Why Do Cost Reduction Programs Fail?

A Chief Procurement Officer (CPO) recently asked me what typically leads to the failure of cost reduction programs, especially those that involve supplier suggestions for optimized design or services.

In training buyers on commodity leadership, we often cite the article “75% of Cross-Functional Teams Are Dysfunctional” by Behnam Tabrizi (June 23, 2015). This article offers crucial insights into how purchasing organizations can effectively coordinate cost reduction activities across various functions such as sales, engineering, and operations.

Understanding the Challenge

The article by Tabrizi underscores a significant issue: most cross-functional teams fail to meet their objectives due to unclear governance, lack of accountability, and misaligned goals.

With 75% of these teams found to be dysfunctional, it’s evident that traditional methods of team management and project execution often fall short in today’s dynamic business environment.

Tabrizi’s definition of a dysfunctional team is that they fail on at least three of five criteria:

  1. Meeting a planned budget
  2. Staying on schedule
  3. Adhering to specifications
  4. Meeting customer expectations; and/or,
  5. Maintaining alignment with the company’s corporate goals.

The Role of Governance Teams

While Tabrizi notes that 75% of teams fail, he also highlights that projects with strong governance support — either by a higher-level cross-functional team or a single high-level executive champion — had a 76% success rate.

Those with only moderate governance support had a 19% success rate. For purchasing and cost reduction, the attributes that create strong governance and high success rates include:

1. Establish a Governance Team with Cross-functional Representation

Material cost reduction is a collaborative effort. Vice presidents from engineering, sales, and operations should have accountable leaders responsible for delivering results aligned with the overarching cost reduction goals. Ideally, the governance team should meet monthly.

These meetings need not be in-depth; rather, buyers and cost reduction teams should provide brief updates on their projects, highlighting successes and identifying support needed to overcome obstacles.

Example: A manufacturing company formed a governance team with VPs from key departments and held monthly updates. This led to a 30% increase in cost-saving initiatives completed on time.
[source: Liker, J. K. (2004). The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. McGraw-Hill.]

2. Define Specific Value-Based Goals and Metrics

Too often, only the purchasing function is measured for cost reduction, typically through Purchase Order (PO) to PO pricing changes. This simplistic metric overlooks the impact on customers, operations, and engineering.

We suggest adopting a value metric that encompasses costs and benefits beyond simple price reductions. The governance team should own and report against these value-based goals. Progress against these goals should be the focal point of every meeting.

Example: A technology firm shifted from focusing solely on PO price changes to a value-based metric that included quality improvements and customer satisfaction. This holistic approach led to more sustainable cost savings and higher customer retention.
[source: IBM Case Study on Procurement Transformation. Available at: IBM Procurement Case Study]

3. Have Leaders for Individual Projects

While material cost reduction is a collaborative endeavor, purchasing should take the lead on individual projects. In some organizations, buyers act as the project leaders; in others, Purchasing has specific project manager roles. Either approach can be successful, provided the first two governance elements are in place.

Conclusion

Implementing these strategies within purchasing organizations can dramatically improve the functionality of cross-functional teams. By focusing on strong governance, clear accountability, and aligned objectives, organizations can effectively navigate the challenges posed by these teams.

The success of cross-functional teams not only drives cost efficiency but also enhances the overall agility and competitiveness of the organization. As businesses continue to evolve, the ability to effectively manage and utilize cross-functional teams will become increasingly crucial.

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