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Cost Reduction for Management Consultants & Managers

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Every company has to control costs in order to survive and prosper. Therefore, many firms on regular basis perform cost reduction projects. Cost reduction project may be part of a wider Performance Improvement Project or be a standalone project carried out only in one of the business units. Those projects are extremely interesting because you will be able to make a real change, create a new reality and improve part of the business or even the whole business. There are also very difficult as you have to not only analyze areas but also find ways to cut costs, improve the current situation as well as, on some occasions, implement the change. The skills that you will learn during this sort of projects will be also very useful once you move to work for regular businesses or set-up your own firm. In this course I will show you how to deliver such projects fast and efficiently. In the course you will learn the following things:
1. How to identify potential savings especially quick wins
2. How to optimize processes
3. How to analyze investments
4. How to carry out make-or-buy analysis
5. How to spend less
For more check the following course: https://bit.ly/CostReductionCourse

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Cost Reduction for Management Consultants & Managers

  1. 1. 1 Cost Reduction for Managers & Management Consultants Practical guide how to cut costs in business & in private life
  2. 2. 2 In business you have to make a lot of important decisions As a manager quite often you will have to find ways to spend less, reduce costs. This is not an easy task as you will have to increase efficiency and quality at the same time.
  3. 3. 3 In business you have to make a lot of important decisions Luckily, there are a lot of techniques that will help you in a structured way look for savings that will help you improve the profits of your business.
  4. 4. 4 In business you have to make a lot of important decisions In this course I will teach you how to find potential savings, estimate them in Excel and how to make sure that they don’t impact quality or efficiency.
  5. 5. 5 In business you have to make a lot of important decisions We will use for that management consulting tools, techniques and frameworks from top management consulting firms.
  6. 6. 6 How the presentation is organized
  7. 7. 7 In this presentation I will show you how to find potential savings, estimate them in Excel and how to make sure that they don’t impact quality or efficiency.
  8. 8. 8 Quick wins Process optimization in practice – Retail chain example Cost reduction frameworks Investment analyses Reduce usageMake-or-buy analyses How to spend less in private life
  9. 9. 9 What you will see in this presentation is a part of my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  10. 10. 10 Cost reduction frameworks
  11. 11. 11 Cost reduction frameworks – Introduction
  12. 12. 12 Frameworks are great because they help you see the big picture. They also provide you with guidance what to do to achieve your goals
  13. 13. 13 In this section I will discuss frameworks for cost reduction. I will show you also 2 cases where we will modify the framework to better address specific industry General cost reduction framework How to increase the profitability for cosmetics producer How to increase the profitability of a retail chain
  14. 14. 14 Cost reduction framework
  15. 15. 15 Let’s have a look at the general framework we can use to cut costs Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts Eliminate fully certain expenses Change specification – use less of certain thing Change specification – use cheaper substitute Standardized the process using the best practice Automate with software Automate with machine Simplify and optimize processes Replace Opex with capex (analyze Opex vs capex tradeoff) Make it or buy it analyses and if needed outsource or buy outside Renegotiate contracts with current suppliers Change the supplier Change the form of using (i.e. owing something instead of leasing)
  16. 16. 16 How to increase the profitability for cosmetics producer – Problem
  17. 17. 17 Imagine that you are working for a cosmetics producers. And you have to increase his profitability 2 brands. 1 stong in Poland the other in Romania No e-commerce Penetration in some regions is stronger than in others Has 2 Head Quarters (in Romania and in Poland) and 4 factories Every factory has different supplier base and buys independently
  18. 18. 18 Divide your answer into 2 fields Increase sales Cut costs
  19. 19. 19 How to increase the profitability for cosmetics producer – Solution – Sales Increase
