National Furniture has initiated an aggressive cost-control system that is now in place.  For several years, escalating costs throughout the company, and particularly in the production process, eroded profit margins.  Bob Wood Jr., inheriting the business from his parents, realized the need to make immediate and drastic reversals in the problem of escalating costs.

Toward the end of last year, he hired ABC Consulting, an international consulting organization with whom he had made ties as a college intern.  Working closely with ABC Consultants, he made great strides in implementing a cost containment program and a timetable for it to be implemented.  The table (Cost Containment) is a basic version of that timetable.

The self-directed cost audit containment is comprised of several programs used for internal cost control purposes.  Four of the programs are mentioned above.  The Cost Reduction Reward Program is designed to enable employees to earn bonuses based on projected cost savings from the suggestions they provide.  Several employees have actually been given bonuses of substantial amounts of money as a result, and the reductions in cost of the production processes have been substantial.

National Furniture also directed Kevin Flowchart to conduct a complete analysis of the management structure of the company to determine if any alternative organization of that structure could result in savings.  Because no substantial savings were found to be possible, no action was taken on this front.

The two Vice Presidents, Kevin Flowchart and Amy Spreadsheet have conducted thorough reviews of the National Furniture insurance and outside services portfolio, and substantial savings have been realized through combining certain services and restructuring coverage.  Amy Spreadsheet has also dramatically reduced costs by developing an effective plan for purchasing raw materials and supplies that are used in production processes and front offices.  Monitoring these purchases has allowed the company to budget it’s expenses more efficiently.

The External Cost Audit portion of the Cost Containment Strategy program is designed to review and implement specific suggestions of the ABC Consulting Company.  Substantial savings have been achieved as a result, primarily in the production input and distribution areas.

The Production Cost Audit portion of the Cost Containment Strategy is the area in which the most substantial savings have been realized.  Upon the recommendation of ABC Consulting, National Furniture conducted a vigorous study of the potential for cost savings in the production-input area to follow-up on ABC's studies.  The study confirmed ABC's conclusion that savings roughly equivalent to a 10% increase in net margins were easily feasible merely through the use of competitive sales brokers.  The company had to pay more attention to it’s material receiving operation, therefore the increased cost in that area has been about 1/20th of the cost savings realized from the switch in placement of orders.

Finally, the study has also confirmed ABC's analysis that the company should make a substantial investment in new machinery.  Spiraling repair costs have eroded profit margins, and repairs have just been a stopgap, leading to more expensive and more frequent repairs.  ABC estimates that National Furniture will be able to finance new machinery with payments that are less than the current repair costs.  This modern machinery will also increase net assets over the long term, and will enable the company to purchase more equipment to support increased sales.

Because National Furniture has had cost difficulties leading to financial shortfalls in the past two years, the schedule for modernization of this equipment has been delayed pending the acquisition of the necessary capital from outside sources.