Sustainability is now Part of the Cost Reduction Toolbox

Sustainability is now Part of the Cost Reduction Toolbox

Your management team asked you to deliver more cost savings, but you believe that you have already considered all levers? Turn towards sustainability as an additional source of cost reduction….

 

  • Sustainable cost reduction entails more than material, procurement and operations savings.
  • CFO’s see sustainability as viable lever to achieve more savings and sustainable cost reduction.
  • Companies that understand how to tap into this additional potential, will stay ahead of the competition.

 

Given the uncertainty in the global economy and an increasing number of regional conflicts, many companies slowly but surely move towards a ‘pre-crisis’ mode. The financial crisis in 2008 and the subsequent volatility have taught many companies to ‘be ready’ for the next hit. Specifically in a crisis, a focus on reducing cost in products, supply chains and structures is a common way to secure cash and viability of the business.

As described in my book Sustainable Value Chain Management, the need for sustainable cost reductions is driven by an accelerated pace of global competition. While cost reduction objectives are not new in procurement and supply chain operations, they have moved to additional areas like product development, logistics and corporate risk management. The latest opportunities to reduce a company’s cost position are coming from an area, which is typically misinterpreted as a cost driver: Sustainability as a source of cost reduction.

Sustainable cost reduction entails trimming down cost along the entire product lifecycle and across the end-to-end value chain (ie. for designs, material, production, logistics, packaging, environmental management, returns, reuse, …) as well as for the so called ‘externalities’. Externalities are all factors that are related to a company’s value creation but do not show up on the balance sheet. Understanding how to tap into the potential for cost reductions from a sustainability perspective is an opportunity to stay ahead of the competition. My view that sustainability is the next area to drive cost reductions is supported by research studies and practitioner feedback, like the 2012 CFO Sustainability Survey from Deloitte. The study finds that, despite the fact that the involvement of CFOs in shaping the sustainability agenda differs from country to country, there is an increased involvement in many organisations.

Corporate leaders now start caring about overall energy management schemes, waste reduction, managing water risks, hedging against commodity price increases or simply finding cost savings from closed loop supply chains. Packaging is a great example here, where the initial cost to redesign and acquire reusable packaging are paying off mid-term. From an environmental perspective, returnable packaging promotes sustainability by reducing the amount of product dumped in landfills, while also decreasing the amount of raw materials needed to create packaging. For more details see Suzanne Heyn’s article on sustainable packaging cost reduction: Finding Cost Savings: It’s the Whole Package.

From a perspective of managing products and supply chains (ie. the value chain), sustainability aspects will be more dominant going forward, uncovering new opportunities. Some examples of these opportunities are:

  • To utilise tax incentives for more sustainable practices.
  • To change product designs to use more components from renewable sources, to reduce product cost.
  • To To consider the impact of externalities in ‘simulation mode’ and develop the required strategies to avoid/reduce their impact.
  • To develop and implement the strategies to manage risks and cost of non-compliance with new legal requirements.
  • To change the sourcing approach towards making sustainable products are prerequisite for doing business.
  • To develop new approaches to manage volatile commodity prices (hedging, substitution, etc.).
  • To assess the cost of retaining/building talent versus a hiring & firing philosophy.

The key to uncovering the full set of cost reduction opportunities is to understand your full cost position along the product lifecycle and the end-to-end value chain. Taking a sustainability perspective will bring the obvious, the new, the hidden and the unexpected opportunitities to the table. The future will be shaped by companies who are willing to lead in that space.

It is time to get started! We are available for support and guidance: You are invited to review our Sustainable Cost Reduction approach that delivers real results!

This post is also available in: German