The Irish retail sector is well accustomed to conducting cost reduction exercises since the world imploded in the autumn of 2008. In troubled times, when organisations need to reduce costs, a staff cull can often be the first solution. However, evidence suggests this can result in a reduction in business performance, falling service levels and damage to reputation, not to mention a demoralising effect on staff. Declan Quinn, a Cost Management Consultant of Auditel (Ireland) Limited, explains why.
Quinn believes that reducing the size of the workforce should be the last resort and argues that the first course of action should always be to look under the bonnet of an organisation to see where costs can be reduced and efficiencies made. So, what are the options available to members of Retail Excellence Ireland?
Beyond staff costs, it is also a fact that all organisation need to spend money on essential business services in order to exist. Premises-related costs, fixed and mobile communications, IT, utilities and finance such as insurance and banking charges are just a selection of essential overheads. Without these services, most retail business would find it very difficult to operate.
According to Quinn, essential business services are costing Ireland’s retail sector hundreds of millions Euros annually and squeezing profitability for organisations of every size. Given the vast level of expenditure involved, organisations need to find a way to sensibly and vigorously manage cost. Clearly, this involves identifying suppliers and service providers and assessing their respective offerings in terms of performance, price and service levels offered.
Whilst this may, at a first glance, seem blatantly obvious, many organisations believe they ‘have people who look after that’. Unfortunately, according to research under taken by Deloitte in March 2013, the biggest barrier to effective internal cost reduction cited by respondents was a ‘lack of understanding.’
It is often the case that department managers, whose experience lies elsewhere within the organisation, are routinely left with the responsibility. Is it right to make an assumption that these individuals hold the necessary skills to enable them to implement an effective and sustainable cost management programme? Surely, the answer is of course no. As a consequence, many opt for the apparent ‘cheapest supplier’ option adopting a purely headline cost model. This may appear to be a logical approach, but it is fundamentally flawed as it fails to take into account a wide range of additional factors that contribute to what Auditel term as the total cost of purchase. The bottom line appears to be that many retailers are spending more money than they need to on essential costs and implementing woefully poor cost management strategies.
The appointment of an outsourced provider of cost management services is becoming an increasingly popular option and one adopted by many members of Retail Excellence Ireland. Companies including Eddie Rockets, Maxi Zoo and La Croissanterie have engaged with outsourced cost management consultancies like Auditel to review the total cost of procuring goods and services. Cost management companies like Auditel can use their independence and experience in the market place to help them make intelligent effective purchasing decisions and implement professional cost management strategies.
Auditing and benchmarking procedures are an important aspect of cost management consultancy. Best practice should include a comprehensive, in-depth review of current essential service expenditure with key performance data being identified. Advanced analytical tools that are specially designed for cost management are also essential as they enable the fast and accurate analysis, monitoring, benchmarking and management all areas of expenditure.
The key to maintaining best value purchasing and supplier management is to be consistent. It’s not just a one-off exercise and should be considered as an ongoing activity to realise maximum benefits.
Cost managing for performance may well also be the answer to realising untapped profitability. For example, if we take an organisation that has a gross profit margin of 25 per cent. It engages with a cost management consultant identifying €100,000 of potential savings across essential business expenditure areas. In order to generate this additional profit through sales it would have to increase turnover by €400,000.
Retailers continually need to examine costs on all fronts. However, a forward thinking business can go a long way to countering the potential problems that can occur by embracing and adopting a robust and professional approach to the fast growing discipline of professional cost management consultancy.