Mike Dedunovich – the founder of Infinium and BelTransSat explains – after implementing the so-called Cost Management Systems, a manager may ask the question: “Where is the promised management from the system? Why again should I guess what to do and bear all the risks?”
In order not to be deceived, let’s figure it out: what in the promises of such “automators” is a trick, and what is the truth?
A typical example of a manager’s transition from “I trust employees” through “automation of cost accounting” to “automation of cost management.”
Typically, the first step toward automation is for departments to start using systems to track their work and costs. Sellers use a CRM to record activities with clients, production workers use ERP to keep track of materials and products, and financiers use an accounting program to reduce costs and monitor how funds are spent.
The next step is to combine these modules into the Enterprise Management System. And at this stage a play on words arises. After all, they, in fact, remain systems for recording costs of all types: from employee working time to the purchase of spare parts. On what basis does the term “management” appear? The only thing is that this is the manager’s desk. It’s like the instruments in the cockpit. But he still controls it manually.
Further – more. Programmers propose to modernize the system to make it a Cost Management System. But, as a rule, it is based on grouping costs into different items and calculating costs. And nothing more. How can you find out where the risk-free reserves are? What is their size? How to extract them?
What happens in real business when using such a system? The director received in January a detailed report on expenses and income for the past year. I looked at this and thought: what can be done to increase income? Well, it’s clear: either reduce costs or raise prices. How to do this without risks? He looks and looks at this picture – what to do? After all, he is not Baba Vanga. How can he predict what will happen under this or that managerial pressure on the enterprise in order to reduce costs? He tries to “fall through” into the deep sections of the system. But there is no answer there either: there are a lot of numbers, but no recommendations.
And then the director begins to act in a way proven in the 1990s: he calls the head of supply and says: “Spin as you want, and so that in the new year all purchases become 2% cheaper”.
The supply manager timidly objects: “Yes, we have been pitting suppliers against each other for many years, blackmailing them and threatening to go to their competitors! We have now reached the very bottom of prices.”
Director: “I don’t want to listen to this. Tell your wife how you struggle at work. In short: if you reduce the prices of all purchases by 2%, you will receive a bonus. If you don’t demote me, I’ll replace you with a more effective manager”.
Such a boss leaves the director’s office and, cursing, goes to his department. Then the director calls all the heads of services in turn and sets them exactly the same tasks.
What should service chiefs do? They decide for themselves: “Well, after all, this is not my enterprise. Since the director has decided so, I will reduce costs at any cost”.
And the replacement of suppliers of more or less reliable equipment with anyhow, but cheaper, begins. Replacing reliable and high-quality contractors with any kind, but cheaper.
There have been purchases of cheap paper, which causes printers to break down, purchases of cheap spare parts, which lead to more repairs and downtime, experienced employees leaving, and reliable contractors being replaced anyhow. But this is no longer the purchasing manager’s problem. This is a headache for other services.
As a result of such actions, a sustainable business begins to rock. “Effective managers” are changing. The task of each next one is to show greater savings and receive a bonus from the owner or director. And they are no longer interested in the future of the company.
Does it sound familiar?
That is why all contractors receive blackmail calls from customer representatives at the beginning of the year: “Reduce your prices even more! Otherwise we will leave.” Quality suppliers are pointing fingers at their temples. And they either refuse to cooperate or reduce the quality of service. And what ultimately suffers is the business of the director, who decided to reduce costs based on figures from the so-called Cost Management System.
In the early 2010s, one Belarusian company supplied German support bearings to the domestic car assembly line for 230 euros. After the annual demands of the plant’s commercial director for a further reduction in price, they reached a price of 180 euros, then there are no German options. And the customer calls again next year: reduce the price. I had to turn to the Chinese. And the price became 120 euros. But a year later the customer again demands: reduce the price. What to do, they are going to China for negotiations. The Chinese listened to them and said: “What’s the problem? We will give the price and 100 euros.” Our people can’t believe their ears: really? And just in case they ask: “Can you do 80?” Those: “We can. And we can do it for 60 euros. Only they will fall apart in a month…”
Therefore, many experienced directors try not to touch the compressed level of costs at all. Otherwise, you can ruin your business, which you have been creating all your life.
Where is the truth? Should we put pressure on costs or not? She is, as always, in the middle. We need to put pressure on costs. But not on a common front, but only where the “X-ray” showed and proved the presence of specific reserves.
Common sense tells us: only those systems that find objective cost reserves and show how to reduce them without risks justify the title of Cost Management Systems.
Better yet, such systems help manage risks: they calculate what your company will pay for reducing costs above the risk-free level. And they helped balance on the risk-benefit line.
Unfortunately, such systems are rare today. And that’s why.
How can you find out exactly where the reserves are in your company and what their value is? This is only possible in systems that contain Big Data of the work of your entire industry; can find common signs of successful actions of employees of thousands of companies; train artificial intelligence on them to show you where the reserves are in your company and what their size is.
That is, this can be done by comparing the work of your services with the work of your industry colleagues under comparable conditions. If many were able to do this work cheaper and nothing collapsed for them, then you also have a reserve in this process. This way you will get answers to the questions: is it possible to work better? by how much exactly and due to what?
In other words, you are sitting at a table. Think of the table level as your historical cost level. You can try to press with your hand on the table top – it is impossible to lower it. If you increase the pressure, you can simply break your normally functioning business. Therefore, it seems impossible to do anything about the costs without taking risks.
However, if you X-ray the costs, you will see that they, like a honey cake, consist of many layers. And each layer has a first and last name. And if you compare each of your layers with artificial intelligence with the Big Data of your industry, objectively evaluate and motivate people to improve, replacing those who do not want to improve with employees filtered at the entrance, your overall cost level will begin to slowly sag without pressure. And without the risk of business disruption.
However, positive news appeared in Belarus: our IT specialists developed and implemented the first examples of such systems.
To begin with, the creators of the “industry mind” paid attention to the logistics of goods distribution – TMS LOGIMUS and road transport – OPTIDRIVING. Because delivery logistics, field service and freight transportation are present in almost every business. The actual cost reduction achieved by the implementing Belarusian companies was in the range of 5%–80%. At the same time, a significant effect was obtained in private and state-owned companies companies both.
Each manager will have to decide whether to supplement their ERP accounting system with these tools. Today there is a race going on in the world: who will implement artificial intelligence into their processes faster and more efficiently? Because these innovations allow you to win not by force (maximum investment), but by intelligence (not expensive machine intelligence).
This will help maintain the “place in the sun” that the company has been winning throughout its life.
