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COST REDUCTION

Lowering the Cost Base

Material

Cost of parts and materials.

Labor

Cost of direct and indirect labor.

Overhead

Cost to operate the business.

Defects

Cost of defects, chaos cost.

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. But attacking the symptoms without addressing the causes, such as lacking competitiveness for example, leads to short-term gains in the best case, while costs will bounce back eventually. Our Cost Reduction Program (CRP) lowers the cost base in a sustainable way.

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, chaos cost
  • Duration: 6 months to improve and 12 months to redesign the cost structure
  • Deliverable: implemented improvements and validated cost reductions
  • Factory case: -10% material, -20% labor, -10% utilities, -30% rework+returns

Cost Inflators

If not controlled, costs naturally rise over time, driven by lack of information and human behavior.

People

  • Preference – managers prefer to grow/expand, rather than to cut/reduce
  • Mindset – shift of thinking and behavior is not encouraged and supported
  • Inflation – 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

Process

  • Quality – additional inspection and sorting in an attempt to control quality
  • Waste – lack of customer-knowledge, adding unnecessary items and features

System

  • Maintenance – inflated, fear of breakdown, lack of cost-risk knowledge
  • Resourcing – permanent versus fixed rather, than variable when needed

Basic Considerations

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 capabilities, what a department or function can really do
  • Demand – identify to which extend and how often those capabilities are used
  • Performance – measure how well they are delivered: quality, speed, efficiency

Considerations before Cutting

  • 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 Improvement (Kaizen): removing non-value adding activities, components and features, while maintaining existing structure and systems; expected gains 5-20%.
  • Cost Structure Redesign (Kaikaku): redesigning the cost structure around its core, keeping only what is essential to meet requirements; expected gains 20-50%.

Pitfalls and Conclusion

Quick fix approaches generally do not work. When fewer people do more of the same work deteriorates productivity, quality and morale with serious consequences. Costly errors quickly offset savings in the short-term and the lack of innovation erodes competitiveness in the long-term. Successful cost reductions require deep-rooted change, a redesigned cost structure that ensures processes and systems run effectively and efficiently, and skilled people to implement and sustain them. Contact us to develop sustainable cost reductions – ‘Navigating to Results’.