In the current economic climate, entrepreneurs are grappling with a myriad of challenges, including inefficient production and manufacturing processes, high manufacturing costs, lack of control over labor efficiency and costs, inadequate control over production quality, and suboptimal cost management.

To address these challenges and navigate through difficult times, entrepreneurs can adopt a range of strategies and tips to optimize their business costs and boost efficiency.

Perform Cost Analysis of Business

When analyzing their costs, entrepreneurs need to carefully consider four key components, the first of which is raw material. It’s important for entrepreneurs to not overlook critical factors such as whether there are alternative vendors for sourcing materials, strategies for enhancing product quality, and methods for reducing costs. Particularly during challenging economic periods, entrepreneurs should consistently negotiate with their vendors to secure favorable raw material costs and work with suppliers to identify opportunities for cost reduction. Implementing measures such as sourcing raw materials strategically, optimizing economic order quantities, and engaging in ongoing negotiations can effectively decrease the costs associated with raw materials and the bill of materials (BOM) consumption.

When it comes to managing labour costs, the key is not just to reduce the number of workers, but to focus on optimizing their productivity and efficiency. Instead of simply cutting the number of workers from 100 to 90, consider implementing the following strategies:

• Find ways to increase the productivity of your existing workforce.
• Explore the possibility of shifting workers to alternate or new products or tasks.
• Look for ways to reduce the per-unit labour cost through efficiency improvements or process optimization.

Variable costs are expenses that fluctuate with the level of production or sales. These costs include utility expenses such as electricity, freight, and fuel charges.

Ways to manage variable costs effectively:

1. Reducing electricity bill by implementing energy-saving measures, such as using energy-efficient appliances and optimizing the use of lighting and equipment
2. Decreasing fuel costs related to diesel generators by improving their efficiency through regular maintenance, proper tuning, and using high-quality fuel.
3. Optimizing freight costs by negotiating with carriers, consolidating shipments, and utilizing cost-effective shipping methods.

Indirect costs encompass the expenses associated with maintaining and managing existing inventory. These expenses may include storage costs, insurance, and other overhead expenses related to inventory management.

Get Prepared to Tackle Difficult Times

In light of the unprecedented challenges posed by the COVID-19 pandemic, it is crucial for both business owners and employees to recognize the severity of the situation. The impact of the pandemic has been historic, and as the lockdown measures begin to ease, businesses are likely to face further obstacles.

The upcoming months are expected to present significant financial hurdles, with businesses experiencing reduced profitability due to prolonged periods of no sales. Despite this, operational expenses are unlikely to decrease. The government’s directive to continue paying employee salaries on humanitarian grounds further adds to the financial strain. Additionally, fixed expenses, such as loan repayments and rent obligations, persist even if business operations are temporarily halted.

To navigate the challenges ahead, it is imperative for business owners and employees to utilize the lockdown period effectively. This includes devising comprehensive strategies to reverse the current losses, formulating plans to drive sales and enhance profitability, and developing robust recovery plans for the future.

As business owners navigate the path to increased profitability and recovery from losses, they should consider implementing a range of strategies, including:

1. Streamlining operational costs by identifying and eliminating inefficiencies.
2. Enhancing production and marketing efforts to maximize output and reach target audiences more effectively.
3. Optimizing inventory size to reduce overhead and minimize carrying costs.
4. Maximizing labor utilization by implementing efficient scheduling and task allocation.
5. Introducing new technologies to improve processes, reduce costs, and enhance overall competitiveness.
6. Exploring the possibility of diversifying or expanding the business to tap into new revenue streams.

In order to support the business’s recovery, every employee can contribute by:

1. Being willing to work additional hours to aid in the recovery process.
2. Considering extended shifts, such as working 12 hours instead of the standard 8, to help meet production or service demands.
3. Being open to contributing additional time without expectation of overtime pay, where feasible and agreed upon.
4. Providing valuable suggestions and insights to help reduce material costs and improve operational efficiency.

During challenging periods, it’s important for business owners and their employees to take proactive steps to maintain high morale. To boost morale, it’s crucial to create a positive environment by focusing on the good and avoiding dwelling on negative aspects. Additionally, individuals should actively work on maintaining a positive mindset and belief in their abilities to overcome obstacles and emerge stronger.

