Cost Reduction Program: Competitive Cost at Budget

Doing More With Less:

The Cost Reduction Program (CRP) allows companies to meet budget and achieve a healthier cost-base, while creating a lasting competitive advantage. This is done throughout the entire economic cycle, from creation to phaseout. In order to prevent costs bouncing back, improvements are systemized (“locked”) and people trained in the new way of working, effectively addressing the root that causes over 90% cost-cutting initiatives fail, not to deliver any value in the long run. Use our our proven model and method to prevent the bounce-back, reducing costs in a sustainable way.

Cost Reduction Model

How the Model works

An Unhealthy Cost Level is the starting point, caused by losses from mismatch, failures and inefficiencies.
The Cost Reduction Program lowers the cost baseline by addressing spending, efficiency, technology, organization, and business model. Four pillars (4T) enable the program:
T1 – Targets align the program with vision, mission, and strategy, while integrating it into the overall roadmap.
T2 – Team covers organizational structure, skills and capabilities, and roles and responsibilities, mindset and behavior of people involved.
T3 – Toolbox includes cost analysis, performance management, problem solving, project management, and work standards.
T4 – Training builds skills in cost analysis, zero-based budgeting, activity-based and non-performance costing.
A Competitive Cost Level is the ultimate outcome, requiring less effort, fewer materials, at lower non-performance cost.
Gains from the program include higher competitiveness at lower resource consumption rates.

Cost Reduction Process

How the Process works

The 6D Process leads people systematically from initiation through improvement to the institutionalization of cost reductions.

D1 – Define: the first step delivers the project charter, specifying problem, approach, and sponsorship.
D2 – Diagnose: the second step delivers the current state analysis, specifying baseline and improvement potential.
D3 – Design: the third steps delivers the future state design, including target and implementation plan.
D4 – Demo: the fourth step confirms assumptions during the pilot run, while optimizing design parameters.
D5 – Deliver: the fifth step delivers the impact, while establishing ownership and accountability for results.
D6 – Delegate: the sixth step establishes standards, while training people in the new way of working.

Quality gates ensure deliverables are being met at each step.

Cost Reduction: Program Description

How it works:
We help the team to analyze their cost structure, using value driver treesto allocate each dollar spent to its respective category and driver. By doing so we identify inefficiencies (“bad costs”) and separate them from activities that generate customer value, stimulate growth and differentiation (“good costs”). Most effort is then spent on understanding the drivers of bad costs and systematically eliminating their root-causes, raising contribution to the bottom line with each step.

How long it takes:
The program is divided into five modules. The shortest being Demand Management for 3-6 months; then Process Efficiency 6-12 months, Technology Alignment 1-2 years, Organizational Agility 2-4 years, and finally Business Effectiveness 4-8 years. Modulescan be executed sequentially or in parallel. Each implementation sprint deliversbottom-linesavings,whilethe full-scope program creates a continuous stream of cost reductions for several years.

Who is involved:
Members of the leadership team, representing all functions and teams in scope of the program. The project sponsor and project controller must be assigned internally, while Leanmap provides external support. Acting as analysist or program leader, we offer support by providing knowledge and filling resource gaps, while ensuring that savings are not only identified but also realized.

What you can expect:
A reduction of bad costs by 10-20% per year, equivalent to 2.5-5% of the addressable cost base, assuming bad costs account for one quarter of the total. Savings obtained through the Cost Reduction Program allow the organization to focus on innovation and high-value opportunities, or convert them into increased bottom-line contributions.

How much it costs:
As a rule of thumb, 1 full-time expert resource is required to realize $1 million in cost savings per year, assuming a $50M addressable cost base. In order to insure a successful implementation, the leadership team needs to dedicate 10-20% of their time to the program, removing barriers and greasing the wheels. As for the external support we provide, every dollar our clients spend in consulting fees, we typically identify $10-$30 in cost reduction potentials.

