GUEST COLUMN Why an Obsession with Cost is Damaging Your Profi tability and Handicapping Growth It’s time to confront the demon. By Justin Roff-Marsh Images courtesy of Ballistix M anagers of industrial organizations are obsessed with unit cost. This obsession avors almost every management decision, damaging organizations’ pro tability and competitive strength. But it turns out that unit cost isn’t the only game in town. It would make much more sense for managers to develop an obsession with speed. All else being equal, an organization with a faster clock speed is more pro table and grows faster. It consumes less capital, holds less inventory, and harvests greater economies of scale. Managers appreciate the value of speed but they are reluctant to change horses for one simple reason. Increasing the clock speed of an organization will cause unit costs to increase. And nothing strikes fear into the heart of a manager like the prospect of rising unit costs! Confronting the Demon A focus on unit costs is better for pro tability than no focus at all. About the Author: Justin Roff-Marsh is the founder of sales management and marketing consultancy Ballistix. For more information, visit www.ballistix.com . This much is true! However, to invoke the notion of unit cost to make a management decision is to fail to understand basic mathematics (well, calculus, speci cally). The core problem is that the standard formula for pro t (pro t = revenue -cost) only works when analyzing the past. We cannot use it to make predictions (about the future) because revenue and cost are not independent variables. If we’re predicting the impact of a management decision, the rate at which we generate pro t in the future will be the difference between two rates — the rate at which we generate contribution margin; and the rate at which we accrue operating expenses. The standard pro t formula ignores time. And standard cost accounting is an attempt to shoehorn the standard pro t formula into use to make forward-looking decisions. It’s true that cost accountants have developed exotic approaches to costing in an effort to smuggle time back into consideration, but these simply perpetuate the same bad idea. The thing is, business is primarily a game of speed maximization, not cost minimization. Changing Horses Consider Formula One for a moment. The pit crew, in particular. It’s easy to imagine that a young MBA tasked with improving the pro tability of a Formula One team might xate on the apparent lack of ef ciency here. A team has about 22 crew members responsible for as few as four pit stops each race. Each stop takes around 2 seconds. This means that 22 crew members spend most of their time idle. If the young MBA suggested downsizing the pit crew to increase the ef ciency of this department, his suggestion would be treated with the scorn it deserves. Given that an industrial organization is a complex system with a network of internal dependencies, the Formula One example is more relevant than it www.inddist.com 12 INDUSTRIAL DISTRIBUTION | May/June 2025
Industrial Distribution May / June 2025: Page 12
