Costs which do not add value to customers and which are not noticed by companies are characterized as “bad costs”. There are very few companies which have identified this kind of cost and got rid of them. Successful examples in the world include Nokia, Nucor, Wal-Mart and Zara. In Turkey companies such as Efes Pilsen, Eti, Vestel and Henkel have succeeded in saving themselves from costs which do not contribute anything and moved one step ahead in the competition.
In fact, to date, the first reaction of companies to a crisis has been to look to cut costs. But management experts say that they should be more careful. Because cuts in “good costs” which provide customers with value and meet their needs can result in long-term losses for companies. Instead, companies would identify “bad costs” and it will be more useful in the long-term to get rid of them.
Ken Favaro, who is one of the partners in the management consulting company Marakon, agrees. Favaro came to prominence as a result of the book “The Three Tensions”, which he co-authored with Dominic Dodd, and believes that it is important for companies to classify their costs. He says that, when they are making the classifications, companies can easily identify bad costs and get rid of them.
Bad Costs Should Be At Zero Level
So, even if it is difficult, how can bad costs be identified? Experts say that it is useful if companies first define what would be a bad cost from their own perspective. Ken Favaro notes that even the best managed companies have numerous bad costs and adds: “Let’s take as an example Starbucks, which has recently been experiencing problems. Bad costs at this company could perhaps be allocating more seating space than necessary to customers who come for a takeaway service or having longer than necessary opening hours in certain local markets. In addition to this, allocating too much space in stores to accessories that only a small number of customers buy is unnecessary and an unbeneficial cost.”
Algoritma Consulting Founder Ali Özgenç defines bad costs as costs which do not create value for customers. He notes that the best methodology to use in order to get rid of such costs is “value innovation”.
How Are Bad Costs Identified?
Some companies in Turkey have begun to implement cost controls independently of the crisis. One of the most striking examples is Efes Pilsen.
The company began to produce its own malt, which is one of the largest items in beer production, and succeeded in ensuring that it was not affected by fluctuations in global malt prices. Vestel concentrated in particular on cutting energy costs and is another example of a company which forwarded the extra revenue it acquired as a result to customers. Vestel Companies Group Board Chairman Omer Yüngül says that, because they had equipped their factories with the latest technology, they used less electricity and natural resources than factories which manufactured using old technology. “As a result, we are able to offer our products to customers at more economical prices,” says Yüngül, noting that Vestel’s consumer products reached customers through a single service channel and that they had increased customer satisfaction.
Does Getting Rid Of Them Provide Any Benefits?
Eti keeps its bad costs under control through a “Total Productivity Management” system, which it has been applying for the last seven years. As a result of applying this system, the company has saved nearly €37 million over the last seven years. Eti Procurement Chain Group President Basri Akçasoy says that, as a result of their efforts, they have introduced approximately 24,000 improvements in production. He says that the proposals related to improving productivity have increased 18 fold.
Productivity Systems Are Beneficial
Since 2006, Yeşim Tekstil has been applying a “Lean Production and Management System”. The company’s CEO Şenol Şankaya says that profit margins in the sector have declined to around 4 percent. He notes that, for this reason, every unbeneficial cost in the company reduces the profit margin.
YKM has rid itself of unbeneficial costs through the “Customer-Focused Restructuring” programme it introduced in 2007. YKM General Manager Jaklin Güner says that, as a result of this programme, they have realised significant improvements in the redesign of their business processes.
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