Cost Reduction Strategies & Implementation Plan

The program consists of five modules to address the specific cost reduction opportunities at each level:

Demand Management: minimizing spend according demand
Process Efficiency: reducing waste, variability, and inflexibility
Technology Alignment: adjusting configuration to requirements
Organization Agility: building skills and simplifying structure
Business Effectiveness: realigning strategy and business model

Sprint Element

Following our 6D-model, improvements are implemented in small increments (sprints), delivering a continuous stream of successes that keep people engaged and motivation high.

Cost Reduction Activities for Each Strategy

Demand

Matching Spend with Demand:

Demand-driven resource allocation (pull)
Batch-size alignment and volume bundling
Global sourcing, shift to low cost country (LCC)
Target pricing and price renegotiation
Supplier qualification and second tier sourcing
Payment terms, accounts payable
Multi-year contracts and life-cycle contracts
Purchasing cooperation and mutualizing
Transport optimization by frequency and amount
E-auction tendering
Purchasing controls to prevent maverick buying

Process

Improving Process Efficiency:

Defect reduction, process controls, error-proofing
Load-leveling, reducing idling and overload
Service and quality level rationalization
Process streamlining and interface optimization
Modularization and platforming
Automate manual work, e-workflow, web-interface
Shared service center, consolidate back-office and routine work in LCC
Make-buy optimization
Influence provider cost base, internal and external

Technology

Aligning Technology with Requirements:

Inventory right-sizing by risk and velocity
Business-driven capex allocation (ROI)
Decisions based on total cost of ownership (TOC)
Rationalization of support and maintenance activities
Consolidation of facilities, right-sizing capacity
Process and technology harmonization
Specification right-sizing to prevent over-processing
System supplier development
Early involvement, joint development programs
Concurrent engineering, design to purpose (DFMA)
Concept competition
Simplification and standardization
Consignment warehousing
Vendor-managed inventory
System redesign based on technical benchmarking

Organization

Boosting Organizational Agility:

Staff rightsizing and re-alignment based on contributions (BVA)
Job design based on requirement analysis
Job profile and pay level harmonization
Centralization of support functions
Roles and responsibilities standardization
Streamlining of reporting
Flatten hierarchy, reduction of layers, increasing spans
Consolidation of duplicate organizations
Incentive scheme optimization
Organizational redesign based on benchmarking
Tighten bonus, tougher targets, reduced payout
Shift from full-time to part-time or contractor

Strategy

Maximizing Business Effectiveness:

Value-driven business proposition, altering business value-add
Centralized versus decentralized control
Outsourcing of non-core manufacturing and service
Scope shift and model realignment
Footprint rationalization
Joint ventures for scalability
Acquisitions for greater control
Rationalize product and service portfolios

Use the Cost Driver Tree to Analyze the Cost Structure

Cost is an outcome; the result of structure, methods, requirements, and capabilities. This means, to effectively reduce costs, the structure must be well understood, so that that the right actions can be defined that directly impact cost drivers. Here an example of a cost driver tree for a service process. The model can be adjusted to fit a broad range of service businesses, such as accounting, purchasing, education, maintenance etc.

The Enemy: Cost Inflators

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

Managers prefer to grow and expand, rather than to cut and reduce
Value-driven thinking and behavior is not encouraged and supported
Staying busy by expanding work to fill the time available for its completion “Parkinson’s Law”
Managers avoid the difficult decisions to reduce resources to match demand
Cost is out of focus during good times, building waste into products and processes
Cost reduction programs are often avoided as they could dampen morale
Adding unpaid extras or unnecessary features due to lack of customer knowledge
Excessive quality or service level in an attempt to “over-satisfy” customers
Additional inspection and sorting in an attempt to control quality
Excessive maintenance in fear of breakdown due to lack of risk-cost knowledge
Adding fixed rather than variable resources to cope with peak demand

Key to Sustainable Cost Reductions

‘Quick Fix’ approaches, such as rapid cost cutting, generally do not work. When fewer people do more of the same work, it 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 redesigned cost structure, efficient processes, and skilled people to implement and sustain them. Contact us to jointly develop a cost reduction program that works for you.