Managing and reducing costs are vital aspects of any business, especially for FMCG brands and manufacturers. By reducing costs, brands increase their profits, and can set competitive prices which are attractive to customers. It also means better numbers for the company, which is attractive to investors. Therefore, cost reduction and management efforts are crucial to every business’s strategy.
However, reducing costs is not as simple as it sounds. Traditionally, cost management strategies have focused on cost cutting or cost reduction. Unfortunately, these methods often backfire and result in reduced service, poor quality goods, loss of market share and eventually reduced profits. Therefore, to remain competitive with their pricing without compromising quality and value, brands need to be smarter and more strategic with how they manage costs.
This article examines the traditional methods of cost management and shows why businesses must employ strategic cost transformation in these times.
Why traditional cost management solutions are ineffective
While brands have experienced revenue growth in previous years, their costs have grown significantly as well, which has made cost reduction a priority for many FMCG brands, but just how effective are these programs?
In 2019, Oliver Wyman conducted a survey of the leaders of CPG companies who had recently implemented significant cost cutting programs, and 76% of them said the program failed to deliver the value expected, and only 6% had better results than anticipated. Moreover, the programs that didn’t meet expectations missed the mark by significant margins. On average, these companies missed the target by 36% when compared to the savings the programs were expected to make.
This analysis shows that there is obviously a disparity between cost reduction intentions and reality. This is because the traditional approaches to managing and reducing costs are becoming increasingly inadequate. The tools that brand leaders and executives used to address cost in the previous decades will no longer produce expected results and, in the future, delivering effective cost management solutions will require new thinking and fresh approaches. Fortunately, the emergence of newer and more effective cost management models is paving the way for dramatic improvements in how companies view and approach cost management.
Cost Transformation: A strategic approach to cost management
If brands will generate the results they want from their cost management initiatives; they need to take a strategic and holistic approach to programs. According to PwC, the crucial priority is not what costs are taken out, but where resources are focused to stimulate growth and differentiation, this is strategic cost transformation. By recognizing the need to view cost in a fundamentally different and holistic way and drive dramatic improvements, the rewards can be enormous.
When setting cost transformation goals, business leaders tend to be conservative, which is a recipe for disappointment. By setting ambitious yet realistic goals, the entire team is focused on identifying creative step-changes on how each process is run rather than incremental savings actions. And can optimize processes for increased efficiency and attain cost reduction targets.
To create and drive successful cost transformation programs, the customer must be the focus. Even though this might sound counter-intuitive at first, assessing cost reduction options via a ‘customer lens assessment’ will provide important input for prioritizing and redesigning how the company carries out its processes, both internally and externally.
Finally, to design successful cost transformation programs, brands must embrace digital solutions. Innovative solutions when rapidly adopted and implemented improve efficiency, streamline processes, and provide better visibility across the entire business operations, so that executives can make better decisions. Adopting better technology also reduces risk, and inefficiencies, which directly saves costs, and moves the brand closer to achieving their cost management goals.
Transform costs effectively with RedCloud’s open commerce platform
One of the sectors that can help brands reduce costs is in their distribution chain. By digitizing the distribution chain, brands can cut costs by 10 – 20%, which is why you need RedCloud.
At RedCloud, we’ve built the FMCG industry’s first open commerce platform. With this digital ecosystem, brands now have real-time visibility over their distribution chain and better control over their inventory. Adopting an open commerce platform allows the brand to unlock the full value of their distribution chain and transform each existing industry relationship into a potential data point. Utilizing this data, brands can then reduce inefficiencies, streamline their operations and save costs.
To find out more about RedCloud and our innovative industry solutions here that help brands, distributors and merchants sell smarter and improve visibility along the distribution chain, please get in touch via this contact form.