Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Fri May 09, 2008 4:54 pm Post subject: Cost Cutting Strategies, Effective Or Not?
Cost containment in business is a factor, but in the service sector, perhaps far less a factor than most might imagine. This statement seems to fly in the face of most common management teaching. Haven’t we always been told to watch every penny? Keep cost to the minimum?
I feel this advice may be somewhat applicable in a strictly commodity business, which is where it comes from. After all, if everything else is much the same, price will often decide the purchase. Lower cost helps lower prices, while maintaining profit. This also ignores, what I feel are a few other fundamental parts of the equation.
First, few auto repair shops are going to have outlandish cost that can be cut. Most shops will have quite nearly equal cost, considering value. For instance, one shop may have a 4,000 square foot facility and another a 9,000 foot facility. While the larger shop has a higher cost, unless it is totally mis-designed (a factor that could affect either,) it also has a much larger earning potential. In fact, the larger shop could actually enjoy an overall lower cost, all factors considered.
The same might be said with location, furnishings, equipment, parts and supplies used, business insurance and on and on. Most times, the law of business balance simply precludes paying a little and getting a lot, without increased risk. Weighing the risk, it is often less expensive to simply pay a bit more and pursue delighted clients instead.
I once heard advice that a shop should consider buying used equipment, to lower cost. Considering repair cost, downtime, obsolescence, suitability, effect on morale, appearance and even tax implications, new may often have an overall lower cost.
I feel, gaining market share and delighting clients will save a business that is in trouble, not merely cutting cost. I feel it is doubtful that any substantial amount can be trimmed without increasing risk or reducing earning potential. Rather a business of tomorrow, needs to look to innovation, reinvestment and constant improvement, in my opinion. I read a quote, “By itself, cost reduction is not a strategy unless you want to commoditize [sic] or go out of business.1" I very much agree and feel this is perhaps the best of all times to invest and move ahead with our businesses.
1 University professor Jim Matheson (also chairman, SmartOrg Inc., Menlo Park, Calif.).
Joined: 04 Sep 2007 Posts: 47 Location: Grand Rapids, MI, USA
Posted: Sat May 10, 2008 11:08 am Post subject: Re: Cost Cutting Strategies, Effective Or Not?
louis wrote:
Cost containment in business is a factor, but in the service sector, perhaps far less a factor than most might imagine. This statement seems to fly in the face of most common management teaching. Haven’t we always been told to watch every penny? Keep cost to the minimum?
I feel this advice may be somewhat applicable in a strictly commodity business, which is where it comes from. After all, if everything else is much the same, price will often decide the purchase. Lower cost helps lower prices, while maintaining profit. This also ignores, what I feel are a few other fundamental parts of the equation.
First, few auto repair shops are going to have outlandish cost that can be cut. Most shops will have quite nearly equal cost, considering value. For instance, one shop may have a 4,000 square foot facility and another a 9,000 foot facility. While the larger shop has a higher cost, unless it is totally mis-designed (a factor that could affect either,) it also has a much larger earning potential. In fact, the larger shop could actually enjoy an overall lower cost, all factors considered.
The same might be said with location, furnishings, equipment, parts and supplies used, business insurance and on and on. Most times, the law of business balance simply precludes paying a little and getting a lot, without increased risk. Weighing the risk, it is often less expensive to simply pay a bit more and pursue delighted clients instead.
I once heard advice that a shop should consider buying used equipment, to lower cost. Considering repair cost, downtime, obsolescence, suitability, effect on morale, appearance and even tax implications, new may often have an overall lower cost.
I feel, gaining market share and delighting clients will save a business that is in trouble, not merely cutting cost. I feel it is doubtful that any substantial amount can be trimmed without increasing risk or reducing earning potential. Rather a business of tomorrow, needs to look to innovation, reinvestment and constant improvement, in my opinion. I read a quote, “By itself, cost reduction is not a strategy unless you want to commoditize [sic] or go out of business.1" I very much agree and feel this is perhaps the best of all times to invest and move ahead with our businesses.
1 University professor Jim Matheson (also chairman, SmartOrg Inc., Menlo Park, Calif.).
Louis:
For what it's worth, I have access to numbers from many shops and I can absolutely tell you that it is not unusual to find shops in similar areas with similar sales and vastly different costs. A specific example is a shop with $1M in sales with expenses (excluding the cost of sales) of over $500K and another with the same sales with expenses of less than $300K. I have found it to be not unusual to have $100K difference in expenses in similar shops. I have also found costs to be the number one killer of shops. Massive costs for new equipment that has a lousy ROI is one of the biggest wastes.
