Most companies today want to cut costs. As competition heats up and gross margins get squeezed, it’s natural to turn to cost-cutting to maintain a healthy bottom line.

The typical approach used to cut costs is the P&L line item approach. Basically, management reviews a recent financial statement and scrutinizes all the operating costs, line item by line item, for possible reductions. Unfortunately, this method may not produce the total results desired.

When it comes to cutting costs, it is critical to realize that the bulk of any company’s operating costs are a by-product of their business processes. To dramatically reduce costs, therefore, a company must re-engineer those processes.

The best way to think about re-engineering is to totally remove yourself from your day-to-day operations, giving up all ideas and preconceived notions about how your business is presently working. In essence, think of re-engineering as getting a brand new start. If you had it to do all over again, how would structure your business processes? Use these conceptual questions to get your thinking started :

1)Who should be my target customer?

2)What goods and services would I need to provide to best serve that target customer?

3)What would be the most efficient and profitable way to fulfill that customer’s needs?

4)If you could design the perfect business system, how would it work?

Edwards Deming, the father of Total Quality Management, gave us a very profound statement when he said that business is a system, and that we are getting exactly what our system is set up to deliver. To achieve significant cost reduction, you must change your business system.

For instance, let’s look at the example of dispatch routing systems. Very few companies want to tackle the job of re-engineering dispatch! (Dispatch appears to be the sacred cow of the petroleum and propane industries.   Ever heard a dispatcher explain his system with, “That’s how we’ve always done it?”) Too often, however, dispatching the way we’ve always done it costs us way too much money.

Let’s look at an example of dispatching a keep-full route. Here is how you would spot-check for system efficiency:

1)Randomly select five to ten regular keep-full customers that will be used in your spot-check.

2)From your computer system, get the following information for each account over a full one-year period:

tank size

date of delivery

gallons delivered.

3)Compute the customer’s gallons-per-day usage (number of days since last delivery divided by gallons delivered).

4)Based upon the customer’s tank size, compute the number of deliveries that should have been made in one year’s time.

5)Subtract the number of deliveries that should have been made from the actual number of deliveries.

6)Multiply the excess number of deliveries by your average delivery cost. (Use $50 per delivery if you don’t know your actual cost.) The result is the amount of money wasted on too-frequent deliveries.

Particularly with lube accounts, dispatchers often schedule weekly deliveries (because that’s easiest for the dispatcher) when 10 to 12 day schedules would adequately meet the customer’s product requirements. This translates to 20 extra, unnecessary loads per year. At $50 per load, this is $1,000 per customer. For a company with 50 keep-full customers, this waste costs $50,000 per year. With 100 customers, the waste is $100,000 per year, and so forth.

Please note that these excess costs due to the inefficiency of the dispatch system would not be found using the traditional line-item P&L approach to cost reduction. This is just one example of a six-figure unnecessary cost due to a typical, taken-for-granted business process. To eliminate significant costs in your company, you must re-engineer your processes!

Also note that re-engineering of any business process requires change, something very uncomfortable to our basic human instinct. The dispatcher in our example would likely balk at leaving his known and trusted once-per-week schedule. He would give the company lots of reasons why not to change the schedule — like the customer may run out if we don’t go once per week. (By the way, this is simply not true. You would know the customer’s usage cycle better now than ever before.)

Stay mindful that any time you re-engineer a business system, there will be outward signs of human discomfort as change is initiated. Very few people enjoy and embrace change. If, however, everyone knows why the change must occur, you will experience less grumbling through the change, better team spirit, and perhaps even a little humor when it’s needed most.

Make a list of every system within your business. Do a thorough check-up on each. Don’t leave out any systems — there should be no sacred cows! Next, for each and every process, determine at least one efficiency measure and then use random sampling to test your existing efficiency.   For example, time how long it takes to do a critical task, or measure how many errors are occurring. Don’t be afraid of the truth, even though it may be painful!

Finally, develop and reward a questioning attitude in your employees. Blind obedience may be attractive at times, but it won’t help you sharpen up your business and substantially increase your profits.

Every time you re-engineer a process, make a mental note that even the best processes should be upgraded every three years. Whenever you think you are through improving your process, think again! Highly successful companies know that process re-engineering should never stops. You just simply never get perfect, but you should never stop trying to get there.

PetroAnswers Cut Costs through Process Re-engineering