To work effectively on your costs, it is extremely important to know your cost structure and to have a good visibility on it. To do this, the first reflex I recommend is to take out the list of your accounts, the accounts we call 60, 61 or 62. These are your expense accounts.
And then go through the list of your costs, according to the Pareto principle. The Pareto principle is also called the 80-20 principle. It's an empirical principle that says 80% of the effects are the product of 20% of the causes. What does that mean concretely? It means, for example, that 80% of your costs are in fact the product of 20% of your suppliers. So it applies very well to purchasing.
That way, you'll be able to determine where you really need to focus. With which supplier do you have to start working? Or on which purchases you need to put the focus? Once you have drawn up a list of the main costs or the main suppliers, I recommend that you go through a screening for each of them. I call it a prism. There are three dimensions.
The first is the amount you think you're going to be able to collect. The amount of savings. Generally, I recommend focusing on categories where you think you're going to get at least 10%. Why 10%? My experience has shown that if you're only going to find a few percent, eventually the indirect costs you're going to have will make you question a solution. In 95% if you go for at least 10%, it will be a real motivation to go and implement that solution.
The second component is timing. Take a good look at how long it will take you to implement this solution or simply to analyze it. From when can the savings be effectively implemented? This is the second component. This is the time component.
And the third component that is often underestimated in companies is the implementation capacity. Indeed, perhaps in your company, there are unions that will be against one of your solutions or simply an aversion to change, perhaps your employees will not be ready to change in the direction you want to go or simply contractual commitments. Maybe you are still tied to a supplier for two or three years.
In the next episode I will explain how to avoid falling into the vicious circle of cost-cutting.
La minute Cost-Killer is a series of 7 episodes to help you optimize your costs and create value in your company:
Lesson 1: The job of Cost Killer. Lesson 2: Pareto, your best ally Lesson 3: The vicious circle of Cost-cutting (to be published on 30/06/2020) Lesson 4: The Maverick Buying (to be published on 07/07/2020) Lesson 5: The decision tree (to be published on 14/07/2020) Lesson 6: The goose with the golden eggs (to be published on 21/07/2020) Lesson 7: Champagne for everyone! (to be published on 28/07/2020)