Cost Reduction

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PowerPoint Diagram Pack

Cost Reduction Toolkit

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This toolkit details cost reduction opportunities across the Value Chain (as defined by strategist Michael Porter). Cost reduction initiatives are categorized in the areas of Enterprise-wide Opportunities, Asset Management Opportunities, and Function-specific Opportunities. Over 45 cost reduction initiatives identified—for each initiative, specific examples are provided, along with projected potential savings.

Capital and Assets

Procurement

Information Technology

Finance and Accounting

Human Resources

Operations Marketing / Sales

Logistics Service

SharedServiceCenters

Outsourcing

ProductInnovation

Product Development

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2Questions & feedback? Email me – [email protected] diagrams in this pack are to be used by the original buyer only.

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Contents

• Overview 4

- Levers to Profitability

5

- Profitability Challenges

6

- Cost Reduction Opportunities

7

- Cost Reduction in the Face of Downturn

8

• Cost Reduction Opportunities 9

- Across the Value Chain

10

- Enterprise-wide Opportunities

11

- Asset Management Opportunities

15

- Function-specific Opportunities

17


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Contents

• Overview





• Cost Reduction Opportunities






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Though there are multiple levers to maximizing a firm’s profitability, costs are the most directly controllable by any firm

Profits

Cost challenge Increasing material prices

Overhead costs

Capital challenge

High cost of capital Availability of capital

Revenue challenge

Declining orstagnatingrevenues

• Firms have direct control over their procurement and cost structure

• Efficiency and effectiveness improvements through new operating models provide sustainable mid-to-long term benefits

• Cost of debt and the availability of capital are defined by the markets – a firm has limited or no influence

• Strong balance sheet provides shelter, but changes to the capital structure are not carried out overnight

• In downturn economy, capturing of new revenue streams is challenging and has risky payoff

• Requires increased SG&A and/or R&D spending

The capital challenge during downturn is largely beyond

control of the firm

Possibility for strategic changes and significantly impact the bottom line

Limited and risky possibilities for bottom-line improvement

Overview – Levers to Profitability

Firm’s span of control: Firm’s span of control:

Firm’s span of control:

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Profitability is being challenged by increased costs, stagnated revenue growth, and increased capital costs in today’s economic climate

• Rising energy, commodity and material prices directly increase firms’ costs

• Increased SG&A / overhead costs across sectors. Special challenge as they do not decline as volumes go down.

• Imported goods and material are more expensive due to low value of US Dollar against other major currencies

• Challenging to acquire new capital due to declined institutional loan issuance activity and IPO activity

• Cost of capital increased due to declining credit ratings, increasing credit risk and lack of liquidity

• Revenues stagnating or declining as consumers reduce spending and change consumption patterns*

• Declining up-stream industry revenues as companies cut costs and spending

• Capacity reductions and layoffs across sectors result to lower volume and revenue

Evidence:

Evidence:

Evidence:

*Note: Changed consumption patterns may mean increased demand for low-end brands and some special products

Profits

Cost challenge Increasing material prices

Overhead costs

Capital challenge

High cost of capital Availability of capital

Revenue challenge

Declining orstagnatingrevenues

Overview – Profitability Challenges




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At each level of the income statement, there exists opportunities for a firm to make cost reduction improvements

Overview – Cost Reduction Opportunities

EconomicValue Added

(EVA)

=

Net Sales COGS

–

Capital Employed

Cost of Capital

–

Va

lue

SG&A

–

How toimprove:

• Invest in Sales & Marketing

• New products and range extensions

• Reduce spending• Efficiency and effectiveness improvement

across primary and supporting functions

R&D

–

• Reduce working capital and fixed assets

• Improve capital structure

Results:

Challenge:

Increased SG&A and R&D costs

Short to mid to long term effect

Reduced spending provides immediate increase of value added

Efficiency and effectiveness improvements provide sustainable mid-to-long term effect

Mid to long term effects

• Declining or stagnating revenues

• Increasing material prices and costs• Overhead / SG&A costs across sectors

• High cost of capital• Availability of capital




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Overview – Cost Reduction in the Face of Downturn

It is imperative to focus on cost reduction and management during an economic downturn

• Necessity to maintain profitability and to stay in the game

• Companies in good shape have better changes to survive the downturn

Focus on costs to survive the downturn

Failure may have long-term consequences

Success or failure in cost reduction will determine tomorrow’s winners and losers.Success or failure in cost reduction will determine tomorrow’s winners and losers.

