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That airline example makes a good analogy, for similar dynamics apply to almost every major expense in business. Business expenses can vary in price as much as those airline tickets. In business, where profit margins often range between 5% and 10%, cost discipline can be the difference between succeeding and failing. In fact, the degree of cost discipline exercised often determines the level of a business' success -- whether that means going broke, struggling to survive, or prospering and growing into an empire.
What is cost discipline? Cost discipline is developing an integrated approach to searching out low prices, scrutinizing those prices, negotiating for even lower prices, and eliminating unnecessary costs. That contrasts with taking a path-of-least-resistance approach and just accepting prices initially quoted by a supplier.
Cost discipline can be applied to almost any expense. For example, a person can go out and spend $1,000 on office furniture. Or, he or she can search out a furniture discount store and spend $500 on the same furniture. A person can go out and spend $15,000 on a computer system. Or, he or she can search around and find a sufficient used computer system for $3,500. A person can pay $5,000 to have an office moved to a new city. Or, he or she can hire a couple of handymen to move that office for $2,000. A person can spend $75 at a high-priced office supply store. Or, he or she can spend $40 at a discount store. A person can simply accept standard quotes from suppliers, or he or she can spend a few minutes discussing the need to receive that supplier's most competitive quotes in order to assure steady, repeat business.
Cost discipline, however, must be integrated to be effective. A person should not push suppliers to the point where it is not worthwhile for those suppliers to deal with one's business. But, a serious, rational approach to cost discipline will always pay off. For example, a person should always explain to a supplier how his company needs that supplier's most competitive, commercial rate in order to continue business with that supplier and to expand business with that supplier. Then, one should request that supplier to break down quotations into individual cost components for review. Most suppliers will then work with a business, instead of against that business, trying to figure out how to reduce costs.
The technique of breaking down and analyzing each cost component making up a quotation can be particularly effective. For example, Neo-Tech Publishing must purchase millions of envelopes each year. Thus, Neo-Tech had its envelope manufacturer break down its pricing quote into specific charges -- e.g., paper costs, press costs, set-up costs. Then, Neo-Tech's manager analyzed and negotiated each individual cost component to arrive at the best rate. Maybe the cost of paper has recently gone down so that cost can be lowered. Or, maybe a less expensive type of paper can be used. Maybe a different printing process will require less press time, and thus the press cost can be reduced. Maybe orders from other customers who are using the same type envelope can be combined to reduce set-up costs, and so on.
Cost discipline requires scrutinizing and negotiating. A manager can just accept a standard rate from a supplier, or he can explain to a supplier the importance of receiving that supplier's most competitive rates. That manager can explain how such rates will then enable his business to scale up orders with that supplier. A manager should also request that a supplier break down all of the individual component costs that make up a price quotation in order to see where specific costs can be reduced. This may lead to using a different type of raw material, a different manufacturing process, combining orders from other customers to receive quantity discounts, and so on. Once a supplier is aware of how cost-conscious a customer is, that supplier will often come up with effective suggestions of his own that can save enormous amounts of money over time. By lowering an ongoing operating cost even fractionally, whole new realms of business opportunity can be opened up -- sometimes making the difference between a business earning a profit and prospering, or that business losing money and failing.
Exerting constant cost discipline is simply good economic theory. Since there are limited resources in the economy at any given time, those who exert the discipline to make the maximum use of resources will end up controlling those resources. They will be the controllers of money and business.
Over time, as old employees leave, as new employees are hired, as a company expands, cost discipline must continuously be drilled into workers. Most new employees will not recognize the significance of cost discipline to the long-range success or failure of a company, especially in an already prosperous company. But, the idea of cost discipline must never fade from the front lines. Once a business becomes successful in an area, the tendency is to feel satisfied with that smooth-running area and to turn attention to new challenges. However, when everything is going smoothly, that is the time to reshuffle the deck and come back in with tough cost discipline. Otherwise, a long-term erosion of a company's bottom line will begin. Without exerting ever-vigilant cost discipline, expenses will gradually creep upward. The opportunity to move into new realms of business will be lost if costs edge up too high. Profit margins for vulnerable, test projects will be wiped out. Complacency with a smooth-running operation versus exerting constant cost discipline can make the difference several years hence between a business beginning a slow decline, or that business pushing into new directions and eventually growing into an empire.
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