A recent survey by Gartner indicated that less than half (43%) of business leaders achieve their cost-reduction goals because of unrealistic targets.
With labour costs, supply chain costs, and inflation rising, leading retailers, like you, are racing to save on operational expenditures to shore up their bottom line.
This often leads to setting unrealistic targets by trying to cut costs anywhere and everywhere; which can unintentionally damage present and future operations because the cuts are too wide and too deep.
A more realistic approach would be to compare the benefits and drawbacks of each cost-cutting option.
By weighing the pros and cons you can:
- Speed up decision-making
- Improve your understanding of the situation
- Help avoid decision-making paralysis
Let’s take a look at some realistic ways you can slash costs–the pros and the cons.
1. Develop a war chest of opportunity buys
During the pandemic retailers sometimes paid over and above for inventory due to scarcity of products and the challenge of a clogged supply chain.
In a recession, however, aggregate demand for those same goods and services decreases.
With less demand, suppliers will be competing for fewer dollars.
As a result, some suppliers will offer discounts and incentives to stay competitive and stay afloat.
So, if it’s a non-essential expense, and you can wait it out, you may be able to take advantage of opportunities to get significant savings.
Pro:
You can acquire inventory/services for a significant discount, and decrease spending by making more deliberate purchases.
Con:
It’s impossible to predict when a discount opportunity buy will present itself, and if you wait too long you might end up paying even more due to inflation and opportunity cost.
2. Automate labour-intensive processes
Retailers are in the age of digital transformation.
What that means, in general terms, is that retailers are investing and integrating digital technology into all areas of the business resulting in fundamental changes to how they operate and how they deliver value to customers.
Retailers are successfully automating nearly every facet of their business, from in-store checkout and order picking to automated inventory replenishment and fulfillment.
In fact, approximately half (49.5%) of medium to large operators of warehouses and fulfillment centers will use robots by 2024, up significantly from 28.0% in 2019 as indicated in the chart below.
Beyond this, Amazon has more than 520,000 robotic drive units in its fulfillment and sort centers.
Automation is no longer a nice-to-have tool; especially for retailers looking to reduce their operational costs.
Pro:
Automaton saves time and effort, making business efficient, which leads to reduced costs.
Con:
Automation requires significant financial investment and training, but costs associated with ROI will also be significant.
3. Work backward to achieve your money-saving goals
Knowing where to begin with cuts in the budget is difficult, and part of the reason cost-reduction targets are unrealistic.
How about, working backward from big-picture end goals in order to get to a starting point?
Fundamentally, executives are tasked with maximizing revenue while minimizing costs, especially in a recession.
Clearly, this is a broad financial goal, and so you’ll want to:
Set your end goal(s)
There will probably be many goals. So, make sure each financial goal is clear and distinct.
Break the goal down into smaller goals
Supporting goals must be performed to achieve the main goal, but should be seen as independent goals–yet always tied to the greater end goal.
Create a list of essential actions
Determine the necessary steps to achieve the goals, taking into account that some steps cannot be performed until a previous step has been completed.
This list will help you build momentum, and prevents you from having to deal with setbacks because you have to wait a long time for the completion of a previous step.
On the surface, backward planning doesn’t seem much different from the traditional goal-setting processes. However, working backward from your end goal forces you to see things from a different perspective.
With backward planning, you take strategic actions to make your chosen ending happen.
Pro:
You get a clearer picture of important and competing timelines, and the order in which actions need to take place, allowing you to redirect activities and funds where needed to attain goals.
Con:
Because people commonly underestimate how long it will take to achieve a goal, a phenomenon known as the planning fallacy, you will need to build in time for delays and mistakes.
4. Kill vampire projects
Today’s retailers have a lot of projects on the go.
The thing is, in a recession you need to separate essential from non-essential projects because some projects will improve your business’s bottom line, while others, although nice to have, will drain finances.
Now is a good time for decision-makers to become leaner by only investing in projects that make them more competitive and profitable.
What do those projects look like?
According to a recent Morgan Stanley Research survey, the top 5 most important projects are:
- Cloud Computing
- Security Software
- Digital Transformation
- Artificial Intelligence/Machine Learning
- Data warehouse / Business intelligence / Analytics.
This is because top-performing companies recognize that these projects remain invaluable in a downturn. They do more than just keep the lights, they keep your business growing and moving forward.
By comparison, projects like finding office space, some social programs, and purchasing new hardware can be cut or at least reduced, until your bottom line is shored up.
Pro:
Cutting vampire projects means you’ll free up funds to continue with projects that keep your channels safe, like security software, and for projects that help your business remain steadfast and even grow in a downturn, as with artificial intelligence.
Con:
Projects that don’t contribute to your bottom line may be hard to cut because they are usually passion projects. They are always the ones to get cut first, so they never get up and running.
5. Reevaluate your vendor relationships
Feeling the pinch in a recession is likely.
One way to relieve the pressure is to take a second look at your vendors–all of them.
If you look across the board–IT, marketing, legal, accounting, suppliers, etc.–you can assess which vendors are in the critical path of your revenue, and which ones will have the least impact should you need to cut them.
We can see the principle of keeping only top-performing vendors at work if we look at the current situation of bloated inventory levels retailers are dealing with due to the pandemic and a logistically overwhelmed supply chain.
Many retailers have cut back significantly on orders/vendors in order to get rid of overstock.
Bloomberg News reported that Walmart saw its inventory levels jump by almost one-third in the first quarter. So it cancelled billions of dollars in orders and slashed prices on items such as apparel. In the second quarter, it reduced the number of shipping containers by 50 percent to match stockpiles with demand, and its inventory growth slowed.
Walmart’s strategy was to right-size its inventory levels, keeping only top-performing vendors that budget-conscious consumers are still spending on.
So, by cutting ties with vendors that don’t drive bottom-line value:
Pros:
You’ll save costs by not spending on underperforming vendors–whether in product or service.
Cons:
Vendors may prioritize retailers other than you when you want to do business in the future.
Realistic cuts make you lean and profitable
With pressure to seriously trim budgets, executives may look to make cuts across the entire business which can negatively impact its value proposition.
However, if you make practical, levelheaded decisions, weighing the pros and cons as you go, your organization will be leaner and still perform, during and after the economic downshift.
Realistic ways you can reduce the cost of doing business include:
- Making opportunity buys
- Automating repetitive tasks
- Working backward from your end goals
- Cancelling non-profitable projects
- Hanging on to your best vendors
Taking some or all of these actions can move you in the right direction.
