Cost control is essential for every business, but the strategies and priorities can shift over time due to economic and logistical factors.
Recently, Boston Consulting Group released a report titled "The CEO’s Guide to Costs and Growth," summarizing findings from a survey of 600 C-suite executives. The report highlighted that cost management remains a key focus for leaders heading into 2024. According to the survey, the top three categories for cost-cutting initiatives included:
1. Supply chain/manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy.
Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.
It also pays to know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.
2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending.
A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. The labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance, and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce.
Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.
3. Marketing/sales. Much like labor, strong marketing, and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.
Choosing and monitoring effective metrics is crucial in this context. The best metrics can differ based on industry and company specifics. Commonly utilized metrics in marketing include lead conversion rate, click-through rate for online ads, and cost per lead. In sales, key metrics often include total revenue, year-over-year growth, and average customer lifetime value.
Whether assessing sales metrics, labor burden rate, or supply chain management, seeking objective, professional advice can provide clarity on cost dynamics and identify practical solutions. Reach out to an Axley & Rode advisor for further assistance.
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