Improving the System to Reduce Costs Isn’t Equal to Cost Cutting

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By John Hunter, author of Management Matters: Building Enterprise Capability.

Real benefits come when managers begin to understand the profound difference between “cost cutting” and “eliminating the causes of costs.”

Brian Joiner in Fourth Generation Management

Cutting costs by fiat via executive orders reduces the capability of the organization. Those costs are often born by customers. In the short term reducing costs in such a manner improves the financial statements. In the long run those cost reductions harm the companies ability to innovate, improve and delight customers.

If instead we create a continual improvement capability and culture in the organization we will make improvements that in turn reduce costs (the Deming chain reaction). Those costs will be cut based on what improvements are made not based on some arbitrary target or mandate. It might be certain costs go up but other costs decrease much more and so the organization as a whole wins.

As W. Edwards Deming said in this interview with Bill Scherkenbach

Minimizing costs in one place can often lead to maximizing costs in another. Only management is responsible, and I mean top management, for looking at the company as a whole, to minimize total cost and not the cost here or there or there… must get departments to work together. That is difficult in the face of the annual rating… because they get rated on their own performance.

Related: Minimize Total CostTyranny of the Prevailing Style of ManagementPeople: Team Members or Costs

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