_________________ Tom Ham
AutomotiveManagementNetwork.com - Hams Management Systems
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sat May 10, 2008 12:21 pm Post subject: Re: Cost Cutting Strategies, Effective Or Not?
Tom Ham wrote:
louis wrote:
Cost containment in business is a factor, but in the service sector, perhaps far less a factor than most might imagine. This statement seems to fly in the face of most common management teaching. Haven’t we always been told to watch every penny? Keep cost to the minimum?
I feel this advice may be somewhat applicable in a strictly commodity business, which is where it comes from. After all, if everything else is much the same, price will often decide the purchase. Lower cost helps lower prices, while maintaining profit. This also ignores, what I feel are a few other fundamental parts of the equation.
First, few auto repair shops are going to have outlandish cost that can be cut. Most shops will have quite nearly equal cost, considering value. For instance, one shop may have a 4,000 square foot facility and another a 9,000 foot facility. While the larger shop has a higher cost, unless it is totally mis-designed (a factor that could affect either,) it also has a much larger earning potential. In fact, the larger shop could actually enjoy an overall lower cost, all factors considered.
The same might be said with location, furnishings, equipment, parts and supplies used, business insurance and on and on. Most times, the law of business balance simply precludes paying a little and getting a lot, without increased risk. Weighing the risk, it is often less expensive to simply pay a bit more and pursue delighted clients instead.
I once heard advice that a shop should consider buying used equipment, to lower cost. Considering repair cost, downtime, obsolescence, suitability, effect on morale, appearance and even tax implications, new may often have an overall lower cost.
I feel, gaining market share and delighting clients will save a business that is in trouble, not merely cutting cost. I feel it is doubtful that any substantial amount can be trimmed without increasing risk or reducing earning potential. Rather a business of tomorrow, needs to look to innovation, reinvestment and constant improvement, in my opinion. I read a quote, “By itself, cost reduction is not a strategy unless you want to commoditize [sic] or go out of business.1" I very much agree and feel this is perhaps the best of all times to invest and move ahead with our businesses.
1 University professor Jim Matheson (also chairman, SmartOrg Inc., Menlo Park, Calif.).
Louis:
For what it's worth, I have access to numbers from many shops and I can absolutely tell you that it is not unusual to find shops in similar areas with similar sales and vastly different costs. A specific example is a shop with $1M in sales with expenses (excluding the cost of sales) of over $500K and another with the same sales with expenses of less than $300K. I have found it to be not unusual to have $100K difference in expenses in similar shops. I have also found costs to be the number one killer of shops. Massive costs for new equipment that has a lousy ROI is one of the biggest wastes.
Hi Tom,
There can certainly be a difference in cost, but what is written is:
louis wrote:
First, few auto repair shops are going to have outlandish cost that can be cut. Most shops will have quite nearly equal cost, considering value.
Figures are often very misleading, when applied improperly. Value can often only be measured over time, not in a snap-shot view. For instance, I may invest heavily in training and equipment and viewed short-term my cost may appear to have risen. In reality, this should not be seen as an expense at all, rather depreciated over it's useful life. An asset has been acquired and my earning potential has risen, perhaps far greater than the cost.
Another example might be a shop owner who remains in an out of the way building, on the "bad side of town." Another owner takes the initiative and moves to a good location. Viewed short-term, the owner that has moved has higher cost. I feel everyone also realizes, long-term the owner that has moved may be in a tremendously stronger position. He has made an investment in the future.
The same might be said with buying equipment; It is an investment. If the investment is a bad one, for whatever reason, it may pay no dividends. The person who did not invest at all could be in an equally or perhaps poorer state as their equipment ages and they are not equipped to serve future markets.
Concentrating only on cost, while ignoring future potential is the point I had hoped to bring out. It is relatively easy, in fact very common for companies to reduce cost substantially, by all sorts of means. They may also destroy their future. Common examples include, cutting/eliminating training, defraying or cutting maintenance, cutting marketing, cutting/eliminating insurance coverages and so on. Each measure reduces cost, nearly immediately. They also increase risk and decrease future potential.
