Cost-optimization efforts.

• Author: Lis, Stephen
• Position: OPTIMIZING

During a downturn, many companies try to maintain their bottom lines by identifying costs that can be cut. But nine out of 10 cost-reduction programs fail to achieve their targets and don't deliver long-lasting results, a recent KPMG survey found.

That's because instead of focusing on long-term improvement, most firms look at cost reduction as a short-term exercise to bolster earnings. There are some signs that this is changing, however.

Some leading organizations are starting to realize that "cost optimization"--instead of cost cutting--is not a one-time exercise, and they are focusing on more effectively managing their business to deliver sustainable cost improvement.

These companies take a holistic view across functions and processes to identify waste and potential areas of improvement, while providing visibility into what drives their costs.

Ultimately, effective business management is the key to successful cost-optimization strategies. The results? Increased efficiency, improved costs, enhanced quality and service levels as well as reduced risk. Though executives should identify and understand the drivers of cost to make intelligent and sustainable changes, few of them take such a holistic view.

For example, management may seek to improve its distribution center and realize some cost savings, but the process often stops there. If that exercise were repeated across the organization--on a continual basis--it could bring significant, long-term cost savings.

Innovative Strategies

Because every organization has its own distinctive set of business issues, there are no "one-size-fits-all" solutions. But there are some often-overlooked areas that can frequently provide good opportunities for cost improvement.

* Assess opportunities to improve working capital and increase cash flow. By focusing only on expenses and net income, many organizations forget the potential impact that improved working capital and enhanced cash flow can have on the business. Typically considered the responsibility of the treasury department, total cash management requires a focused effort across all aspects of the business, including marketing, sales, operations, logistics and finance.

Yet, challenges exist to optimize cash and working capital. In some situations, for instance, ownership and accountability for working capital is inconsistent or fragmented, while in others, the metrics conflict.

Most companies ultimately require a "cash culture" that focuses on profit...