by Bill Pierce

In today's globally competitive organisations, direct labour often forms the smaller portion of total costs. Yet when faced with a volatile currency market and profit slumps many industries, particularly those in the manufacturing sector, are dropping the axe on the workforce - a traditional solution to cutting costs.

Whether this is the best solution in what promises to be a consistently changing world, is highly debatable. Three vital questions should be put to management prior to drastic decisions. These include:

• What have you done to eliminate waste?
• What steps were taken to cut variation?
• How is the company's supply chain being optimised?

A well thought-out answer to these questions would suggest there are alternative solutions to cost cutting, making unnecessary lay-offs a last resort. The Japanese are undisputed leaders when it comes to applying management principles focused on eliminating waste, reducing variation and optimising the supply chain. Such principles include the widely successful practice of total quality management, total preventative maintenance and 5S, a housekeeping concept.

The Japanese word for waste, muda, defines waste as any activity that absorbs resources but creates no value. While organisations have focused, to a large extent, on the external supply chain, it is just as important to consider the internal supply chain. Eliminating waste and reducing variation can optimise any organisation’s internal processes.

Whether processes are conversion-based, producing a new output, or transactional - where output is not very different from input - continuous application of best practices in waste reduction can bring substantial cost savings. Typically, implementing best practices and waste reduction can result in sustained cost savings of more than 20% of operational costs.

Japanese founder of the Toyota Production System, Taiichi Ohno, identified seven major wastes. Included in these are overproduction; inventory (excessive raw material or work in progress); and processing (using excessive capacity or energy without adding value). Two key factors are attributed to waste creation: any irregularity or variation, and anything that burdens the capacity of people or machines beyond their limits, thereby creating breakdowns.

There are today several management methodologies that can be used to tackle variation and eliminate waste. Yet the application of one of them, best practices, can be institutionalised by any organisation, with immediate effect.

Basic best practices in areas such as teamwork, visual performance management (setting targets for people to manage themselves), 5S (maintaining an orderly, controllable work environment) and focused improvement (identifying major wastes and training people in problem-solving processes) have been proven to bring sustainable reduced costs, by creating optimal internal supply chains and improved people performance, which all ultimately leads to more competitiveness.

While best practices implementation is a lifelong process, management would do well to start with a thorough evaluation of waste-reducing best practices, as a viable alternative solution to unnecessary and disruptive job loss.

Bill Pierce is Competitive Capabilities International 's (CCI's) Managing Director for Africa and this article is used with permission from CCI Australia.