  20. 20. 20 Let’s have a look how we can increase sales in the cosmetics Increase sales of cosmetics Increase distribution Increase Product Range Price & Discount Policy Increase demand for your cosmetics Add e-commerce Improve sales in the regions in which you are under- represented Enter other new channels or enter new markets (regions, countries) Increase your shelf space within the existing partners Consider introducing the Polish brand in Romania and Romanian brand in Poland Add new products within existing categories Add new categories within existing brands Changing price structure. Look at the prices vs competitors Changing discount policy used toward channels Changing pricing for specific channels Increase consumption per capita Find new segments of customers i.e. different age groups / men Find new customers
  21. 21. 21 How to increase the profitability for cosmetics producer – Solution – Cost Reduction
  22. 22. 22 Let’s have a look how you can cut costs in a cosmetics producer Cut costs Improve factories Standardize the product Reduce head offices costs Renegotiate contracts Optimize process in the factories using best practices lean manufacturing, TOC Consider consolidating the production in smaller number of factories Automate production if necessary Check how similar the products are Standardize materials or products Create 1 universal version for all markets Go through the Head Offices costs and organizational chart and check the overlaps Consolidate some functions in 1 place and reduce FTE Get best practices and implement them in both Consolidate purchases of main materials in 1 -2 places Consolidate suppliers Renegotiate contracts with current suppliers or get new ones Simplify and optimize processes at the head-office
  23. 23. 23 How to increase the profitability of a retail chain – Problem
  24. 24. 24 Imagine that you are working for a fashion discounter that operates a retail chain in Easter Europe Sells mainly cheap fashion, toys and small items for the home No e-commerce Competes with other low cost discounters and hypermarkets
  25. 25. 25 Let’s have a look at some KPIs for the firm you are advising and their competitor Size Profitability Pace of growth Cash generation Debt level  Revenues  % EBITDA  % Gross Margin  # of new stores  LFL Growth  Cash to EBITDA ratio,  Inventory in DOS  Payables in DOS  Debt to EBITDA ratio Your Customer Competitor 1 Competitor 2  USD 2 000 M  8%  45%  30  2%  50%  140  70  5.5  USD 1 000 M  15%  55%  10  5%  55%  90  150  1  USD 3 000 M  17%  57%  100  5%  40%  120  200  2 Costs  Head office as % of Sales  Average # of employees per managers and directors  # of managers and directors  11%  4  80  7%  6  30  8%  10  70
  26. 26. 26 Divide your answer into 2 fields Increase sales & Margin Cut costs
  27. 27. 27 How to increase the profitability of a retail chain – Solution – Sales Increase
  28. 28. 28 Just as a reminder you are working for a fashion discounter that operates a retail chain in Easter Europe Sells mainly cheap fashion, toys and small items for the home No e-commerce Competes with other low cost discounters and hypermarkets
  29. 29. 29 Let’s first start by analyzing the sales and margin increase Increase sales & Margin Cut costs
  30. 30. 30 Let’s have a look at some KPIs for the firm you are advising and their competitor Size Profitability Pace of growth Cash generation Debt level  Revenues  % EBITDA  % Gross Margin  # of new stores  LFL Growth  Cash to EBITDA ratio,  Inventory in DOS  Payables in DOS  Debt to EBITDA ratio Your Customer Competitor 1 Competitor 2  USD 2 000 M  8%  45%  30  2%  50%  140  70  5.5  USD 1 000 M  15%  55%  10  5%  55%  90  150  1  USD 3 000 M  17%  57%  100  5%  40%  120  200  2 Costs  Head office as % of Sales  Average # of employees per managers and directors  # of managers and directors  11%  4  80  7%  6  30  8%  10  70
  31. 31. 31 Let’s have a look how we can increase sales and margin for our coustomer Increase sales & margin Open more new stores Find ways to increase LFL sales Expand some categories Gross Margin Build faster more stores in existing markets – 2x or 3x Enter new markets (regions, countries) Create new formats if needed Bring more traffic to existing stores Improve % conversion Increases Average Transaction Value (ATV) Check sales and margin densities per category Consider expanding some categories Consider totally new categories for the same target group Renegotiate with suppliers Do value engineering Look for cheaper suppliers Consolidate some products or suppliers Increase selling space within existing stores
  32. 32. 32 How to increase the profitability of a retail chain – Solution – Cost Reduction
  33. 33. 33 Just as a reminder you are working for a fashion discounter that operates a retail chain in Easter Europe Sells mainly cheap fashion, toys and small items for the home No e-commerce Competes with other low cost discounters and hypermarkets
  34. 34. 34 Let’s first have a look at how to cut costs Increase sales & Margin Cut costs
