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It's time to circle the supply chain wagons: Should you start by cutting costs or cutting revenue?

12-15-2008
In a downturn, most companies immediately focus on cost reduction. That could be a mistake, according to Frank Burkitt, a principal with Deloitte Consulting LLP.

"To make smart cuts to your supply chain, you should first understand which elements represent the core of your business," said Burkitt. "Which customers are the most profitable and which are expendable? Which products do customers truly care about and which are just window dressing? What level of service quality do key customers need and expect?

"Ironically, the best way to start cutting costs may be to start cutting revenue -- specifically the 'bad' revenue that undermines profitability. Decide which revenue streams are not worth preserving and then target cost reductions," said Burkitt.

The idea of cutting revenue in a downturn might seem crazy, but simply put, some customers are not worth serving and some products are not worth selling. The shrinking margins that accompany an economic slowdown often only make the problem worse. Executives need to use top-down revenue cutting and bottom-up cost cutting approaches.

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