Article 26 – Growth is important but cost can make or break a company

by Tan Thiam Hock

I miss my roti canai breakfast at Raju’s. Big time. The breakfast menu in the dining hall has been unchanged since Day 1. The caterer must be operating on a small fixed cost in this business school. Since they charged astronomical school fees, the gross margin for this executive education course must be very lucrative. Education entrepreneurs… food for thought.

So on the 38th same-same food aroma day, I was having a breakfast chat with Ben, the COO of Alaskan Airlines. I showed him the Star ePaper report on MAS and AirAsia. He was amazed that the MAS trade union could influence our PM to intervene in a strictly commercial business issue. His dealings with his trade union nowadays revolves around the issue of keeping jobs and increasing productivity. With the American airline industry in shambles, their main concern is to stay afloat, conserve cash and no layoffs.

Every morning at work, Ben focuses on another four letter word. COST. With the low-cost Southwest Airline driving down air ticket prices, he has to keep driving his cost down so that profit stays up. Labour productivity goes up, plane downtime goes down. Layoffs down, trade union morale up. Load factor up, cost per passenger goes down. If only the turnaround specialist sent to MAS understands the ups and downs of this airline industry, he would have formulated a turnaround plan around a no brainer four letter word. If sales cannot go up, COST must come down.

OK, so I oversimplify a bit. I have assumed that political influence is non-existent in Malaysia and I do not care for the well-being of the unionised workers. As a manager, I have been guilty of building up cost based on growth forecasts that never did materialise. Growth years and good margins help to cover cost buildups and created inefficiencies. But when the well-being of the organisation is threatened with extinction, then you have to act fast and decisively to save as many jobs as possible. Like the Titanic, you have to put as many passengers as possible on the lifeboats before the inevitable happens.

Stephen, the Irish supply chain director of Coca-Cola Germany told me he had to close five plants and lay off 3,000 people some years back. So that he can save 10,000 jobs. The unions understood the necessity of doing the right thing and cooperated fully with the company, making sure those who lost their jobs were well looked after.

One of the professors described business as a cost centre looking for customers. High cost centres will have to look for high end customers who can afford to pay. If you are serving low end customers, then make sure you have a low cost structure. So in your business, what is you cost structure? High or low?

Most businesses tend to concentrate on top line sales and gross margins. During the good years, even the best managers tend to lose sight of the creeping costs. These are the sunshine moments. Then sales stagnate or worse still, it goes south. Clouds appear in the horizon, thunder and lightning lights up the sky. You need to cut costs. Where do you start?

Withdraw the perks? No Milo and Nescaf Bring your own. Only hot water available. Travel only when absolutely necessary. If you need to fly, wait for zero airfares offer by AirAsia. Just tell your customer, you will see him nine months from now. You have just taken forward planning to another level.

Off with the lights in the office. Go work by the window. You will get natural light. Since you are there, might as well open the windows since the aircond is off. Great place to search for inspiration. Did I not tell you that success is 99% perspiration?

When you have cut costs everywhere to the bone, you start looking at your most valuable resource. Your people. Sales have dropped 30%. Desperate times called for desperate measures. But your managers believe everyone in their own department silo is crucial. From his own personal driver to his PA (secretary is so unfashionable nowadays) to the tea lady to the three receptionists. No worries, he tells you. Sales will be back next quarter. This is cyclical.

Yup. With the economies of US and Japan going nowhere and Europe going to the toilet (as mentioned by a very famous Harvard professor), this downcycle might see more winters before you see sunshine. So, how do you forecast for the next five years? And guess what, even the famous Jack Welch himself just said, you can’t. He even said that incentives based on forecast budget is a negotiation between two fools! This is way too deep for me. You figure it out for yourself.

As for me, I will just sack the manager and keep the three receptionists. That’s why this manager is now back in business school trying to learn something new. Darn, while writing this article, I have missed breakfast again. No worries. At least I can look forward to the same-same delicious lunch. And it’s free.

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