Zero-based budgeting: What works and what doesn’t?
Profit improvement in the consumer goods industry
Deloitte’s fourth biennial survey of cost management and cost improvement trends spotlights a growth paradox we call “thriving in uncertainty.” Global macroeconomic conditions have created an environment where companies are pursuing the seemingly conflicting goals of both aggressive profit improvement and aggressive growth. This is no exception in the consumer goods industry. But is that approach working? And how can zero-based budgeting (ZBB) help?
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- Thriving in uncertainty
- Seven ways to be more successful with ZBB
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Zero-based budgeting infographic
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Thriving in uncertainty: An industry lens
The consumer products industry faces an unprecedented amount of challenges from declining brand loyalty, rapidly evolving technologies, changing demographics and consumer preferences, and economic uncertainty. How can consumer products companies thrive in uncertainty, and further, enhance profit improvement? Consumer products executives will need to simultaneously pursue aggressive growth and cost improvement.
Deloitte’s latest global cost survey highlights some telling information. Within the consumer products sector, gaining a competitive advantage over a peer group is the top driver of cost management. Sales growth is the top strategic priority. Survey respondents say reducing external spend and streamlining business processes—with a focus on reducing operational sales and marketing costs—are likely actions.
Top highlights from the survey include:
- Likely actions, strategic priorities, and top external risks are consistent with the majority of responses from other industries.
- While top drivers of cost management are consistent with other sectors’ responses, gaining a competitive advantage over peer groups is singularly important to this sector.
- The focus on reducing sales/marketing costs is not commonly cited by other sectors.
Download our infographic to learn how to succeed with cost management and profit improvement.
Seven ways to be more successful with ZBB
Zero-based budgeting is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history. Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold. When successful, ZBB produces radical savings. When unsuccessful, the costs to an organization can be considerable.
In our global cost survey, we found the latter to be true. In fact, nearly two-thirds of companies that conducted ZBB over the past 24 months did not meet cost targets—only 9 percent exceeded goals. And if there were any cost savings, our survey reflects that 50 percent of companies allowed costs to “bounce back” afterward.
We have outlined seven ways consumer products companies can be more successful with ZBB:
Align ZBB initiatives to business strategy
1. Dedicated executive oversight: 32 percent of companies surveyed created a dedicated executive position to oversee cost reduction.
2. Fuel for growth: Only 34 percent of executives believe the reinvestment of cost savings is aligned with business strategy.
Get to meaningful cost savings faster
3. From tactical to structural: 63 percent of planned cost initiatives are tactical (e.g., reduce external spend), focusing on more strategic approaches such as reconfiguring the operating model and increasing centralization.
4. Accelerated, data driven process: 52 percent of companies surveyed complained about the long ZBB process, accelerated by using advanced analytics and tools.
Create sustainable solutions by focusing on capabilities
5. Next Gen operating model changes: 42 percent of consumer goods companies plan to change their operating model, focusing on creating a more agile operating model supported by the right management model and culture.
6. Cross-functional focus: Move from a siloed ZBB approach, focusing on functions to a cross-functional approach that is driven by capabilities.
7. Measurement and incentives: Create a closed-loop objectives/measurement system to drive the right behavior and focus at the individual level.
If you’re interested in learning more, please contact us. We’d be happy to schedule a meeting with you and your team.