• Failure to meet investors’ expectations

• Limited funds for R&D, marketing, operational development puts at risk the company’s future

• Ultimately may lead to bankruptcy or take over

• Get into position where you can capture opportunities created by the downturn:

– Acquire assets and companies at discount prices during the downturn

– Strategic R&D and marketing investments to create growth platform for the next upturn

– Retain and acquire talents

Success enables you to capture opportunities created by the downturn




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Contents

• Overview











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Capital and Assets

Opportunities at Cost Reduction exists across the entire Value Chain

Procurement

Information Technology

Finance and Accounting

Human Resources

Operations Marketing / SalesLogistics Service

Enterprise wide opportunities

Function specific opportunities*

• Cross-functional, can affect several functions

• Impact mainly Selling, General and Administrative costs (SG&A)

• Technical and strategic in nature

• Specific opportunities for the primary and support activities:

– Impact mainly Selling, General & Administrative costs (SG&A) and Cost of Goods Sold (COGS)

• Operational and transactional in nature

SharedServiceCenters

Outsourcing

ProductInnovation

Product Development

Asset management opportunities

2

1

3

2

1

• Improving fixed assets efficiency and decreasing net working capital

• Impact mainly capital efficiency

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Cost Reduction Opportunities across the Value Chain

3




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Contents

• Overview











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Shared Services provide immediate cost and efficiency benefits and opportunities for further service delivery improvementEnterprise wide opportunity: Shared Service Centers

Benefits Example

• Labor arbitrage through lower cost locations– efficiency increase (up to 15% savings)

• Headcount reduction through increased performance and better controls– effectiveness increase (up to 15% savings)

• Leverage of economies of scale and scope / consolidation (up to 10% savings)– standardization (elimination of duplication, consistency,

standard service portfolio)– optimization (incl. continuous improvement, best practices)– globalization– specialization (mutual use, utilization)– full leverage of technology

Reduction of Costs

Setting up a SSC for the first time might reap up to 40% of savings

Optimizing existing SSC might still deliver up to 20% of savings

Increase in Quality and Performance

• Focus on select activities only– competencies, skills– service culture

• Implementation of strict performance management (SLAs, KPIs, etc.)– transparency– consistency

Potential

Shared Services as a often used

beneficial delivery alternative for

various support functions, esp.

Finance and Accounting, HR, IT

and Customer Care/Services

Increase in Flexibility and Value-Add

• “Variabilization” of costs• Cross-business leverage of resources

(no fiefdoms or pockets of staff)• More direct staffing process

(incl. temporary hiring)• Legacy staff to work on value-adding activities




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Outsourcing provides operational cost savings, improves strategic flexibility & provides a foundation for industry best practicesEnterprise wide opportunity: Outsourcing

Outsourcing Example

Commonly used with routine and non-strategic processes

Cost savings and improved flexibility

• Benefit from lower cost structure:– Labor cost arbitrage in low cost locations– Continuous process improvement – Economies of scale

• Improve your strategic flexibility:– Reduce capital employed by transferring fixed

costs to variable costs– Improve business scalability

• Advanced outsourcing partners can provide other value adding services:– Business insight to drive top-line growth– E.g. Use customer contact data to improve service

experience and reduce churn

• Consider outsourcing for processes that share the following characteristics:– Routine, standard activity– Does not require critical or strategic business knowledge– Significant gap against best practice– Requires IT systems implementation/upgrade– High variability in load– Rapid improvement needed

• Number of functions benefit from outsourcing:– IT, Finance & Accounting, Customer Care, Assurance management,

Knowledge processes (master data mgmt etc.)

Potential

Reduce total IT Costs by 15% - 25%

Reduce F&A Spend by 20% - 50%

Reduce Application Management costs by 15% - 25%

Reduce Infrastructure Management costs by 10% - 15%




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Innovation in product re-design may yield considerable cost savings in manufacturing, transportation and procurementEnterprise wide opportunity: Product Innovation

Product Re-design Example

• Reuse of preferred components:– Approved Supplier and Approved Vendor Lists

(ASL/AVL) for components and materials– Reuse decision supported by ratings around

material cost, quality, availability and reliability• Standardization of Designs:

– Modularization, using common parts and assemblies across many product lines

Design for lower BOM

Design for supply chain management

• Re-design package to be lighter, smaller, more durable and easier to handle:– E.g. Nokia has gained ~80 million dollars yearly

savings from its smaller packages

80% of the product cost is determined during R&D and Engineering design cycles

Cost reduction opportunities in direct material costs, manufacturing operations, logistics and transportation.

Design for improved manufacturability

• Bill of Processes:– Tying Mfg processes, assets and plant location

to BOM to assist with minimizing engineering change requests

– Manufacturing capabilities are built into R&D/Engineering processes

Integrated IT architecture

• Product design improvements require improvements in IT architecture: – PLM - ERP - SCM system integrations for information exchanges– Point to point models or a SOA based Master Data Management

(MDM)

Potential




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Cost Reduction