  35. 35. 35 Let’s have a look at some KPIs for the firm you are advising and their competitor Size Profitability Pace of growth Cash generation Debt level  Revenues  % EBITDA  % Gross Margin  # of new stores  LFL Growth  Cash to EBITDA ratio,  Inventory in DOS  Payables in DOS  Debt to EBITDA ratio Your Customer Competitor 1 Competitor 2  USD 2 000 M  8%  45%  30  2%  50%  140  70  5.5  USD 1 000 M  15%  55%  10  5%  55%  90  150  1  USD 3 000 M  17%  57%  100  5%  40%  120  200  2 Costs  Head office as % of Sales  Average # of employees per managers and directors  # of managers and directors  11%  4  80  7%  6  30  8%  10  70
  36. 36. 36 Let’s have how we could cut costs in the Retailer Cut costs Reduce Head-office costs Improve inventory management Reduce Store costs Renegotiate contracts Decrease the number of directors and managers Simplify the structure Simplify and optimize processes in the Head-office Check why they keep so high level of stock and change the algorithm / policies Sell deadweight stock (non- rotating) Keep more stock in the central warehouse Simplify and optimize processes in the stores Replace Opex with capex (analyze Opex vs capex tradeoff) Destock the stores Renegotiate contracts to increase the payment terms Make the supplier do certain things currently done by you Look for optimal size of logistic delivery batches
  37. 37. 37 Quick wins
  38. 38. 38 Quick wins – Introduction
  39. 39. 39 You want obviously to get the savings fast. Therefore you should concentrate on the quick wins. We will discuss this in this section
  40. 40. 40 In this section we will discuss how to identify quick wins in cost reduction. What is 80/20 Pareto principal Low hanging fruits Quick wins for cost reduction Quick wins for cost reduction – drugstore chain case study
  41. 41. 41 So let’s start with the low hanging fruit frameworks and later we will move on to 80/20 rule Low hanging fruit framework 80/20 rule
  42. 42. 42 Low hanging fruits
  43. 43. 43
  44. 44. 44 Get the low hanging fruits first. By low hanging fruits we mean things with big impact and easy to accomplish
  45. 45. 45 Resources needed Impact SmallBig High Low  Things with big impact that require little work 1 How to find low hanging fruits?  Easy but with low impact 3  Things with big impact yet expensive, time consuming 2 No
  46. 46. 46  Office hours 1 Low hanging fruits for StartupAkademia 2 4 3  Blog posts  Slideshare presentation Impact High Low Resources needed SmallBig  Udemy Course  Sniply  Youtube  Events  Twitter  Additional resources
  47. 47. 47 Applying 80/20 rule in practice
  48. 48. 48 80/20
  49. 49. 49 What does 80/20 mean in practice  Concentrate only on the big items  Concentrate on the big customers  Analyze the most typical cases  Concentrate on the most frequently occurring problems  Analyze problems with big impact  Your analyses should have only 20% of the variable that generate 80% of the impact  Start with subjects where you see the biggest difference between actual results and benchmarks
  50. 50. 50 Here are 3 examples of using 80/20 rules  Learning Visual Basic for Excel  Checking competitors  Salsa course Area  Learn only the 5 most used items that will take only 20% of full course and will be used by in you in 80% cases  You check only 20% of competitors that sales add-up to 80% of the market  Go through 20% of the course to learn the moves and the figures used in 80% of cases Description
  51. 51. 51 Quick wins for cost reduction
  52. 52. 52 How easy it is to implement it? What is the potential savings we can achieve EasyDifficult Big Small  Holly Grail 1  Compounding savings  You need a lot of them to make the difference 3  Second best 2 4 Let’s look how the quick win framework looks for savings  Big effort savings  To be considered at later stage
  53. 53. 53 How easy it is to implement it? What is the potential savings we can achieve EasyDifficult Big Small  Cow savings – easy to kill and big 1  Chicken savings – easy to kill yet you need to kill a lot of them not to be hungry 3  Elephant – difficult to catch yet big 2 4 Let’s look at what animals could represent every category  Bat savings – small and difficult to catch
  54. 54. 54 Remember that the potential reduction in costs depends on 2 elements: potential percentage cost reduction and the cost starting point. Potential % cost reduction x Cost starting point = Potential Saving 10% x 100 = 1 50% x 2 = 1
  55. 55. 55 When it comes to cost savings what would you be more happy about? % $  Big savings expressed as % of initial costs  Big savings expressed in absolute value (i.e. in dollars) regardless of the initial cost
  56. 56. 56 Quick wins in Drugstore – Case Introduction
  57. 57. 57 Imagine that you have to identify quick wins in cost reduction for an international chain of drugstores. We know their cost structure
  58. 58. 58 A few information about the firm that we will be analyzing They have 4 000 stores We have their cost structure They have send us a list of projects that will help them reduce costs Estimate the potential and group them using the quick wins framework
  59. 59. 59 How to estimate the potential reduction in costs
