- May 12, 2013
- Posted by: Javier González Montané
- Category: Cost reduction, Turnaround
Products, customers and offices unprofitable must be identified and make profitably or we should take the decision to remove them. Many times it is assumed that facilities network are a strategic long-term decision, so it is not reviewed the strategic convenience of those investments approved for top management any time ago. Thus, we are going to review some of the commonest strategic and financial reasons argued to open/maintain subsidiaries opened.
We must be aware that in the last few years many things relating communications have changed a lot. For instance, traveling costs are cheaper because we have low-cost airlines, communication costs are cheaper because there are communications base on Internet, companies have adopted widely conference-calls as a cheap and reliable communication way, virtual offices with sharing meeting rooms and other services are in place, teleworking can avoid investing in an office, and so on. Moreover, dot com firms have showed us that is possible to compete in many industries with a much less footprint those traditional companies.
So let’s go to analyze those often strategic reasons for opening/maintaining facilities:
“Being close to customers was going to facilitate customer acquisition and/or retention.”
- If we analyze our value proposition, we used to ask ourselves: What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? Why do customers turn to one company over another? (Alexander Osterwalder & Yves Pigneur 2010) But having a new office is not a likely question.
- If we analyze our customer relationship approaches: Personal assistance; Dedicated Personal Assistance; self-Service; Automated Services; Communities; Co-creation (Alexander Osterwalder & Yves Pigneur 2010). Even the personal assistance relationships not necessary must be built from the same location. In personal assistant is more important the person than the location.
“Being close to customer means offering better services.”
Nowadays, we have access to motorways, higher fly frequency, service logistics operators that deliver in 24 hours or fewer from central distribution centers, etc. This means that today we could offer a similar service level from a central location than from a local one.
Many times is hard to recognize that managing subsidiaries is a very tough task for our organization. So outsourcing that distribution center or for instance using a dealer could be more profitable at the same time that we could be able to improve service levels. Although that means having the humility to recognize that someone can do a better job than us.
“Cost of doing business is reduced because traveling costs are reduced.”
We must analyze the traveling cost avoided versus cost to have a facility:
- Obvious office related costs: Costs for rent, electricity, water, communications, insurance, cleaning, security, taxes, and so on.
- Office staff related costs: Salaries, office furniture, telephones, computers, software licenses, company cars, petrol, traveling costs to headquarter meetings, etc.
- Office/Warehouse improving costs: Human being used to try to improve things. So because we have a new facility, we can take advantage of that and we could think that we could build some stock. So because we have some stock, we need racks. So because we have some stock, we need a forklift. So because we have a forklift, we need a warehouse man, etc. I mean once that we have a new facility we open the door to many initial unexpected costs.
- Control costs: ERP customization to control that office, traveling to audit and support the office staff, etc.
- Productivity costs: Many small offices have less access to resources, training, control, etc.
- Complexity costs: Sometimes subsidiaries argue that local suppliers are better than corporate ones. That practice reduces cost saving of using corporate suppliers.
I am not suggesting that having more than one facility is wrong. What I am trying to suggest is that in turnaround is very important to review the real need of current offices or even the appropriate decision to open a new one. Subsidiaries can affect massively in company profitability.