Companies should make cost leadership their primary focus

5 October 2012

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5 October 2012 | Anna Reynolds

Companies should make managing costs their primary strategy and purchasing their main priority.

Speaking at the CIPS Annual Conference 2012, Ed Ainsworth, managing director of 4C Associates advised businesses: “Make cost leadership your primary strategy and procurement your key driver.”

He said FTSE100 companies that have implemented effective cost leadership strategies outperform their competitiors. He cited Ryanair, Whitbread and construction supplier CRH are among the current leaders in this. CRH has been the fastest growing company in the past six months, due to its cost reduction programme that began in 2007 saving £2 billion.

Ainsworth recommended companies communicate their plans to become a cost leader with their supply base and ensure suppliers are on board too. He stressed the importance of suppliers taking costs out of their own supply chain by replacing expensive products with cheaper, more generic ones.

“Suppliers have to prove they are lean and this requires frequent discussions with them about the types of innovations they can implement,” he added.

Using the example of Ryanair, Ainsworth addressed how the company has changed the relationship of the supplier and customer, with airports now paying Ryanair to receive its passengers. Further cost reductions through eliminating check-in desks has driven down staff numbers and making aircraft doors wider allows passengers to exit and board the plane quicker, making time for extra flights to take off.

Ainsworth said: “Companies need to think how they can apply Ryanair thinking into their own businesses and become a cost leader.”

Another leader, Premier Inn, owned by Whitbread, is one of the fastest growing hotel chain, which Ainsworth puts down to its “thought-through cost model” whereby the hotel’s automated service means low staff and low cost. Similarly with Whitbread’s Costa Coffee chain, the stores and coffee cups are smaller than its competitor Starbucks, and Costa has a higher turnover.

Ainsworth said businesses must understand their company strategy and know how they compare to competitors in terms of input and output cost. He also advised communicating targets early to achieve value quickly.

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