There is a need for more Tata Nanos and Godrej Chotukools as long as we have a good population at the bottom of the pyramid looking for cost effective products

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BANGALORE, INDIA: Cost reduction is so much a part of all Indian companies; the relevance of this will need little introduction.

India will always be among the leaders for frugal engineering and cost innovation in years to come. There is a need for more Tata Nanos and Godrej Chotukools as long as we have a good population at the bottom of the pyramid looking for cost effective products.

Companies are striving on new ways to capture this mega market. In this journey, organizations are pushed to keep their costs low at all times. To succeed in such an environment a strategic approach to cost reduction will ensure superior competitive advantage.

Cost is one of the significant value levers influencing free cash flow and thereby shareholder value.

So, what does sustainable cost reduction mean?

Sustainable means maintainable. In the cost reduction context, organizations would like to ensure that they have sizable and perennial pipeline of ideas and initiatives to meet their year on year cost reduction goals. Cost reduction attempts are always posed with a wide gap between identified & realized savings. In a typical enterprise, 20 per cent to 25 per cent of negotiated savings remain unrealized.

Sustainable also means ecological. Sustainable cost reduction programs are environment friendly and focus on elimination of wastage. Here, the role of sourcing manager shifts from just 'buy-for-less' to 'buy-better', 'buy-for-less on TCO (Total Cost of Ownership)', 'use better & manage better'.

Material resources across industries are always consumables and scarce. Looking across the lifecycle of demand and consumption of material, buyers are able to optimize the needs, recycle the input materials and reuse the waste while ensuring continuous cost reduction opportunities.

Example, cost of power is a significant cost factor for most companies. Having said, power is a critical but constrained resource and always price governed. Thus leaving limited scope for direct input cost reduction. The opportunity of cost optimization here is in 'using better'.

Sourcing organizations can roll-out energy audits to identify areas of cost leakage, thus influencing the demand. The best strategic sourcing fable I remember is the collaboration between the noodle and the baker on the usage of eggs. While the yolk is used by the baker, the white is consumed by the noodle manufacturer.

On the other hand, the baker, noodle manufacturer and poultries consolidate their grain procurement to leverage on cost benefits thus reducing costs beyond 50 per cent.

In our recent research we found there were paradigm shifts in the approach towards sustainable cost reduction programs from the traditional cost reduction methods.

Traits of sustainable cost reduction programs:

1. Tailor made cost reduction: Sustainable cost reduction programs are always tailor made for each product-competitive strategy and aligned to organizational goals unlike traditional methods

2. Integrated demand planning - drives efficiencies in cost reduction.

3. Cost-Value focus - total cost and value focus, encompassing all cost levers including supplier productivity, cost of performance and cost of relationships than having a pure supplier price based approach.

4. Wider perspective on value chain – to ensure benefits and value maximization along the value chain from design to deliver processes than to have a pure sourcing focus.

5. Wider partnerships – net benefits need to be aligned across the entire partner eco-system and not held only within the organization.

6. A holistic approach – to have a multidimensional strategy/process /capability improvement approach aligned to category characteristics than being a pure category-led-cost reduction.

7. Continuous opportunity identification – Use of annual cost reduction calendars for realizing on-going benefits while maintaining effective supplier relationships.

8. More than 'Buy-for-Less' – buying , using and meeting customer needs better.

9. Persistent focus on visibility and analytics – Leverage on analytics for building deeper insights on spend areas , performance levels across the supply chain etc.

10. Driven by processes, effective program management and change initiatives - While better processes bring better cost efficiencies, increased visibility , optimal staffing ( across functions); effective program and change management helps better realization and conversion of savings identified.

11. Technology enabled – adoption of advanced technology into critical areas such as cost modelling, forecasting, spend and analytics will drive better results.

Leaders look beyond ad-hoc category and head count staffing reductions and have a sustainable long term view to these initiatives. Sustainable cost reduction look at TCO of spend, core process performance and product lifecycles to grave costs. They ensure that the opportunities from strategic sourcing programs are tracked for savings identification. On-going savings, improving shareholder value & competitive advantage - there is always money on your table.

The author s senior principal of Management Consulting Services at Infosys.