  60. 60. 60 How easy it is to implement it? What is the potential savings we can achieve EasyDifficult Big Small  Cow savings – easy to kill and big 1  Chicken savings – easy to kill yet you need to kill a lot of them not to be hungry 3  Elephant – difficult to catch yet big 2 4 In quick wins for cost reduction we want to set priorities to projects  Bat savings – small and difficult to catch
  61. 61. 61 As we said potential reduction in costs depends on 2 elements: potential percentage cost reduction and the cost starting point. Potential % cost reduction x Cost starting point = Potential Saving 10% x 100 = 1 50% x 2 = 1
  62. 62. 62 Cost starting point is known. What is a mystery is the potential percentage cost reduction. We have to somehow estimate it Potential % cost reduction x Cost starting point = Potential Saving ? x 100 = ? ? x 2 = ?
  63. 63. 63 There are some ways to estimate the potential reduction in costs Get benchmarks Carry out 1-day audit Measure a sample Ask experts Ask suppliers of tools / IT solution / machines Organize auction / tender Do a consulting project with a consulting firm
  64. 64. 64 NPV
  65. 65. 65 Let’s start with a short definition  NPV stands for Net Present Value  NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time usually related to some investment  It’s used to determine whether something (action, investment etc.) makes sense or not NPV =
  66. 66. 66 Just as a reminder Present Value of money is different than the Nominal Value 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓) 𝟏 Nominal Value (𝟏 + 𝒓) 𝟐
  67. 67. 67 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
  68. 68. 68 NPV enables you to make decisions about specific investment NPV 0>  The investment can generate more cash than it requires. Can be considered to be done NPV 0<  The investment will be eating away cash. Rather consider not doing it NPV 0=  Neither creates nor destroys value. Look for other criteria i.e. strategic, tactical factors
  69. 69. 69 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
  70. 70. 70 IRR
  71. 71. 71 Let’s start with a short definition  IRR stands for Internal Rate of Return  IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero  IRR tells us how much you would have to earn on saving account every year to get to the same results as from the investment you are anlayzing IRR =
  72. 72. 72 If you want to decide on whether to do certain investment or not compare IRR with the right interest rate IRR Interest rate >  The investment can generate higher returns than the alternatives. Can be considered to be done IRR Interest rate <  The investment will generate lower returns than the alternatives. Rather consider not doing it IRR Interest rate =  The investment is as good as other alternatives. Look for other criteria i.e. strategic, tactical factors
  73. 73. 73 NPV and IRR gives you the same directional information NPV 1 NPV 2>  Investment 1 is better than Investment 2 IRR 1 IRR 2>  Investment 1 is better than Investment 2
  74. 74. 74 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  75. 75. 75 Process optimization in practice – Retail chain example
  76. 76. 76 Process optimization in practice – Introduction
  77. 77. 77 As you may remember we said that there are 4 main direction when it comes to cost cutting Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts
  78. 78. 78 We will concentrate on optimizing processes Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts
  79. 79. 79 Optimization of in-store processes – Introduction
  80. 80. 80 Let’s have a look at the value creation at the Fashion Retailer firm Selling the products in the stores / website Shipping the products to the stores Develop & design products Sourcing / Purchasing Products Putting the products on the shelves Get & open new stores Create new store formats Maintain / Renovate stores Recruit & Train
  81. 81. 81 As you can see majority of people are working in stores. That’s why optimizing store processes is crucial for the profitability of the business Selling the products in the stores / website Shipping the products to the stores Develop & design products Sourcing / Purchasing Products Putting the products on the shelves Get & open new stores Create new store formats Maintain / Renovate stores Recruit & Train 30 1500 10 30 10002004020 10
  82. 82. 82 We will use a case study of DIY Retailer to show you how to optimize store processes +70 stores 2 countries Average size of the store: 3 500 sq. m
  83. 83. 83 Steering Committee Implementation Team 1 Implementation Team 1 Implementation Team 1 SMI Project Team • Project Sponsor • 2 Board Members Members • Asen Gyczew • 9 People from DIY • Asen Gyczew • 9 people from Project Team • Store Managers • Regional Managers Below you can see how the project was organized
