Cost management in uncertain times: From stepchild to darling?

Practical implementation of active, transparent cost management was the central issue addressed during the 5th FACTON Congress on October 17 at the “Petersberg” near Bonn. Participants included representatives from leading German and international industrial enterprises. The discussions centered around one question: Companies are facing rising innovation pressure paired with shortened economic cycles. How can they survive in volatile markets under these increasingly difficult conditions? 

Potsdam, October 22, 2013. Above all, medium-sized businesses are confronted with enormous pressure from a number of different directions, commented former president of the German Automotive Association (VDA) and event sponsor, Prof. Bernd Gottschalk. Economic volatility is only one part of the equation; customers are also exerting pressure on these mid-sized companies. However, the current market situation is not the only source of stress. Extended payment terms, “quick savings” or “pay to play” are just a few of the pressure tactics used on a daily basis. Indeed, he added, today many companies are even expected to pay “entrance admission” in order to merely participate in the bidding process (“pay to quote”). This is why Gottschalk outlined the clear need for a new set of cultural norms within the value chain.

In the meantime, medium-sized businesses have little alternative but to concentrate on their cash flow. This is the only way to finance the innovations of the future, which will ultimately be the sole weapon businesses can use to battle steadily growing price pressure. Gottschalk noted that the key to accomplishing this goal lies in cost management: “Cost management is the most effective card businesses can play,” he said. “An existential question for companies in the future will be how they can achieve full transparency over costs and, consequently, a clear overview of the options available for reducing these costs.” This will be their only chance for conducting business effectively.

Automotive supplier MANN+HUMMEL identified this trend early on and responded by launching the FIT (Financial InTegration) project: Michael Distl, Vice President Finance & Controlling at MANN+HUMMEL, explained how his company harmonized its accounting activities throughout the entire enterprise, which had grown rapidly as a result of numerous acquisitions. In acquiring new subsidiaries, the company was also acquiring new data records and foreign structures. This is why they decided to standardize the databases and accounting processes and integrate them into a centralized, enterprise-wide IT system.

“Controllers are often viewed with skepticism by their colleagues. So their behavior has a powerful impact on whether employees participate in the process of continuous efficiency enhancement or not,” said Distl. “It is essential to check your own department first and determine whether your work can be more efficient, cost-effective and automated – all with as little expenditure as possible.” The FIT project was a complete success for MANN+HUMMEL.  Data redundancy is a thing of the past and now the company has ensured that all of its cost-relevant information is more precise and more rapidly available than before – in every department at every location around the globe.

Peter Muhr, President and CEO of Bühler Motor GmbH, also used the term “fit” in the evolutionary sense. He reminded attendees of how Darwin’s principle of the “survival of the fittest” translates in the business world: “The company that survives will not be the biggest in terms of size or revenue, but instead the company that is best able to adapt to its volatile environment.” In this sense, everyone at Bühler pays close attention to the impact of financial volatility on the veritable independence of banks; as a global corporation, Bühler counters forex risks with regional production sites and value chains. The family-owned business has had to respond to many changes in the market over its 150-year history, he added.

The key lies in results-oriented business management, a prerequisite of which is that all employees pursue the same goals. Muhr discussed how the company’s self-image and corporate guidelines were first defined at the executive level and then brought to all of the firm’s 1,600 employees in special workshops. “So everyone in the organization – from executives to assembly line workers – is aware of the influence he or she personally has on the company’s success,” emphasized Muhr. “If the goal is results-oriented business management, then the best way to get there is by implementing a cost management concept that gets everyone involved.”

Michael Suderow, Vice President Finance Automotive & Industrial at Weidmann Plastics Technology AG, also described a new way of thinking in the long term. He noted that the Swiss family-owned company had to change in many ways in order to respond to the automotive crisis, the development of the Swiss franc and the rising pressure of globalization, for instance. Among other things, they recognized that it doesn’t always make sense to blindly follow customers’ demands to produce goods on site overseas. If order volume is too low, it simply wouldn’t be profitable to build a plant abroad. Instead, Weidmann works with smaller trade partners who specialize exclusively in manufacturing. “Trade partners are more than just suppliers for us,” underscored Suderow. “They must meet our quality standards and can therefore be seen as an extension of our own corporate structure.”

Dr. Albert Neumann, CEO of Strategy Engineers GmbH & Co.KG, offered additional insight into the inner workings of these businesses. Neumann’s consulting firm understands the challenges that the automotive, supplier and transportation industries face along with other sectors involved in complex technical products. Neumann discussed how crucial it is to make product decisions that have a powerful influence on product profitability prior to defining concepts and setting goals. Thus, before companies begin producing a new product based on their customer’s specifications, it is essential for them to determine precisely whether that product will also meet consumer demands. In many cases, companies discover that their product characteristics are exaggerated and their specifications are overdone – all aspects that only serve to drive costs even higher. This occurs quite often, especially in the automotive industry.

Even more insight into the automotive sector was provided by Dr. Ing. Ralf Hofmann, CEO of Mieschke, Hofmann und Partner (MHP) GmbH: According to a survey conducted by the process and IT consulting firm MHP, around 89 percent of companies see cost management as an integral part of their corporate strategy. But over half of all respondents indicated that they lacked the processes and IT structures to even identify cost drivers. This corresponds to his experience in the field, the consultant reported: To this day, many customers are still working with a chaotic mix of Excel spreadsheets. “Businesses may be conscious of cost management, but they lack the ability to implement it in practice,” says Hofmann.

Alexander M. Swoboda and Axel Weese, Managing Directors at FACTON and organizers of the FACTON Congress, concluded the day with a positive summary of the event: “Our speakers made it very clear both from an internal and an external perspective that active, reliable cost management can be implemented in a practical way. This is also our message at FACTON, which is why we are working to ensure that cost management is no longer treated as a stepchild but will soon become businesses’ darling instead.”