Cost Optimization as a Method to Achieve the Desired Profit
Author: Nataliya Tadeyeva, Director, Accace Ukraine, more than 5 years of experience as an auditor in “Big 4”, financial management in a manufacturing enterprise
We get accustomed to be oriented on the result using the well-known management model. The terms a “result-oriented” or “effective” manager are becoming commonly used. However, international practice shifts the focus from “the result” to “ the result + efficiency.”
So, what is the difference between the concepts of “productivity” and “efficiency.” It is obvious that they are directly related to the reduction of costs, but the context of these cuts is not less important.
Let’s consider the original concept of the efficiency and productivity of management activities. A prominent theorist of modernity in the field of management Peter Drucker distinguished between productivity and efficiency, defining management as a kind of professional activity, and a manager – as a special profession. He also developed the concept of management by objectives.
Drucker argued that the productivity means that “the right things are being done”Organisations meet the needs and interests of customers, -which are in demand onthe market. The efficiency of the organization’s activities is a consequence of the fact that “the right things are being done in the best way”, using advanced processes, in compliance with the relevant requirements, which lead to the required quality and the cost of production, ensuring its competitiveness on the market. For example, Ronald McDonald has defined popular food – hamburgers, provide them with a low cost and high quality, and it succeeded.
The effectiveness and efficiency are equally important. At the same time, _ determination of the sequence and interrelationship of these concepts _are obvious. To work effectively, you should survive and succeed in a competitive environment. To do this, select the target activity corresponding to a specific need, really existing in the country or the world. This may be the manufacture of products and provision of services. The level of satisfaction of needs of the economy – the overall goal or mission of any organization.
The effectiveness of the control is the control system’s ability to achieve the outcomes corresponding to an object satisfying a specific requirement of the person, society and state and create conditions for sustainable development of the organization (the social and economic system).
So, according to the above, it is necessary to understand the context of reduction (optimization) costs to achieve the result or to operate effectively. In the first case – it is only necessary to determine the extra costs, which is unnecessary and it’s possible to do business without them, while the second concept implies a deeper theory of the reduction of losses during operation. In any case, outflow of cash and cashtypification are the object .
Among the many classifications of costs and operating costs, a lot of attention should be paid to the expenses that are result of decisions taken by management. This is expenditure, which can and should be managed. How to avoid making the inefficient decisions is a key issue for modern management. the business processes grading according to the priority is interesting as well. This classification is well-known in the world. This matrix is named for Paul Harmon and is used to assess the strategic importance of the business process in relation to the complexity and dynamism.
This matrix is a real tool that makes it possible to take a correct and efficient management decision for every business process in the enterprise.
Primarily the expenditure cut is a reduction of losses in the existing business processes. The most common causes (97%) of loss in the business process is the manager’s indifference which resulted in a snowball effect, when there is no gain and costs on maintaining business grows. The second main cause of losses in the business process is non-proficient management. There are effective methods and tools with the help of which every manager has a good chance to learn business process and its shortcomings in a short period of time. We will consider two basic tools and discuss their effectiveness.
One tool is a method “Go through it.” Accordingly, the Manager receives a full picture of the duration and the added value of each stage from the beginning to the end of the business process. The second method has a game character and is borrowed from the theory of project management and project activities. It implies not theoretical, but practical reproducation of business process maps which are also intended to show the real picture and the possible temporary / informational loss of a business process.
It is worth saying, that there is a huge amount of books about management, but the efficiency of any of them isnot scientifically proved. That suggests creativity management. However, we have a lot of successful stories of companies that invented and introduced a unique management tools, but only few of them have transformed them into the system. One such system is implemented and operates in many countries and thousands of small businesses.Unfortunately, it’s not popular in Ukraine, but it’s the future of business management . CEO SRC Holding Corporation Jack Stack is its author. The concept has been introduced in the holding companies since 1983 and it still works. This approach combines the motivation and the effect of competition, as well as honesty and openness towards employees. It is aimed at the reducing of risks of loss, and, consequently, cost reductions. As a result, the company gets profit growth.