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Masters of the Cost Cutting Universe

General Mills is a $13.7 billion food company. In 2007, the company increased its profits by 13% on a 10% increase in sales. It enjoys higher margins than either Kraft or ConAgra.

The company reaches these margin heights by a constant and unrelenting focus on improving the efficiency of its operations. The attention to cost containment emanates from the very top of the company.

Here are some of the cost savings the company has implemented in the recent past:

  • Get rid of some of the fourteen different pretzel shapes in its Hot’n Spicy Chex Mix.
  • Eliminating half of the more than fifty versions of its Hamburger Helper product.
  • Eliminate unimportant spice and cheese pouches in the Hamburger Helper product.
  • Shrink the size of the product box, while keeping the product serving size the same in order to reduce shipping costs.
  • Eliminating multi-colored lids on Yoplait yogurt.

We have studied patterns of cost reduction for a number of years. Costs are Inputs of people, purchases or capital. These Inputs produce product Outputs. The cost reduction objective is to reduce the ratio of Inputs to Outputs. We have observed that there are four separate approaches to reducing costs:

  • Reduce the rates the company pays for the use of an Input
  • Reduce the number of units of Input that are wasted or idle in the production of the Output
  • Redesign the product or the process to avoid activities or steps that are currently undertaken in the production of the Output
  • Find new customers and sales volume, i.e. more Output, for fixed cost Inputs

The examples of the real-world cost reductions at General Mills all fall under the third category redesign the product and the process in order to reduce activities. In this case, the company eliminated components of the product that brought little value to the customer. The components the company eliminated may have generated some revenues, but the revenues they generated were far lower than the costs they caused the company to incur. (See the Perspective, “Cutting the Right Cost”, on StrategyStreet.com.)

The Improve/Cost section of StrategyStreet contains several hundred brainstorming ideas to control costs in even the best of markets.

Posted 11/24/08

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