When cost management is a cultural mindset, it’s a breeze.

You might think a fast-growth company would have little time to spend worrying about such mundane issues as cost-control, and in the case of Tucson’s AGM Container Controls, Inc., you’d be right. AGM doesn’t worry about costs—it manages them proactively, and the results are impressive.

When asked what areas AGM is best able to target when cost reductions are needed, president and CEO Howard Stewart at first seems puzzled. “We haven’t put a lot of thought into that because we have tripled in size during the past 12 years,” he says, the implication being that AGM’s management team has been focused on more important issues.

But with a little prompting from Ellen Howlett, AGM’s treasurer and ISO administrator, and Rick BeMiller, its quality systems manager, it quickly becomes apparent that Stewart’s perception of not thinking much about cost management is the result of he and others at the company putting so much effort into this area over the years that it has become ingrained into AGM’s corporate culture.

Cost management from within
A good example of that mindset is the “Bright Idea” program the company has been using for about a decade. The program encourages employees to write up ideas they think can help the company and offers monetary rewards for those selected. Originally, it was called the “Cost-Cutting” program, “But I didn’t like that name because many of the ideas are revenue-enhancing,” Stewart says. Still, about 80% of the ideas submitted by the custom design and fabrication firm’s
workforce of just under 100 employee-owners (the company is an ESOP) are cost-cutting in nature.

Along with regular quarterly Bright Idea payouts that reach $300, AGM also awards “Super Bonus” payments for outstanding suggestions. “Super Bonus winners get an additional $100 for every $1,000 their ideas save the company, on top of the regular award amount,” Stewart explains. “We’ve had as many as four ideas that get Super Bonus treatment in a single quarter, so the cost-savings potential is significant.”

An important part of AGM’s cost management strategy is a review of key ratios that Stewart and Howlett conduct regularly. “We look at more than a dozen ratios on a monthly basis,” Stewart says. “Some others we review annually, but we keep track of their progress throughout the year as a barometer of how we are doing with cost control.”

Among the ratios Stewart and Howlett monitor are current ratio, current profit margin, return on assets, return on equity, financial leverage, debt-to-asset, total liability-to-net worth, total asset turnover, and fixed assets-to-net worth. Another way AGM has institutionalized cost management and productivity improvement into its corporate culture is through its decision to achieve ISO 9001:2000 registration. That may seem counter-intuitive at first blush, since there are significant costs involved to participate in the program. In fact, Stewart himself was initially opposed to the idea.

“Back in the 1990s [before Stewart became CEO], management talked about going in the ISO direction, and I said no because it was too expensive,” he recalls. “But ISO has turned out to help our quality and our business, and big companies look for this kind of quality certification. It’s taken a lot of time on Ellen and Rick’s part to put the whole thing in place, but we are a much better-functioning company because we are living up to ISO.”

Today, Stewart feels that ISO has helped fuel AGM’s growth, and it has had a positive impact on cost management in subtle but significant ways. “We have seen the frequency of repeat problems dramatically reduced,” BeMiller explains. “When we find a problem today, we create a permanent fix for it, whereas before we would put a Band-Aid on it. We don’t have to reinvent the wheel every time the same problem crops up.”

AGM’s largest cost area is materials, but because of the custom nature of the manufacturing work it does for its customers— who range from the New York City Board of Education to industrial and defense products giant Raytheon—it has only limited control over those costs. Other significant areas of expense include selling costs, administrative costs and labor. The company sets targets of 15% of sales, 12% and 10%, respectively, for the latter two areas. And, despite its robust growth, AGM has achieved some notable success in controlling those costs.

For example, its labor expenses amounted to 11.7% of sales through the end of May 2007. While higher than the target rate, AGM’s labor costs are down from 12.8% last year, in spite of a more than 10% increase in the size of its workforce.
It has also improved its performance in the area of selling costs, which ran about 16% of sales last year. That figure is down to 13.4% currently, and Stewart says the savings is helping to offset costs associated with the increase in the size of
the labor force.

“We could probably cut labor during a down market if we had to, but we haven’t had a layoff in 16 years,” he says. “I’m reluctant to do that because with the custom nature of our operations, employees are constantly moving from one operation to another. An employee might perform an operation today, not see it for months or even years, then have to perform it again. There’s a lot of training involved, and in the long run it is more cost-effective for us to retain our existing employees.”