  84. 84. 84 Below in short how the whole process optimization looked like Project definition Workshop Optimizing 1 store Optimization of 50% of stores Optimization of 100% of stores  Defining the scope of the project and how it should be delivered  Optimizing +20 processes in a selected store – done by the customer team supervised by me  Defining on the basis of that the processes with biggest impact on cost to be optimized in all stores  Implementing optimization of selected processes in the 50% of stores  1 day workshop at the end of this phase to rethink and modify implementation plan  Teaching team members how to optimize processes  Full implementation in the whole retail chain
  85. 85. 85 In this section I will show you how the workshop looked liked and how we optimized the process in the 1st store Project definition Workshop Optimizing 1 store Optimization of 50% of stores Optimization of 100% of stores
  86. 86. 86 The workshop
  87. 87. 87 Introduction to the Workshop
  88. 88. 88 Workshop was very important as I was getting a team that I did not know and that did not trust me. On top of that they did not know how to optimize processes. Therefore, the workshop had following goals: Get to know the team Teach them basic techniques that they will need See who could be a team leader (I needed 3) and a believer Show them on example how to optimize processes Redefine with them the scope if needed Convince them that the project is doable within the assumed timeline Build my authority (despite young age)
  89. 89. 89 Workshop – the scope of the project
  90. 90. 90  Lower costs  Improve the quality of service  Increase the sales and margin per 1 employee We have the following aims in our project
  91. 91. 91 • In-bound Logistics including replenishment of the shelves We will look at the following process Group Process • Special orders • Direct orders • Orders from Central Warehouse (CW) • Cyclical orders • Price change management • Price change • Price monitoring • Communication between stores and Head Office • ? • Promotion area management • Promotion area management • Change of assortment • Range Change • 1 to 1 • Customer support • Selling the product at the cash till • Return of goods • Complaint from a customer • Sales via telephone • Deposit and transportation management • To be confirmed • Direct deliveries • Deliveries from Central Warehouse (CW) • Direct returns • Returns via CW • Transfers between stores • Partial stocktaking • Control of empty spaces
  92. 92. 92 Observation and initial analyses Data gathering Process optimization in 1 store Modification of the process for other Implementation in the whole chain • Observation of process in real life in 1 of the store • Analyses of the formal description of the process • Analyses of available data • Proposal of KPIs needed to set goal for each and every process • Preparation of list of data and format for data entry • Workshop • Data gathering • Data preparation according to provided formats • Analyses of the process as is especially its efficiency and costs • Redesign of the process • Creation of tools supporting the execution of the new process • Test of new processes in chosen locations • Modification of processes • Creation of manuals supporting the new process • Implementation of new redesign process in the whole chain • SMI • DIY • DIY • SMI • DIY • SMI • DIY • DIY Process optimization will be divided in the following phases Execution Description
  93. 93. 93 Name of the process • Cost analyses • Decision on whether to perform it or not • Lean manufacturing • Queuing systems • SIPOC methodology • Cost analyses especially the impact on bottlenecks • Finding the optimal way to perform each activity • Queuing systems • Cost analyses especially the impact on bottlenecks • Finding the optimal way to perform each activity • Lean manufacturing • Theory of Constraint • Queuing systems • Transportation optimization • Description on the frequency of logistic replenishment from the store warehouse • Reorganization of the store warehouse • Lean manufacturing • Reducing the amount of price changes • Reducing time devoted to price changes • Lean manufacturing • Queuing systems • SIPOC methodology • Cost analyses especially the impact on bottlenecks Methodology used Examples of possible changes • In-bound Logistics including replenishment of the shelves • Price change management • Communication between stores and Head Office • Promotion area management • Change of assortment • Customer support We will be using different optimization techniques for different processes
  94. 94. 94 Steering Committee Implementation Team 1 Implementation Team 1 Implementation Team 1 SMI Project Team • Project Sponsor • 2 Board Members Members • Asen Gyczew • People from DIY • Asen Gyczew • To be decided We propose the following organization of the project
  95. 95. 95 Project Sponsor SMI Project team  Participate in Steering Committee Meetings  Supervise of the project on the behalf of Company A  Select of Solutions  Support in implementation (when needed)  Participate in Steering Committee Meetings  Manage the project  Choose the approach to be used.  Workshop organizations  Carry out part of analyses  Support the implementation teams  Gather data  Participate in workshop and project work  Carry out part of analyses  Optimize process on chosen test stores  Modify the process after test  Participate in implementation teams Implementation teams  Implement new process in the whole chain  Modify the process when needed Every participant has a role to play in the project
