products often affect their competitiveness in different markets, enterprises may overprice certain products or customers and offer price subsidies to others. Unintentional cross-subsidizing of prices often gives competing manufacturers an opportunity to take advantage.
China is a major manufacturing country, and the topic of "Made in China" has naturally endured for a long time. At present, the high-end manufacturing industry has received policy support from the state. Relying on its own industrial foundation, it can be said to have great potential and grow rapidly.
However, the mid-to-low-end manufacturing industry lacks technology, brand and market position. They drift along with the competition and struggle to survive. Moreover, the mid-to-low-end manufacturing industry is precisely the main body of China's manufacturing industry. Under the premise that there has been no major breakthrough in technological innovation and industrial upgrading, how can they leverage their own advantages, avoid their weaknesses, break through the competition through efficient resource integration, and achieve a healthy reduction in costs? Winning competitive profits and thus creating opportunities for the next step of development is a common concern and solution for all.
Enterprises should adjust their procurement supplier systems, absorb and introduce more advanced supplier management concepts, and advocate a win-win mechanism.
