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To Make Exponential Cost Reductions, Start by Eliminating the Unnecessary

Jan 30, 2008
The 80/20 Principle states that 80 percent of our results come from 20 percent of our efforts. That observation suggests that we have a lot of unnecessary activity going on.

He's the best physician who knows the worthlessness of the most medicines. --Benjamin Franklin

Three times since the 1960s, gasoline prices have unexpectedly spiked and held at substantially higher levels. The first occasion was during the Arab oil embargo. The second instance was during the aftermath of the Iranian revolution. The third spike began around 2000 and coincided with increased political instability in oil-rich countries and rapidly rising global demand.

On all three occasions, people began to see expensive liabilities in their garages where just a few months before they had perceived large, powerful vehicles. The newly discovered gas guzzlers soon glutted the market, causing prices to plunge for manufacturers and owners of the mighty steel assemblages who wanted to sell. We were reminded of what it must have been like for large dinosaurs after the climate changed and habitats could no longer support such enormous reptiles.

When using the nth-degree test (considering the most extreme imaginable increases and decreases in current conditions) to imagine that gasoline prices are high, large gas-guzzling vehicles would always be seen for what they are -- inefficient users of resources.

The next time you are considering the purchase or lease of another vehicle, simply imagine how you would feel about a particular choice if gasoline prices reached four times their current levels. Chances are that you will choose a more fuel-efficient vehicle after pursuing that thought process.

A simpler test can help us expose inefficiencies in nonprofit and business organizations. You should ask this question: Does a given activity, attribute, or step need to be done under any circumstances?

With your new focus on activities that lead to expanding usage and beneficiaries by 20 times, you will find that much of what you used to think was important no longer is. As a double check on your answer, look into why the activity, attribute, or step was done in the first place. If you cannot find a good reason then or now, you have a great candidate for elimination.

Here's an example. Many people commute long distances. We recently heard of a man who travels more than 110 miles each way daily in southern California to reach his work. Assuming that his car uses around 8 gallons of gasoline each day, that trip costs him $16.00 a day when gasoline costs $2.00 a gallon and four hours of his time. The depreciation and maintenance costs for his car are also significant.

How much would you have to earn to make that worthwhile? Reasonable people will differ on that point. But this man only earns $8.00 an hour. Jobs in local fast food restaurants pay $6.75 an hour in the town where he lives, and these positions frequently go begging. If the man worked an extra two hours a day at such a local job, his time away from home wouldn't be any longer and his pretax income minus expenses would be larger.

Here's the math. His gross pay now is $64.00 a day. From that he has to subtract $16.00 for gasoline before looking at depreciation and other expenses. The local jobs (he might have to get two of them) would pay him $67.50 gross for a 10 hour day if he earned $6.75 an hour. His gasoline expense would probably drop to $1.00 a day. The first job gives him $48.00 after gasoline expenses ($64.00 minus $16.00). The local jobs provide him with $66.50 after expenses ($67.50 minus $1.00). Naturally, when gasoline prices are even higher, his opportunity cost (lost cash flow and time) can be substantial.

Why does he do it? I don't know, but the choice is likely based on some sort of noneconomic reasoning. It can't be the weather or the neighborhood because he lives in a smog-ridden area with an enormously high rate of criminal activity.

Alternatively, he could find an equally inexpensive place to live closer to his place of employment. He would have a one-time moving cost, but that cost would rapidly be recouped through the reduction in driving expenses.

What are you doing that's unnecessary?

What's the best way to eliminate that unnecessary activity?
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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