Managing Your Costs

November/December 1993 

Cost containment is an indispensable management tool that can help any scrap firm operate leaner—and more profitably—in good and bad economic times.

BY CHRISTOPHER CHARLEBOIS

Christopher Charlebois is president of Advance Metals Recycling (Buffalo, N.Y.).

No business can afford to waste money, especially during sluggish economic times, when volumes shrink and margins tighten. But if your company doesn't have a clearly defined cost-containment program, you could be throwing your hard-earned profits away.

Cost containment isn't simply cutting spending or preserving cash, though these options are generally an important part of the picture. It's a broad management strategy based on reviewing your business expenses and taking steps to control them, with the ultimate goal of achieving the most efficient and cost-effective operations possible in your office as well as your plant.

It's important to think of cost containment as an ongoing process, not a one-time deal. Nevertheless, if you've never made a concerted effort to analyze your business expenses and ways to reduce them, you've got to start somewhere, and that should be with outlining your expenses—not only in gross dollars but also in dollars per operating unit, whether it be broad categories such as ferrous and nonferrous, or smaller units such as shearing, baling, shredding, and torching. Breaking expenses down further to examine cost per ton or pound is also a valuable exercise.

This prepares you for the next logical step: zero-base budgeting. In a nutshell, zero-base budgeting means looking at every expense as if it were the first time you incurred it, comparing it to your objectives for the company or the unit it relates to, and asking questions such as, "Do I truly need to be making this expense?" and "Can I reduce or eliminate the expense?" The lesson here is that you can't be complacent about a single cost. On the flip side, you have to be careful not to cut too much, or your productivity will suffer and your efforts could actually end up hurting the business. Balancing expenses with efficiencies, therefore, is the cost management challenge.

Cutting Administrative Costs

While it's important to scrutinize all of your expenses and how they relate to the company as a whole, I've found it useful to concentrate on some key costs, which I divide into two broad categories—administrative and operating—then break these categories down into precise cost centers.

Here are some of the administrative expenses that warrant particular attention.

Long-term debt. Your loan arrangements are a big-picture financial item you should review up front and, if possible, you should pay down long-term debt by accelerating payments, and/or renegotiate long-term debt interest rates. With today's attractively low interest rates, this would be a perfect time to refinance your business mortgage, provided your current loan wouldn't sock you with a prohibitively high interest or payoff penalty.

Salaried employees. One of the popular corporate strategies these days is to eliminate as many management layers as possible, which means, of course, trimming your salaried employees. Some of this trimming can be done simply by consolidating jobs and/or responsibilities, while some of it can be done by eliminating positions altogether. My firm has essentially done away with its entire middle management layer, and we're leaner and meaner as a result. That's the good news. The bad news is that taking this step can erode morale and, perhaps, leave you short-staffed in some areas, particularly during busy times. In my experience, there's a real danger in going too far when it comes to cutting staff.

As for employee compensation, you could freeze or defer salaries, benefits, and bonuses, but you'd be wise to keep in close touch with your employees on this one or risk widespread morale problems.

Accounts payable and receivable. In general, it's a prudent practice to pay your bills at the latest possible date allowed under each vendor's payment terms, unless the vendor offers a discount for early payment. On the other end, be sure to collect your receivables as fast as possible, perhaps even offering discounts of your own. To ensure that your receivables are, indeed, received, you should carefully consider the viability of your consumers and do thorough credit checks. Many once-formidable consumers have gone out of business in recent years, and many others could become similarly extinct, which could mean lost revenue for your company. In the event of nonpayment, consider retaining a collection agency because, though you'll pay the agency a percentage, getting 50 cents on the dollar is better than nothing at all.

General office expenses. If you haven't already computerized your business, follow Nike's advice—just do it. Having information at your fingertips can save you more than time, it can enable you to become more efficient, reduce administrative staff, and determine precisely what your materials and processes cost. And, since it's easy to be wasteful in the office, you should try to minimize your copying and printing costs, and fax information instead of using overnight delivery services and long-distance phone calls.

You may also want to review your payroll method to make sure you're using the most cost-effective one for your company. Using an outside payroll firm can reduce the amount of time your office spends on this task, and offering direct deposit can the save the time it takes to distribute checks.

