Supple Chain Management Essay

Effective Long-Term Cost Reduction: A Strategic Perspective
By Michael D. Shields and S. Mark Young
Journal of Cost Management (Spring 1992): 16-30.

In the 1970’s cost reduction programs relied on the traditional method of simply cutting costs by eliminating jobs and thus reducing payroll. A traditional cost reduction program is usually triggered by an immediate threat to the organization such as poor performance, loss of contracts, or price reductions. Traditional programs tend to be short term in nature and often are ineffective in developing long term sustained change.
While these programs do reduce costs in the short run the associated reduction in the value of human assets sets the stage for potential long-term failure. The five traditional cost reduction programs typically used are:
THE TECHNOLOGY APPROACH
This approach focuses on replacing direct labor with technology to increase operating efficiency and to reduce the influence of unions. This approach is usually adopted or intensified after performance measures indicate poor performance. This approach has not worked in many companies especially those in which labor cost is a small percentage of total product cost.
LEAN AND MEAN
The Lean and Mean approach uses a tough policy to reduce the number of employees. A common approach is to employ across-the-board cuts through layoffs and reductions in pay and benefits. Lean and mean is not effective in long term, because it does not reduce the work that needs to be done to make and sell products.
OFFSHORE RETREAT
This approach relies on reducing costs by moving to locations such as Asia that offer the promise of lower labor costs. The success of this type of approach is often contingent upon how employees at home are treated and on the vagaries of exchange rates and currency fluctuations. Employee morale at home can be hurt if domestic or local employees are laid off when the firm moves jobs offshore.
MERGERS
Mergers purport to create economies of scale for the merging firms. The idea is to eliminate overlapping employees, products, plants and overhead. Problems arise, however, when the merging firms differ significantly on corporate culture, types of products and technologies. Those who remain in their jobs can suffer motivation and morale loss.
DIVERSIFICATION
Diversification into new industries is an approach that firms often used when they are searching for less

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