The Five Sources of Cost Advantage

There are five commonly recognized sources of cost advantage – people, material/supplies, processes/systems, facilities, and capital. It is not necessary to focus on all of them in order to experience the benefits of being the lowest cost producer in your industry; any one could be enough. However, by achieving a true cost advantage in more than one source, you further ensure your company’s success.

 

Now, let’s explore each of these five sources and determine the relationship it has on your business.

 

People

 

Many organizations boast that their people are their most important asset. While this may be true, people can also represent the most significant cost to a company when you shift from the balance sheet to the operating statement.

Companies do not become the lowest cost producers by paying their people the lowest wages and benefits possible. They become the lowest cost producers by leading and managing their employees to performance levels that exceed those of their competition. To do this, they continuously focus on enhancing the skills of their people. They create highly flexible employees who are capable of meeting the demands of an ever-changing marketplace.

 

Lowest cost companies create highly disciplined teams who understand their real competition is outside of their organization, not inside. They: 

• tell their people what to do
• support them in their efforts to do it
• measure how well they do it
• reward and/or discipline based on their measurements

Materials/Supplies

All companies use materials and supplies to produce their products or perform the services that their customers buy. Lowest cost companies do not simply focus on the lowest unit price of materials or supplies, they establish purchasing practices that result in the lowest total cost for these materials and supplies.

 

This distinction is essential because the lowest unit price for a particular purchased product may not be the lowest total cost for the same material. Lowest cost companies identify and separate their strategic purchases from their low-risk purchases. They then align their purchasing resources to ensure that strategic material purchases receive the level of attention they deserve. They understand and track their total purchasing costs and work hard to continuously reduce them.

 

Processes/Systems

 

Everything that a company does is a process. From the way it hires to the way it fires, from entering orders to collecting receivables, from manufacturing products or delivering services to the way you ensure their quality, everything that an organization does can be reduced to a series of definable steps. Processes that are linked together become a system. Lowest cost producers design their processes and resulting systems to be highly efficient.

 

Organizational processes and systems can be classified into four basic categories:

• Sales processes – positioning your company and products, generating leads, converting those leads into orders, and entering those orders into your operations
• Operational processes – engineering and manufacturing your products, and ensuring the quality of your products/services
• Distribution processes – getting your products or services to your customers
• Support processes – human resource activities, management information systems, financial management, administration activities (to name a few). Support processes are essential for your sales, operational, and distribution processes.

As a company grows, these processes and systems tend to evolve with it. Lowest cost companies recognize that evolution does not always yield efficiency, and they constantly evaluate and re-engineer their processes to ensure they are performed in the lowest cost way possible.

 

Facilities

 

After people and materials, the most significant cost center for companies is often their facilities. Facilities include physical plant (offices and factories), equipment and technology hardware.

 

Lowest cost organizations work hard to ensure their offices and/or manufacturing facilities are designed to produce the most cost-efficient performance. They invest in the most effective capital equipment to do the essential work of their business. Increasingly, lowest cost companies look for ways to use technology to increase their productivity and reduce their costs.

 

Capital

 

The last (but not least) source of cost advantage is capital. Capital falls into two fundamental categories, money that you have (cash on hand and equity) and money that you don’t have (receivables and credit availability). Lowest cost companies recognize and maximize the advantages that come from effective capital management.

 

What does this mean for your business? All of these sources are just the first piece of the puzzle. The rest is actually performing them. Once all of these pieces come together, the picture it paints will be one that customers can’t look away from. But how does one figure out if all of the pieces are working together? It’s easy; conduct an employee perception survey. This survey is designed to allow you to get into the minds of your employees. It helps you recognize areas that are and are not working. Most importantly, it instills the fact that you care about your employees and the success of both them and the business.

 

If you’re wondering if an employee perception survey is right for you, we can help. Call us toll-free at 1-800-999-6615, email us at mail@tweedweber.com, and/or visit us on the web at www.tweedweber.com. Also, be sure to follow us on LinkedIn (Tweed-Weber, Inc.) and Twitter (@TweedWeber).Today, sit back and allow us to do all the work, and help you figure out the perfect picture for your company. No one can guarantee certainty, but market research can guarantee clarity. You will Know More, so you can Do More.