As a business owner, it’s crucial to have a backup plan in place to handle unexpected challenges if your primary plan falls through. Being prepared with an alternate plan is essential because once a crisis hits, there won’t be much time to come up with a solution.

Even if Plan B is not as profitable as Plan A, it’s still better than the alternative of watching your business fail. Having a contingency plan can help minimize losses and potentially save your business from collapsing.

During a lockdown or crisis situation, it’s important to maintain open lines of communication with your staff. Utilize video conferencing to regularly talk to your sales, production, marketing, and finance teams. Discuss post-crisis plans with key personnel in your company and develop an annual recovery plan to navigate through difficult times.

To ensure the successful execution of your contingency plan, make a strategy that focuses on efficiency. Utilize this time to make future planning for your company and make the best use of available resources.

Technology

Incorporate Enterprise Resource Planning (ERP) into your business operations to effectively manage various aspects of your organization, including:

• Inventory management
• Consumption and Bill of Materials (BOM) tracking
• Financial management
• Production planning and control

For small-scale industries, Tally ERP package is a suitable option, while larger companies can benefit from implementing SAP or BAAN systems.

Avoid Forward Purchase

It’s important to be cautious when considering forward purchase contracts, as they may not always lead to profitability. Suppliers often adjust prices based on demand and supply, and international commodity prices are heavily influenced by the fluctuating oil prices, which have reached unprecedented lows due to the Coronavirus crisis.

When entering into a forward purchase agreement, there are several risks to consider:

• It requires a significant upfront investment.
• There’s a high level of risk involved, similar to forward shares.
• It can feel like a gamble with uncertain outcomes.

Instead of taking on this uncertainty, consider the following alternatives:

• Focus on strengthening and expanding your core business operations.
• Engage in negotiations with suppliers to lower your raw material costs.
• Explore the possibility of entering into long-term contracts that offer reduced pricing and stability.

Be Updated with Latest Market Trends

To stay ahead in today’s competitive business environment, it’s crucial to remain well-informed about the latest market trends. Whether you’re leading a mid-sized company or managing a team, it’s essential to keep your organization updated with the most recent developments in your industry.

One way to achieve this is by encouraging your leadership and management to regularly monitor business interests by subscribing to industry-specific journals and attending relevant seminars. These platforms provide valuable insights and the most up-to-date information about your industry, helping you make informed decisions and stay ahead of the competition.

Reduce Cost of Production, Not Quality

It’s important to keep in mind that reducing the cost of production should not come at the expense of the quality of the product. Maintaining high quality while cutting costs is essential.

In competitive industries, some companies make the mistake of compromising on quality in order to lower their costs. This often involves using inferior components or lower quality raw materials to reduce expenses.

For instance, let’s consider two individuals, A and B, producing the same product. Person A manages to produce the product at a cost of Rs 100, while person B’s cost is Rs 110. If person B decides to reduce the cost of the product to Rs 100 to compete with person A, it’s likely that the quality of the product will be compromised, as person B may not have the capability to produce the same product at the lower cost while maintaining the original level of quality.

Optimise Logistics Cost

To effectively optimize your logistics costs, it is crucial to consider several key factors. First, assess the time available for movement. This includes evaluating the urgency of delivery and potential bottlenecks in the supply chain.

Next, prioritize the safety of your products during transportation. Assess whether the current methods are leading to any damage and explore ways to minimize potential mishandling.

Furthermore, it’s essential to strategize how to optimize time efficiency while also maintaining product quality during movement. This may involve streamlining processes and utilizing appropriate handling and storage methods.

In addition, it’s important to scrutinize costing elements that may not be essential. To achieve this, consider the following steps:

1. Avoid making cost decisions solely based on previous years’ data. Market conditions and transportation costs can fluctuate, so it’s important to reassess regularly.

2. Conduct an annual review by seeking quotations from various logistics service providers. This allows you to stay updated on the prevailing rates and assess potential cost-saving opportunities.

3. Thoroughly analyze the current transportation rates in the market to ensure that you are getting the best value for your logistics expenditure.

4. Explore potential discounts or incentives that can be negotiated based on the volume of business offered to the transporters. Building strong partnerships with reliable transporters can lead to cost advantages and improved service.

By carefully considering these factors and implementing the suggested steps, you can effectively optimize your logistics costs while maintaining the quality and efficiency of your operations.