Driving down costs by ‘coaxing’ voluntary behavior change
Anyone who survived the social pressure cooker of high school knows about the power of peer pressure. For supply chain professionals trying to drive down costs, the good news is that peer pressure can have the same impact in corporate corridors as it did in the blackboard jungle.
When Consumption behavior is the main cost driver
Supply Chain professionals know unit price is not always the most important cost factor. This is especially true for services where users’ consumption behavior can affect total cost more than the cost per item. Hotel rooms, car rentals and travel are all examples of spend areas where prudent usage is important.
For example, negotiating great discounts on corporate car rentals is a hollow victory, if employees opt for luxury cars when standard ones are available.
Similarly, negotiating a reduction in your travel agent’s booking fees, or a bulk rebate from an airline pale to insignificance when employees book at the last minute.
For these types of purchases, changing peers’ consumption behaviors is almost always more cost effective than squeezing suppliers’ for lower prices.
And the good news is that changing behaviors is not as difficult as you might think, especially if you let peer pressure do most of the work. The next few paragraphs explain how go about doing this.
It’s not that black or white
Most people will agree that changing consumption behavior is a great idea in theory,but not in practice. In fact, they argue, it can be counterproductive. Rigid policies can shackle employees and prevent them from seizing opportunities that easily outweigh any savings.
For example, the extra cost of a last-minute air ticket is more than justified if jumping on a plane means closing a deal that couldn’t wait. An upscale hotel with a great dining room can help solidify a relationship with an important customer, or build a new one with a prospect.
No argument: there are, indeed, many occasions when luxury hotels or expensive plane tickets make good business sense…..but this is simply not true all the time! It’s not that black or white.
In fact, ‘special circumstances’ that justify pricey purchases typically represent less than 15% of total usage. Peer-pressure savings do not come from forbidding high-priced purchases, but rather from encouraging prudent consumption whenever possible.
Easy to implement
Suppliers are a great resource here. Start by explaining you need their help, but instead of going after a price concession (which they are expecting), ask them to produce a simple monthly report that shows consumption by department. Most will be more than happy to comply. The example below for hotel rooms serves to illustrate.
Hotel Room cost Report for Q4, 2014
|Department||# hotel nights||$ spent||$/night|
Look for variation; then focus on driving down the average
Simple as the above chart is, the data in it reveals everything you need to know.
Look for variation in consumption behaviors (shades of Deming). For example, ‘Sales’ spends $107 per night on average, while Operations spends only $77; the company average is $108 per night..
What conclusions can we draw? Well, it’s a bit too simplistic to say Sales people pamper themselves and squander company money. It’s probably good for business to stay in higher-end hotels sometimes, especially if that’s where customers want to meet. Moreover, Sales people tend to make calls in large city centers where hotel rates are higher than in industrial areas, where Operations people usually work.
Your quarry is the $108 average.
Focus on driving that number down so everyone wins. Here’s how.
Set a corporate goal and circulate the report
With this data in hand, you can set a goal for the company average (say, $95 per night). Circulate a copy of the new report widely, publicize the goal, and then ask everyone for their help in achieving it.
Ask for ideas. Make a point of offering your own help to anyone who asks. Finish by stating you are confident that the goal will be met.
Then wait for the reaction. Some managers might be upset (especially those who run departments with high numbers). Calmly point out that everyone understands their numbers may be higher because of the nature of their work. There are no ‘bad guys’ only bad numbers.
Remind them that this company-wide initiative is aimed at lowering the average. Therefore, variation between departments is not the main issue. Pulling together in the same direction is what counts most.
Positive results usually come quickly
You will almost certainly be pleasantly surprised: within the first 2 months you should save about 10%. Some people call this first wave of savings “the measurement affect”: a somewhat mysterious phenomenon that occurs whenever you measure anything for the first time. And savings don’t stop there, of course. Another 10% is often available, but will require more effort. And savings beyond 20% are not unheard of.
Real-world example – Flight costs down 25%
Here’s a real-world example that illustrates the power of peer pressure to drive down costs.
I was head of Purchasing for a large food company spending more than $1.5 million a year on air travel. An edict came down to save 10% on SG&A costs, which meant letting people go, unless we could find ways of cutting back on outside expenses.
Travel was a high-cost area, but had always been a bit of a ‘sacred cow’. Asking that people ‘fly on the cheap’ was frowned by management. They felt (quite rightly) that traveling employees made personal sacrifices in terms of lost personal and family time. The least the company could do was make traveling as pleasant as possible (within limits). This meant no new rules about mandating weekend travel , ‘red-eye’ specials, non-direct flights, etc.
Enter Peer Pressure
We decided to try a peer pressure approach. We visited our travel agent and explained our 10% savings goal. To our surprise, the supplier’s reaction was enthusiastic. They said they knew of lots of ways to save money, especially with a little cooperation from our travelers.
We explained that the final purchase decision was always the traveler’s . We supplied them with a the key corridors we wanted to track closely and they agreed to provide (free of charge) a new travel report at the end of every month like the one shown below.
The next step was to make these reports visible to everyone. We began circulating them to all department heads.
Since no manager wanted to be seen as a poor performer, the high-cost department heads started asking their counterparts in low-cost departments, “How do you do it?” They also asked us in Purchasing what could be done, and we usually referred them to the travel agent who was only too happy to help.
The report had a second level that allowed managers to drill down within their own departments to see data on an employee level.
We were blown away by the results. The payback was exceptional. In six months, peer pressure cut more than 25% from the corporate travel budget. Importantly, general travel satisfaction did not suffer, and so management’s concern about employee morale was never an issue.
It was clear that people were quite willing to make reasonable adjustments to their travel-booking habits whenever they could, especially when the ‘fruits of their labor’ were made clearly visible.
Everyone came away a winner. Senior management was pleased with the savings. The travel agent was delighted to keep the business (at good margins). Lay-offs were avoided (which was huge for everyone). And, of course, the Purchasing department received most of the kudos.
A rising tide
Peer pressure can act like a rising tide. Applied properly, it creates a atmosphere where voluntary, prudent consumption is the norm, raising all boats. Most people are actually happy to participate because they feel good about contributing to the greater whole.
The good news is that it doesn’t take much to bring peer pressure to bear. Make costs visible in a way that clearly shows variation and progress, which in turn, encourages healthy inter-departmental competition, which quickly spreads best practices and attendant savings.