Cost Saving or Problem Creation?

Disruption is a common characteristic of all businesses in 2020.

When reaction takes priority, planning becomes secondary to short term thinking proposing “solutions’ creating a greater problem than the initial problem.

The danger of short term thinking, blind to performance objectives, is demonstrated in the cases studies below:

Victorian Covid-19 Hotel Quarantine System

The Victorian Government decision to contract low cost, unskilled and untrained workers to quarantine international travelers, most likely to be importing Covid-19, will bedevil Victoria, the Victorian Government, and the Australian economy for years to come.

The strategic objective was to quarantine Covid-19 to prevent community transmission.

Senior health officials were warned early that unskilled, untrained security guards were ill-equipped to achieve the objective. Bureaucrats recommended that police take control.

Presumably cost reduction was the reason for ignoring the warning. Quarantine protocol breaches, the subject of the warnings, initiated a surge of Covid-19 outbreaks within Melbourne communities.

The need for higher-level thinking to achieve a clear strategic outcome was absent in the decision to choose the ‘cheap solution’ to outsource security.

Unskilled, untrained security guards was neither a solution or cheap. Contractors spread the virus. As a result, Victoria returned to lock down at huge and escalating social, and economic cost.

 Any fool can reduce cost. Many do. Mostly by losing sight of critical objectives.

Quality is remembered long after price is forgotten.

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Boeing Co.’s 737 Max Fail

Boeing was renowned for meticulous design yet problems with the Boeing 737 Max took the lives of 346 people, cost the aircraft maker more than $18.7 billion and significantly damaged its reputation.

Despite operating at the top end of the aerospace market, Boeing and its subcontractors relied increasingly on offshored work and contractors paid as little as $US9 ($12.80) an hour to develop and test software. Contractors who lacked essential knowledge of aerospace.

If everyone is thinking the same, someone is not thinking. This truism is confirmed by Peter Lemme, the designer of the 767’s automated flight controls, who said:

“a stunning fail. A lot of people should have thought of this problem – not one person – and asked about it.”

Many now do question the cost and opportunity cost of planes parked 24 hours per day in airports around the world as an outcome of offshored contractors paid as little as $US9 ($12.80) an hour who lacked essential knowledge of aerospace.

“A cynic knows the price of everything and the value of nothing.” Oscar Wilde

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Tax Saving = Less Sales & Increased Inventory

Cutting the alcohol content of Australia’s biggest selling beer, to reduce tax and avoid a price hike, was failed cost reduction. This action was taken just weeks after introduction of an advertising campaign to protect Victoria Bitter’s (VB) position as the market leader. 

VB had been Australia’s top selling beer for 20+ years. In the face of the Federal Government’s bi-annual excise increases, CUB decided to maintain the wholesale price of Victoria Bitter (VB) and instead reduce alcohol-by-volume from 4.8% to 4.6%.

Drinkers reacted negatively. Sales dropped. Inventory increased as production levels were based on previous sales. As a result, a major competitor became the top selling beer.

“Your most unhappy customers are your greatest source of learning”   Bill Gates

Former GM Marketing Paul Donaldson declared in reducing the alcohol content:

“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 disagreed. Sales fell, Donaldson later did 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 a decision to reduce the alcohol content of VB.  That taste was more important to VB drinkers than price was a hard lesson which could have been avoided by research.

VB has not returned to its previous status as Australia’s top-selling beer. To their credit, CUB learnt the costly lessons from failure to meet their drinkers needs. Another CUB product in currently No 1 selling beer.

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Business as Usual (BAU) is still evolving for many businesses.

Strategy based on timely and accurate business intelligence is the best way to create value.

Cost Management Specialists bring an external objective view to:

·        balance cross functional collaboration and reconcile diverse views

·        add rigor to challenge thinking, assumptions, and unwritten policy

·        prevent a ‘solution’ becoming a worse problem than the immediate problem.

Contact John Cleary on +61 411 522 521 for a free confidential, no obligation, discussion on how Cost Management Specialists add value, increase your ROI and profit against confirmed baselines.