Professional fees. Consider doing more in-house financial auditing work, or review your bill with your auditor and have him explain what he's doing and why. Regarding attorney fees, review your legal requirements—you may be able to do some work in-house or you may find that it's more cost effective to have a staff attorney than to work with an outside firm. When you do need to rely on external legal services, shop around because, even if you've worked with certain firms for years, you may find a better deal and you can always ask your current provider to meet the offer.

Insurance. In reviewing the insurance coverage you have on your facilities and equipment, reassess the value of your assets—property, buildings, and equipment—to make sure you're not overinsuring them. You also may want to consider increasing your deductible or eliminating some policies to save on premiums, but you should make sure to retain policies that could protect you in the event of a catastrophe. Self-insurance may be an option, too, but it's really only viable for large firms. And if you have a multi-plant company, it may be wise to consolidate the policies of your disparate operations under one umbrella policy. In addition to making your insurance easier to administer, such consolidated coverage could enable you to negotiate a more favorable rate and get better coverage.

Telephone. Get in the habit of accepting long distance phone calls instead of making them, and from time to time check your long distance rates to ensure you're getting the lowest ones. In addition, you may want to consider eliminating your telex line if it's seldom used. In the office, you may want to track calls by telephone extension if you suspect that some employees are spending too much money on personal calls. If you have a car phone, carefully review your service to determine if you're getting the best possible rate and ask yourself if the phone is truly necessary. Also, if you advertise in your local yellow pages, make sure the ad is working for you, as such ads can be expensive.

Travel and entertainment. Consider cutting back on your own travel and reassess which employees need to attend meetings out of town (you may want to consider alternating attendance). When company cars are used for travel, keep in mind that the price of gas at different stations can vary greatly so it often pays to do some comparison shopping.

Donations, dues, and subscriptions. Set up a budget for these areas and stick to your priorities.

Janitorial expenses. Consider using an in-house crew rather than an outside service, and look into a less frequent cleanup schedule if possible.

Streamlining Operations

Operating expenses represent the second half of the cost management equation, and they are equally—perhaps even more—important than administrative costs when it comes to making or breaking your business.

Capital expenditures. Since this tends to be among the most cost-intensive areas of any business, it certainly makes sense to consider cutting back on capital spending in such areas as plant modifications and new equipment purchases. Keep in mind, however, that this isn't a cut-and-dried situation where you can say you won't buy anything for, say, the next year. It all depends on your current operational capabilities. If your plant is already modernized, for instance, you're fairly safe to limit your capital spending. But if you're operating antiquated equipment, it's a different ball game. In this case, you may be needlessly spending money to keep outdated machines functioning and, if so, perhaps investing capital in new equipment would be the right step. While we're on the subject ...

Equipment repair and maintenance. It may sound simplistic, but the best way to reduce repair costs is to prevent problems from happening, which means implementing rigorous preventive maintenance and plant housekeeping programs. When repairs must be done, do what you can in-house, and if you must use outside professionals, make sure you get more than one quote. Again, sometimes the best way to cut your repair costs may be to retire or replace your Jurassic machines.

Supplies and parts. It took us a year and a half, but we did it, we finally completed a thorough parts inventory and, in the process, reduced our inventory level almost 50 percent. We did this using what could be called a zero-base inventory approach in which we determined which parts we had in stock, which parts were essential, and which weren't. We then talked with our parts suppliers to pin down their delivery lead times, and, in the end, we were able to limit our inventory to those parts that can't be received overnight or that would cause serious production downtime. (For more information on parts management, see "Tending Your Parts Inventory," in the July/August 1993 issue.)

In looking at this line item, you should also keep close tabs on your consumption of fuel, oil, and grease, which can be accomplished in part by having employees fill out usage sheets and seeing if there are alternatives at better prices. When it comes to oxygen and acetylene, most recyclers underestimate the cost of these gases in their burning figures, so you should make sure to include these costs in your analysis.