  96. 96. 96 Workshop – Tools overview
  97. 97. 97  Lean Manufacturing  Theory of Constraints  Queuing theory  Overall Labor Efficiency (OLE) We will be using the following techniques to optimize the processes
  98. 98. 98 Workshop – Elements of lean manufacturing
  99. 99. 99 5 60 35 Adds value Does not add value and not obligatory Obligator but does not add value Source: Report Going Lean, P. Hines, D. Taylor; Lean enterprise research centre; Cardiff Business School; 2000 In lean manufacturing We have different types of waste:  Overproduction  Defects  Inventory  Over-Processing  Transport  Motion  Waiting Share in total % Due to different of waste we only use 5% to create value
  100. 100. 100 We will be using the following techniques to optimize the processes Overproduction  Overproduction is making too much or too early. This is usually because of working with oversize batches, long lead times, poor supplier relations and a host of other reasons. Defects  You produce faulty things or not up to agreed standard. This may be due to errors done by production people, quality issues or faulty materials Transport  Transport is the movement of materials, people, machines from one location to another. This is a waste as it adds zero value to the product. Waiting  Long periods of no action due to lack of materials , resources, people Motion  Unnecessary motions of workers due to the way working space is organized Inventory  Too high inventory that costs you money, space and causes operational problems Over-Processing  When you use the wrong tools, procedures or methods you are creating waste as well You have not used the employee’s creativity  If you waste peoples’ efforts and creativity you will stop developing Definition
  101. 101. 101 In the case of DIY you will see 2 main wastes Too much movement (people, resources, materials) Lower the need to move Move faster Change the timing of the movements Eliminate the movement Peak of activities Set priorities Assign specific people to perform the activity during peaks Decrease the difference between high and low periods Use different frequency for different activity
  102. 102. 102 Workshop – elements of theory of constraints
  103. 103. 103 Bottleneck is always at the place where you have the lowest capacity. Have a look at 3 examples below Example 1 7 5 7 Example 2 5 10 20 Example 3 5 5 3 x Stage capacity x Bottleneck
  104. 104. 104 Due to bottlenecks the system the whole system is not efficient. Some people have nothing to do whereas others are stranded with too much work
  105. 105. 105 We can use in DIY elements of theory of constraints that is most often used in production  Throughput of the whole system  Inventory  Operational costs Production  Throughput measured in number of customers served  Inventory  Operational costs of the store DIY
  106. 106. 106 The aim of the theory of constraints is to increase the throughput in bottlenecks. For this you can use  Identify the bottleneck  See how you can use in better way the time of the bottleneck  Everything should be aligned with the bottleneck  Increase the capacity of the bottleneck to meet the full demand (add machines, people, resources, increase the time of work) 1 2 3 4
  107. 107. 107 Workshop – OEE and OLE
  108. 108. 108 Open hours Maintenance Machine uptime Uptime utilizationIdle time 60% 60% OEE = 60 % 60 % x x 98% Proportion of good quality products 98% 35% In the case of machines you can measure Overall Equipment Efficiency (OEE). Similar concept can be used to measure efficiency of people
  109. 109. 109  Estimated for machines  Shows you what percentage of the machine is used to create value for which you are paid by the customer  It makes sense to analyze it especially for expensive machines and bottlenecks OEE  Estimated for people  Shows you what percentage of the people is used to create value for which you are paid by the customer  It makes sense to analyze it especially for people that are representative of a big group of your employees OLE Similar to OEE that is designed for machines you can define the Overall Labor Efficiency (OLE) for people
  110. 110. 110 31% 29% 21% 18% 100% Sales advising Shelf replenishment Transport and movement Others Total  Only sales advising and shelf replenishment are added value activities for which customer is willing to pay  This means that the OLE for a sales reps is equal to 60% at most Below example of results of OLE analysis for sales representatives working at a store
  111. 111. 111 Workday Time that you can devote Time left for real workLack of work 100% 54% OLE = 100 % 54 % x x 98% Work 98% 37% No work due to organizational issues Movement 70% Work well done 70 % Overall Labour Efficiency how much work there is in the work ?