If the aim of a business were only to earn a profit today, it would be a relatively simple task. Continuing, ethical profits is much more difficult and requires a totally different tact.
If I understand Tom's post correctly, I think he is making two points that are worthy of consideration.
One, some shops buy costly equipment that they rarely use. If it is not a key item that other substantial sales depend on, than Tom's view is right. They need to either learn to make more sales with that equipment, or just sub out that occasional work and invest in more appropriate equipment purchases.
Two, while accounting differences cause misleading figures and make comparisons difficult, many businesses do indeed have waste. The big thing sems to be wasted time and effort, because of inefficiencies in management. It has been said that you can't cut your costs enough to "reduce your way into a profit." But there is usually room to trim and reallocate your way into a larger profit.
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sat May 10, 2008 6:28 pm Post subject:
Hi Bud,
Bud wrote:
If I understand Tom's post correctly, I think he is making two points that are worthy of consideration.
One, some shops buy costly equipment that they rarely use. If it is not a key item that other substantial sales depend on, than Tom's view is right. They need to either learn to make more sales with that equipment, or just sub out that occasional work and invest in more appropriate equipment purchases.
I agree that buying equipment or anything for that matter, that will not be used or under utilized is a waste. This would not be unlike throwing out client's checks and not cashing them. There might be any number of ways a business can be mismanaged, this certainly being one.
My feeling is that vastly more businesses fail from lack of sales than overbuying equipment. In my experience, I have not seen a failed auto shop that had any amount of new purchases or any investment in the business to speak of.
The point I hope to make is cost cutting alone is normally insufficient to save a failing business. GM has trimmed billions off their budget and continue to build mediocre vehicles that few people want.
Bud wrote:
Two, while accounting differences cause misleading figures and make comparisons difficult, many businesses do indeed have waste. The big thing seems to be wasted time and effort, because of inefficiencies in management. It has been said that you can't cut your costs enough to "reduce your way into a profit." But there is usually room to trim and reallocate your way into a larger profit.
With that I will fully agree, but have seen very little effort expended in that direction of cost reduction. The cost reductions I have seen tend to make this situation far worse. Things like crowding more techs into less square feet, reducing expenditure on training, reducing marketing cost, etc.
While caution may help a viable business survive, courage and faith will make it grow and prosper. An owner must have faith there will be a future, to invest and courage to follow their convictions.
People will pass over the aurthor's main point and bring up all the sub-points they want to discuss. Probably because everybody has a different focus or view on what is being said?
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sun May 11, 2008 10:00 am Post subject:
Bud wrote:
It’s the nature of internet forums.
People will pass over the aurthor's main point and bring up all the sub-points they want to discuss. Probably because everybody has a different focus or view on what is being said?
Hi Bud,
That is not at all bad and brings a great deal of good. I think it is up to the author of the post to restate their original point if they wish the discussion to continue as it began.
My opening statement:
louis wrote:
Cost containment in business is a factor, but in the service sector, perhaps far less a factor than most might imagine.
Does not say cost is not a factor. Instead it brings out that there are many, perhaps more important factors, that many shops fail to consider in quest of cost cutting.
Cost cutting will no more save a dying shop, that has fundamental problems than telling a patient with Parkinson's disease to quit shaking, will help the patient.
As in Tom's example, a poorly managed shop may have higher cost and may also buy equipment they do not need. Buying equipment they do not need is clearly an example of a lack of management and teaching such a shop to control spending is likely far too little, too late; you are treating a symptom, not approaching the cause.
COST ARE NOT THE PROBLEM, cost are simple a part of business. Useless cost are a problem, but far more prevalent, being unable to cover cost is the problem.
I spend $300 a month to have the streets in front of my shop cleaned. Many shops would see that as an unnecessary expense. The shop has gone from $1M per year to $1.8M per year in three years and net is approaching 25%.
Cost are a factor, but shop owners easily loose sight of the bigger picture, by obsessing on cost. I once knew a shop owner who refused to take credit cards because of the COST. His shop is now a five-year old memory. He saved himself right out of business.
My hope is this discussion will continue. I feel this is another of those “sacred oxen” that needs to be gored.
All true. But my impression is most business owners can more readilly relate to cost cutting than developing a bigger vision for growth.
Costs can be seen and counted. But missed sales and underutilized manpower are difficult to put numbers on. So, people naturally focus on what they can count.
So, how would a typical owner develop a vision for growth and shift his focus onto that?
