Disruption & Strategic Cost Management
Covid-19 disruption undermines Business as Usual (BAU) which is still evolving. Reactions which meet the needs of a silo, but ignore organisational objectives, can create greater problems than a problem arising from disruption.
Forewarned is forearmed in prevent ‘solutions’ becoming problems. Hindsight enables us to learn for problem creation experience and failure to consider the value stream.
Cost Management Specialists promote value stream thinking to manage the risk of incremental change & consider the upstream and downstream implications of every option.
Cost reduction ‘solutions’ in the following cases studies provide ample warning of how a solution can become a greater problem than the original problem.
1. Covid-19 Victorian Hotel Quarantine
The Victorian Government decision to contract low cost, unskilled and poorly trained workers to quarantine international travelers will bedevil Victoria, and the Victorian and Australian economy, for decades.
The strategic objective of the Hotel Quarantine System was to quarantine international travellers and prevent local transmission of Covid-19.
Unskilled security guards, who returned to suburban homes at night, were ill-equipped to achieve the objective. When they went home after their shift, many took Covid-19 home too.
Contrary to the strategic objective, security guards passed Covid-19 on to family members who then went to work, school, kindergarten, childcare, shops, playgrounds, clubs, churches etc. where they passed Covid-19 into other homes, workplaces, schools, kindergartens, childcare centres, shops, and playgrounds, clubs, churches etc.
The Victorian Government, through the Hotel Quarantine system, was spreading Covid-19 into Victorian communities, through contract hotel quarantine staff.
If police had taken security control of hotel quarantine, would the outcome have been any different other than police becoming Covid-19 spreaders in the community & police stations.
Was a budget anchor the reason for ignoring warnings about quarantine protocol breaches which would undermine a clear strategic outcome. In choosing the ‘cheap solution’, the Victorian Government failure to apply value stream thinking and failed to manage known risks in outsourcing security and contract staff living in suburban homes.
Ultimately, use of unskilled, poorly trained security guards was neither a solution nor cheap. Contractor spread Covid-19. Victoria returned to lock down. The huge social, and economic cost contributes to intergenerational debt.
Any fool can reduce cost. Many do!
Ignoring critical strategic objectives, when reducing cost, inevitable creates new problems.
Quality is remembered long after price is forgotten.
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2. Boeing Co.’s 737 Max Fail
Boeing was renowned for meticulous design. Problems with the Boeing 737 Max significantly damaged its reputation and cost the lives of 346 people. Financially the cost of software failures was more than $18.7 billion.
Despite being at the top of the aerospace market, Boeing and its subcontractors increasingly relied on offshored contractors paid as little as $US9.00/hour to develop and test software. How can employing contractors who lacked essential aerospace knowledge be justified?
‘If everyone is thinking the same, someone is not thinking.’
Peter Lemme, the designer of the 767’s automated flight controls, said:
“a stunning fail. A lot of people should have thought of this problem
– not one person asked.”
Consider the actual and opportunity cost of hundreds of planes parked 24 hours/day in airports around the world. Paying low cost contractors, who lacked essential knowledge of aerospace, did not reduce cost. The ‘solution’ incurred excessive cost far beyond any savings.
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3. Tax Saving? – No Saving at All!
Problem – impact on price of the Federal Government’s bi-annual excise tax increase.
Victoria Bitter’s (VB) had been Australia’s top selling beer for 20+ years. To avoid a price hike, the Carlton and United Breweries (CUB) solution was to reduce the alcohol-by-volume of VB from 4.8% to 4.6%. This enabled CUB to maintain the wholesale price just weeks after an advertising campaign to protect VBs position as market leader.
Without the benefit of market research, the former CUB GM Marketing declared:
“With a microscopic change in alcohol content, VB beer tastes exactly the same, has the same standard drinks, and offers better value to stockists.”
Drinkers reacted negatively. Sales dropped. Inventory increased. Production levels, based on previous sales, far exceeded demand. A major competitor became the top selling beer.
“Your most unhappy customers are your greatest source of learning” Bill Gates
Eventually, the former GM Marketing was forced to do an about face when saying:
“VB drinkers have told us we should not have tinkered with their beer.”
Losing sight of the strategic objective to remain Australia’s top-selling beer led to reducing the VB alcohol content. The hard lesson that taste was more important to VB drinkers than price could have been researched before pursuing a ‘cost reduction solution’.
VB has not returned to its previous long held position as Australia’s top-selling beer. To their credit, CUB learnt the costly lessons from failed cost reduction. Nationally another CUB product is the No 1 selling beer in 2022.
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Short term and siloed thinking can create incremental ‘solutions’ and new problems when reactive decision making overlooks upstream and down steam considerations,
Cost Management Specialists focus on value creation through strategy based on timely and accurate business intelligence. We challenge thinking, assumptions, and unwritten policy to prevent proposed ‘solutions’ from becoming worse than the original problem.
Contact John Cleary on +61 411 522 521 for a confidential, no obligation, discussion on how Cost Management Specialists add value in creating sustainable solutions.
“A cynic knows the price of everything and the value of nothing.” Oscar Wilde