Cost Reduction

Continuous Cost Reduction

Increasing competition forces companies to control their expenses at all times. Continuous cost-reduction throughout the entire economic cycle becomes a necessity to remain in business. Cost-cutting is typically used to reduce expenses in difficult times in an attempt to compensate for sliding profits, a failed product launch or loss of a major customer-account. Attacking the symptoms without addressing the causes (example: lacking competitiveness) leads just to short-term gains, costs will bounce-back eventually. Our Cost Reduction Program (CRP) delivers sustainable cost reductions.

Cost Reduction Program (CRP)

• Purpose: reduce cost across all categories
• Application: when traditional cost cutting measures are exhausted
• Process: reducing all cost components: material, labor, overhead, non-quality
• Duration: 6-12 months for improvement to redesign of the cost structure
• Deliverable: implemented and validated cost reductions
• Impact, US-plant case: -10% material -20% labor -10% utilities -30% warranty

Cost Inflators

If not controlled, costs naturally rise, driven by lack of knowledge and human behavior:

1. PEOPLEPreference – managers prefer to grow/expand, rather than to cut/reduceMindset – shift of thinking and behavior is not encouraged and supportedInflation – people naturally fill the available time with additional tasks

   Avoidance – managers avoid difficult decisions to cut according demand

   Priority – cost is out of focus during “good times” and naturally increase

   Morale – reduction-programs are often avoided as they dampen morale

2. PROCESSQuality – additional inspection and sorting in an attempt to control qualityWaste – lack of customer-knowledge, adding unnecessary items/features
3. SYSTEMMaintenance – inflated, fear of breakdown, lack of cost/risk-knowledgeSupport – permanent/fixed support rather than variable/when needed

Cost of Support Activities

Three drivers determine the cost structure of an organization’s support system – to achieve sustainable cost-reductions, those factors must be considered in sequence:

• Capability – define what a department/function can really do
• Demand – define to what extend/how often those capabilities are used
• Efficiency – define how well they are delivered (timing, quality, cost)

Considerations – think before you cut

• How to match capability to strategic needs and market demands
• How to apply “Collaborative Budgeting” – shared budget to drive savings
• How to apply “Bottom Zero” – financing programs through savings

Cost Reduction Approaches

• Cost Structure ImprovementKaizen approach to remove non-value adding activities, components and features while maintaining existing structure and systems – typical gains are 5-20%.
• Cost Structure RedesignKaikaku approach to achieve step-improvement by redesigning the entire structure, using only what is absolutely required to meet market requirements – typical gains are 20-50%.

Cost Reduction Strategies

1. MATERIAL COSTLean Product Development (LPD), reduction to essentialsDesign for Six Sigma (DFSS), maximizing yieldsStandardization and BOM-reduction

   Shared parts and platform-concepts

2. LABOR COSTReducing non-essential activitiesConnecting processes to flowSynchronizing activities to actual demand

   Leveling the schedule to avoid peaks and idle times

   Introducing adaptive manning systems

   Grouping, consolidating and simplifying complex tasks

   Automating, outsourcing, centralizing repetitive work

   Flexibilizing systems to adapt to changing demand

3. OVERHEAD COSTALARM when overhead grows faster than salesLargest spending category for US/EU companies – major focusReducing management-layers

   Shortening planning and approval cycles

   Elimination administrative waste

   Standardization and automating reporting

   Revamping the IT infrastructure

   Eliminating or outsourcing non-strategic activities

Pitfalls and Conclusion

‘Quick Fix’ approaches generally do not work. When fewer people do more of the same work will deteriorate productivity, quality and morale with serious consequences. Costly errors quickly offset savings in the short-term and lack of innovation erodes competitiveness in the long-term. Successful cost-reductions require deep-rooted change, a redesiged cost structure, efficient processes and systems, and skilled people to develop, implement, and sustain them.

Contact us to develop sustainable cost reductions – ‘Navigating to Results’.