Is cutting costs the answer?

February 4, 2012 · Filed Under Consultancy, Posts

John

Times are difficult and many businesses are cutting costs as an (apparently) easy way to maintain profits. Sometimes this can be counter productive. I was reminded this week of the work and philosophy of William Edwards Deming. I guess most of you won’t have heard of Deming but he has played a major role in 20th century business. Deming is credited with having been a major influence (possibly the major influence) on the revival of Japanese industry after the Second Worl War – and we’ve all seen how well the Japanese have done in that time.

The one part of Deming’s philosophy which I am highlighting is his theory on the relationship between Quality, Total Costs and Profit. To put it simply, Deming believed that if a business concentrates on Quality, Quality will increase and costs will ultimately fall and profits will increase. However, if a business concentrates primarily on Costs, Quality will suffer and Costs will actually rise and profits will fall.

This may seem counter intuitive but when put into practice, along with other Deming principles, it saw the rise of the Japanese car industry from virtually nothing to the producers of quality, reliable cars. One story which illustrates this concerns Ford Motor Company who were fitting (supposedly) identical gearboxes into one particular model. Some of the gearboxes were produced in a US factory and some were produced in a Japanese factory. It became apparent fairly quickly that the Japanese produced gearboxes were more reliable, less noisy and generally better so, not unnaturally, customers started specifying that they wanted a Japanese gearbox. The Japanese factory had concentrated on producing a quality product and worked to tighter tolerances than specified but, ultimately, their costs were the same or lower than the US factory.

I’m not saying that costs shouldn’t be a factor but be careful when trying to cut costs that the quality of your product or service doesn’t fall. Customers are fickle and they notice small differences. The decay in sales may not happen immediately so you may think you’ve got away with using a slightly inferior part or not quite finished off as you used to – but these differences are noted and reduce the loyalty your customers feel which ultimately results in fewer recommendations and a greater liklihood of your customer going to one of your competitors.

Sometimes just talking through your problems and queries with someone who is independent, unbiased and has a wide knowledge of business practice can be useful. We would be happy to do this for you.

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