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In a Downturn: Don't Minimize, Optimize

Steve Sashihara is the co-founder and CEO of Princeton Consultants, which develops and implements strategies to help companies optimize their assets. The firm works with clients in many industries, including financial services, life sciences, transportation and logistics, printing, and publishing. Sashihara recently sat down with Leader’s Edge to offer companies some advice for remaining profitable during a downturn.

You suggest that, instead of “hunkering down” and cutting spending during a downturn, companies should invest in optimization. Isn’t this a risky use of scarce capital?

SS: Not at all. As the drumbeat of economic bad news grows louder, many executives are reaching for the axe to chop headcount. Look at the number of recent layoffs at Alcoa, Bank of America, Coca-Cola, GE, Xerox—the list goes on and on. But let’s say that you reduce headcount by 10 people. If each one makes $100,000, you would save $1 million annually. It’s not exactly chump change, but it’s nothing compared to what you can save from an optimization program.

In a downturn, it’s more important than ever to squeeze every ounce of value out of the assets under your control, and that’s what optimization does. If, instead of cutting jobs, a company could increase the utilization of its assets by half a percent, 1% or 2%, it could save hundreds of million dollars a year while driving up employee morale and customer satisfaction.

How, exactly, does optimization create such large savings?

SS: Optimization is the disciplined use of assets, aimed at adding the greatest value to the bottom line. How well you utilize an asset depends on the decisions you make about it. Every day, you have to decide how, when, and where to deploy your assets. Should you acquire new technology or equipment? What products should you put on sale this week, where, and what’s the cross impact on other offerings? These decisions determine how much value you add to or subtract from your enterprise. Optimization can improve the quality of each of those decisions, each time they are made. It’s a gift that keeps on giving.

How can optimization give you a competitive advantage? Can you point to any companies that have used optimization to outpace the competition?

SS: McDonalds and Wal-Mart are obsessive about optimization.

Wal-Mart is the supreme master of logistics. It continually deconstructs its entire supply chain, from supplier to distribution centers to customers, and treats each link as a decision point: Where and how much should we buy and at what price? Where should we route goods? How should we resupply and reorder? It optimizes value, decision by decision, throughout the system.

McDonald’s ability to deliver consistently high-quality, affordable fast food is a tribute to its laser-like focus on optimization. Every day, all over the world its employees make micro-decisions: when to turn hamburgers and dump old coffee; how often to fry chicken and how much to fry; how many times a day to clean bathrooms. Optimization ensures the quality of every one of these decisions.

If a leader wants to start optimizing in his or her company or business unit, where’s the best place to start?

SS: Start by setting criteria. For example, as you look for optimization opportunities, especially in downturns, ask: What’s the size of the prize? What would success look like? What is the dollar value of optimizing this asset, and will it offset the project cost? What’s the theoretical best you could do in this area, and what are your actual results? The gap is the size of the prize—your potential gain. Optimizing repetitive decisions will yield a larger prize than one-time activities. So will optimizing decision making in operations that are carried out at more than one site or by more than one department.

Another criterion is the degree of churn in an area. If things are relatively stable, with few changes, it is unlikely that optimization will be of much value. But if the game keeps changing and getting more complicated, this is a high--potential optimization candidate.

What is your best advice to leaders trying to ride out the current turmoil?

SS: Attitude is king. Don’t just focus on cutting costs; learn to manage them. Above all, look for ways to optimize assets instead of reducing them.