What Amazon taught me about cost management
The dramatic downturn resulting from the pandemic has caused havoc in our economy. Businesses are struggling to survive. Sweeping cost cuts to stem bleeding cashflows has been an immediate reaction as evidenced by mounting unemployment and shuttered stores.
A continuation of this volatility means that it is imperative for businesses to establish financial discipline. The fundamental aim is having effective oversight and control over the cashflows.
While there are a myriad of excellent software applications to effect this, there is a cost free methodology which can be applied irrespective of the system being utilised.
This is a methodology used by Amazon which I learnt as finance leader of their China business. Within a depressed economic environment, it has gained renown as an effective way of managing costs and is known as Zero Based Budgeting (ZBB). Whilst I call it a methodology, at Amazon it was more a mindset.
ZBB is a natural extension of two leadership principles that Amazon relentlessly drummed into me: ownership and frugality.
It is not a new idea. ZBB was developed in the 70s and mainly used by consumer goods companies. Since then, the methodology has spread across the economy given its universal applicability to those businesses wanting to be more lean. It has recently come back into vogue as pre-crisis, economic conditions were deteriorating. The pandemic has ramped up its appeal. Companies such as General Motors, Unilever, Guess? and Mondelez have brought the ZBB discipline into their budgeting process.
What exactly is ZBB? In summary, it is a holistic methodology that assumes all budgets start from zero. ZBB requires a granular scrutiny of all expenditures across the board inclusive of capex. A common practice of ZBB is to completely reset the annual budget to ensure resources are used efficiently. The mindset is to justify the inclusion of a cost rather than referring to past periods and debating its removal. There are growth oriented scenarios where ZBB can be applied though its essence is a bottom-up approach to budgeting. The main aim of ZBB is to drive productivity and efficiency during times of depressed economic growth.
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If you would like to know more about the exciting world of ZBB, please reach out to me ! My email is Cornell@qualia8.com and my LI profile is here 🙂