Page 28 - Logistics News June 2016

news
Forget cost management,
think value management
By Kate Stubbs, Barloworld Logistics
AS A BUSINESS, it has always been wise to
regularly look back and reflect on progress (or
the lack thereof), and to then take stock of the
current trajectory. Increasingly, this has become an In general, this is because accounting practices
important process for entire industries – not just
individual businesses. At Barloworld Logistics, we
conduct an annual survey across the local supply
chain sector to gauge where it is at and what
business leaders can and should be planning for.
Almost every year, this survey reveals a
persisting anxiety around the cost of doing
business.
Consequently, business leaders are almost
always looking to cut costs and trim operating
expenditures in the year ahead. Indeed, when
things aren’t going well – and business conditions
are challenging – cost cutting is invariably the
default reaction. Yet in our view, the thinking
around costs and expenditures among executive
level leadership is often flawed.
In tough economic times, management teams
tend to just take a rather ruthless approach to
various areas of the business where they perceive
costs as being too high. For example, they
immediately cut the marketing budget – when
in fact marketing may be more critical than ever
before. Or they trim down expenditure on IT
systems when investing in more streamlined IT
processes can quickly turn into a cost saving.
Typically, costs within a company are being
divided into pure operational costs but these, in
themselves, have massive indirect costs (head
office expenses, FICA (for banks), IT and more).
But in taking this approach, businesses usually
have little to no idea of what the true cost is to
provide their service/product.
Essentially, management teams fail to look at
costs relative to the value they produce. Cutting
costs can be smart and prudent when those costs
aren’t creating significant value for the business.
But when they are, and the value is overlooked,
then cutting costs will ultimately harm short and
long-term growth.
For example, if you are a food retailer, and
providing fresh produce is one of your critical
selling points for customers, cutting down on
delivery and logistical expenditures would be
foolish. In fact, spending more on ensuring
delivery is timely and efficient would be the smart
move, in this scenario.
26 June 2016 | Logistics News
Unfortunately, most businesses do not have the
ability to identify exactly which costs are creating
value and which are leading to profit erosion.
have not evolved, and still rely on the old school
approach of merely balancing the books. This
type of accounting often hides far more than it
reveals. It is more an aggregation of a bunch of
figures instead of a definitive and skilled analysis
that takes place at the transaction level. And
only by digging down to this level, can one really
determine sources of profitability and sources of
profit erosion.
In today’s increasingly complex – and fast
changing – operating environment, businesses
need to take a far more scientific and ultimately
data-driven approach to managing costs. Given
the huge amounts of data now being produced
on a daily basis, businesses have no lack of
information. (Arguably, they are drowning in
information).
The real challenge is to ask the right questions
and then look at the correct data for answers.
Data is almost useless without a very specific
and clearly constructed approach. Research firm
Gartner has used the analogy of a pond, with
regards to the data explosion. Ignore the pond,
they advise decision-makers. First, decide what
information it is that you’re seeking and then go
fishing.
The good news for businesses is that
technology is quickly evolving to be able to
provide the type of actionable intelligence they so
desperately need. First, however, business leaders
will have to shift their fundamental approach –
from cost management to value management.
Only by making this shift can they capitalise on
the promise of smart technology and data-driven
analysis.