149-Let Someone Else Pay the Freight

Some lucky companies have discovered ways to get other people to carry costs on their behalf. (See “Video #62: How to Improve a Cost Structure” on StrategyStreet.com.)

Twitter is a recent example. Twitter watches what its visitors do with its product and then has its engineers turn these ideas into new features. Twitter is about to release two new features, Lists and ReTweets, that began with users. With Lists, users can create lists of all the tweets written by celebrities or politicians. This innovation helps users save time in deciding whom to follow on Twitter. ReTweet allows a Twitter user to send a posting from another Twitter user to the user’s own set of followers. With these examples, Twitter has off-loaded some of the cost of R&D to its customers.

The shift of a company’s cost to others with no payment is not a new phenomenon. For example, as long ago as 1986, Walgreens decided to reduce its inventory levels by a third. It gave its suppliers the choice to participate in a just-in-time delivery program, or to stop supplying the company. Walgreens shifted the cost of inventory to its suppliers.

Customers can often do more than design new products. The Hilton Hotel chain installed computerized check-in kiosks in lobbies of its larger hotels in 2004. This allowed Hilton to reduce its check-in staffing. (See “Video #55: The Value of Customer Sensitive Cost Structures” on StrategyStreet.com.)

In the right situation, even the general public can help a company reduce its costs. One famous example is NetFlix. It offered a $1 million prize for new software that would predict more accurately whether a NetFlix customer would enjoy a movie based on the ratings of previous movies. A team of software developers won that prize in 2009.

We have found more than 50 examples of companies who shift costs to third parties for little or no payment. You can find them in the Improve/Costs section of StrategyStreet.

Posted 11/19/09

Update:

You can use our many cost reduction concepts and examples to brainstorm improvements for your own company.

Here are some examples of the cost reduction concept in the blog above from StrategyStreet.com:

Shift activity to others outside company with no payment for their assistance

No. Industry SIC Year Notes
1 2844 2004 Avon expanded its cosmetics business globally by rebuilding its manufacturing and transportation infrastructure from top to bottom. Dealing with a smaller number of suppliers delivered other benefits as well. In the process of standardizing bottles, Avon asked the suppliers for help designing new ones in the most cost-effective way. In many cases, Avon had to adjust its own approach so that suppliers could manufacture its products more cost-effectively. For instance, the company agreed to change its order patterns to reduce the suppliers’ manufacturing setup costs.
2 3498 1996 Shaw usually bills contract customers for materials at their published market prices, so clients bear the risk of price rises.
3 3571 2006 IBM is pulling people together for the online equivalent of a town meeting, an “Innovation Jam.” Sixty-seven clients will have first-row seats as the company hashes out its strategies for the future. It’s possible that competitors could lurk in virtual chat rooms, listening in on new ideas. Teams of IBMers will spend the next months sifting through the posts to identify the most promising. During phase two, which takes place September 12-15, everyone is invited to the jam site to refine and rate the best ideas based on their business value.
4 4512 2004 Northwest Airlines cuts costs back even more than it already has. The company has also acted on some employee suggests, extracting a total of $6 million in annual savings from worker ideas. It has cut back on the number of coffee pots boarded on planes, saving Northwest $120,000 a year. A manager had an idea that resulted in an annual saving of $916,000 on maintenance on DC-10 thrust reversers. A customer service agent suggests that blanket folding and washing be done in-house, for savings of $205,000 annually.
5 5411 2004 Albertson’s is using new technology to gather information and build customer loyalty. The hand-held devices, Shop ‘n’ Scans, are being tested at more than a 100 stores in Chicago. The devices allow customers to tally and bag groceries as they shop, eliminating time on check-out lines. They also remind customers about items they may have forgotten. Albertson’s customers who use the Shop ‘n’ Scan devices are on average buying twice as much as they used to on each store visit. One reason: Because they can track the amount they are spending as they shop, they know exactly when they hit their budget limit and feel freer to buy until they do.
6 6289 2000 If investors buy or sell an exchange traded fund, they have to go through a broker rather than directly to the fund itself. That means the exchange traded funds don’t have the cost of dealing with small investors so they should have lower expenses.
7 7375 2007 People are willing to carry out a mundane task for free or very low rates if it is made into a game. Amazon.com has a site called Mechanical Turk which pays low rates for various tasks, like writing a movie plot summary.

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.