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sun May 11, 2008 1:58 pm Post subject:
Bud wrote:
All true. But my impression is most business owners can more readilly relate to cost cutting than developing a bigger vision for growth.
Costs can be seen and counted. But missed sales and underutilized manpower are difficult to put numbers on. So, people naturally focus on what they can count.
So, how would a typical owner develop a vision for growth and shift his focus onto that?
As Deming often stated, "Some of the most important things in business have no numbers, they must be managed by theory." I think truly understanding that statement is the first step.
Second is realizing what is simple is not always effective and what is effective is not always simple. Unfortunately, current culture is obsessed with quick fixes. It does matter if they destroy the system, just do something NOW!
Symptoms are easy to spot, but impossible to correct through direct action. Sort of like the shop that keeps turning the rotors on a car to stop brake shudder.
For a great exercise in finding actual solutions, go to the Practical Applications of Deming Theory In The Shop forum. Read what is written, but don't stop there. Post questions, contradictions, arguments, agreement, whatever. Get involved and start working toward solutions, they wont just come. Most of all get started, moving in the right direction.
Well, I'll bet your view is fighting against the weight of momentum in the minds of many readers.
For instance, when business slows down, what's the first thing people do? They call their friends that own shops, they ask the parts stores, and they ask the tool truck guys how business is overall. When they find out 'everybody else is slow too,' they feel relieved. Some might even be 'slower than they are.'
After all, there is nothing they could do differently, because 'everybody else is slow right now.'
That's the weight of momentum, the way we have always done things.
Baloney. There are 1,000 things they could do differently, as you do.
Business is slow everywhere right now, yet you're going to earn another 1/2 million dollars from your shop alone this year.
P.S. I forgot to say that Tom's view on this post is probably representative of 100 readers that didn't post anything. I'm going by the dozens of shop owners I know personally.
We don't have to change anybody's mind, just entertain all sides of a topic and illustrate what works.
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Mon May 12, 2008 7:04 pm Post subject:
Hi Bud,
Discussion is the point I hope for. I think this topic has been improperly stated for years, and simply hope to point out another view. I have heard many people state over and again that [most] businesses fail from high cost. I have not seen that illustrated nor any factual data to back it up.
To a shop with no sales, any cost would be too high?
I know that you have seen quite a few shops in your life. Some were probably doing well, a lot were probably just getting by and some were clearly failing. How many of the ones that were failing were full of new equipment? Was there a great deal of evidence of capital improvements or investment in the future? Was there over spending on an effective marketing program? I don't know of any and I have seen a lot of failing shops.
What I almost always see is, some poor soul, beaten and scared, who has cut things to the bone, not invested and is failing anyway. They are terrified to change and just as scared to stay the same. Some are the victims of bad advice, but more are the victims of not doing anything at all. They have cut until there is nothing left to cut and if they realize their error, lack resources to make correction.
Cost is NOT inherently bad nor good. Some can be controlled, some must be balanced by income. Unnecessary cost can be a burden, but I think it is unwise to consider cost without reference to income. There is rarely income without cost and wise investment of cost is the bases of most income.
I have heard many people state over and again that [most] businesses fail from high cost. I have not seen that illustrated nor any factual data to back it up.
I've never heard that, and it certainly is not true. Lack of sales is what kills a business.
Joined: 17 May 2008 Posts: 6 Location: Lansing, IL, USA
Posted: Mon May 19, 2008 5:36 pm Post subject:
This is a good post. I've found that one needs to keep expenses as low as possible, but without sacrificing any quality(in other words, just be a wise consumer). If I had to focus on one thing only, however, it would be increasing sales and customer satisfaction. Also shop efficiency is key. These things will have a much better effect on profitability.
_________________ Jason Brennan
CEO
Fine Tune, Inc.
Lansing, IL, USA
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Mon May 19, 2008 6:44 pm Post subject:
Hi Jason,
jbrenn77 wrote:
This is a good post. I've found that one needs to keep expenses as low as possible, but without sacrificing any quality(in other words, just be a wise consumer). If I had to focus on one thing only, however, it would be increasing sales and customer satisfaction. Also shop efficiency is key. These things will have a much better effect on profitability.
I think you make an excellent point. Expense control is important but my experience has been that a shop cannot save itself out of trouble. Success takes sales and that takes satisfied clients. Thanks Jason, I appreciate your thoughts.
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