Scrap inventory. Reducing your scrap inventory can be a wise decision in a down market when cash is tight because, after all, your inventory is simply cash in scrap form. In a rising or strong market, however, it's nice to have big piles of scrap sitting in your plant (with ferrous prices at the levels we've been seeing lately, I wish we had 10,000 tons more of car bodies outside).

Transportation. A whole article could, and has, been written on this one topic (see "Keep on Truckin'," in the July/August 1993 issue), but cost management in this area generally boils down to determining the operating costs of your fleet and reassessing whether owning, leasing, or contracting out is the best trucking option for your firm. My firm sold its fleet a decade ago in favor of using independent contract carriers exclusively for all of its trucking needs. The result has been fewer hassles and trucking costs we can control.

Operational layout. With an efficient plant design, material can basically flow in and out with the greatest speed and minimum handling. Review your plant layout, and see how close it comes to this assembly-line ideal and how you might be able to improve efficiency. If you run a multi-plant business with two or more plants in the same geographic area, you may find it beneficial to consolidate operations.

Electrical usage. Consider operating your energy-intensive machinery such as shredders and wire choppers during off-peak hours. My firm made this move about three years ago, and ever since we've been saving about $12,000 a month in electricity costs. Another option is to check with your power company about reduced rates or rebates if you install new energy-efficient electric equipment. Some scrap companies have even opted to install generators on-site to meet their electricity needs, becoming, in effect, mini-electric companies.

Hourly employees. You have some of the same options here as with salaried employees when it comes to consolidating positions, paring your work force, and deferring or freezing wages and benefits. It pays to think creatively in this area. At my firm, for instance, we were able to reduce our needs for having a foreman on every shift and in every processing area through what we refer to as the lead hand program: We pay employees with demonstrated leadership ability a 50-cent premium on their hourly wage to head their crews.

We also adjusted some work schedules, switching from the standard five-day work week to four 10-hour days per week for certain processing areas. The result? Not only are operations more productive and efficient, but the employees are happy to get long weekends off. Another cost-saver was our switch to using a time clock that calculates each employee's hours automatically, thus reducing administrative time.

Workers' compensation. Workers' comp is a major cost to most recycling companies, but fortunately there are a few ways to minimize its impact on your bottom line. The best way, of course, is to reduce the number of workers' comp claims by implementing loss-prevention programs such as safety training, self-inspections, and incentives. My firm, for one, has a "safety draw" program that gives five $50 awards, or $250, per month to winning employees. For every lost-time accident in a given month, however, we take $100 out of the pot, which gives our employees a good reason to be accident-free.

If lost-time injuries occur, a post-loss, or occupational injury management, program can help limit the financial impact on your company. Such programs are designed to make the employer a partner in the treatment process, reduce litigation by improving communication with injured employees, and return workers to the job as soon as possible, assigning them light-duty work if necessary. (See "Cutting Workers' Comp Costs," in the November/December 1992 issue for more on this strategy.)

Another way to prevent workers' comp costs from rising is to pay small claims yourself, as my firm does with claims of $150 or less.

Work apparel. We used to buy our employees all of their work-related apparel, including safety work boots and coveralls, but we found that keeping track of who had what, who needed what, and who lost what was an administrative nightmare. So today, we give employees each $250 a year in one lump sum to buy their own work apparel, except for protective gear such as gloves, hard hats, safety goggles, and ear protection, which we still provide. In addition to saving the company some money, the move has made employees more responsible and reduced managerial headaches. Another way to contain costs in this area is to "recycle" some apparel such as gloves, which can be returned to the supplier for cleaning and reuse, or for a discount on new gloves.

Getting to the Payoff

Obviously, not every company will be able to take advantage of the cost management ideas presented here. But regardless of the size of your operation or the type of business you're in, chances are, there are ways to reduce your expenses while boosting—or at least maintaining—productivity.

Developing and implementing these methods won't be easy. Cost containment requires forethought, a lot of common sense, employee involvement, and management support at all levels. Plus, controlling costs is like trying to hit a moving target, so you must review your expenses every month to ensure that your plans are working. Despite the challenges of this process, however, the stakes are too high to ignore it. In these economic times, being cost conscious is getting to be less of an option and more of a requirement if you want your company to be around in the 21st century. •