  112. 112. 112 Workshop – Queuing system
  113. 113. 113 You have to identify queues in your system to be able to serve your customers in the proper pace Customer appears Exit Number of service point (servers) Queue Delivery of service
  114. 114. 114 In Queuing system there are 2 parameters you have to estimate to see how big the problem is We have to parameters that we should look at • λ – average number of people appearing in the system • μ – average number of people that the system can service We have 2 possible situations • λ> μ – we are not able to service all customers – they are leaving the store • λ< μ – We are able to service customers quite well yet occasionally we can have still queues. The customer in the queue may give up purchasing or can be less satisfied (not return for new purchase)
  115. 115. 115 Even small difference between the number of appearing customers and your capacity to service can cause fast big queues 0,0 20,0 40,0 60,0 80,0 100,0 120,0 1,0 1,4 1,8 2,2 2,6 3,0 3,4 3,8 4,2 4,6 5,0 5,4 5,8 6,2 6,6 7,0 7,4 7,8 8,2 8,6 9,0 9,4 9,8 λ – average number of people appearing in the system Size of the queue μ =10
  116. 116. 116 In complicated systems you can have 2 types of queues  Clear service points  People know where they are and how to queue  A good example is the queue to cash till Visible  No clear service points or service points not visible  People cannot find the service points and don’t know how to queue to them  A good example is the invisible queues to sales reps for advices Invisible
  117. 117. 117 Have a look how the service level (advice during the purchasing process of the customer) looks like in the test store DIY test store example • λ = 126 customers • μ = 6 sales rep x 9 customer serviced in during the hour 54 customers Conclusions: • A big part of customer cannot be served • Some of the customer will not buy at all (lower conversion) or will buy less (lower average transaction value – ATV) • μ can be increased by increasing the number of sales reps, increasing the time they devote to servicing customers or shortening the time of service
  118. 118. 118 Workshop – Defining metrics and cost drivers
  119. 119. 119 • In-bound Logistics including replenishment of the shelves I divided the team into 2 groups and ask them to work on process metrics Group Process • Special orders • Direct orders • Orders from Central Warehouse (CW) • Cyclical orders • Price change management • Price change • Price monitoring • Communication between stores and Head Office • ? • Promotion area management • Promotion area management • Change of assortment • Range Change • 1 to 1 • Customer support • Selling the product at the cash till • Return of goods • Complaint from a customer • Sales via telephone • Deposit and transportation management • To be confirmed • Direct deliveries • Deliveries from Central Warehouse (CW) • Direct returns • Returns via CW • Transfers between stores • Partial stocktaking • Control of empty spaces Group I Group II
  120. 120. 120 For selected process in 2 groups perform 2 tasks  For every process define KPIs  Name cost drivers and cost position that it influence
  121. 121. 121 The team managed to do the following process and to define for them KPIs that we will use to optimize them • Partial stocktaking Name of the process • Number of indexes audited during 1 day • Average stocktaking time • % of stocktaking carried out outside the peak • Cost of 1 stocktaking • Price change • Time needed to change the prices • Number of changes per week • Number of prices changed during 1 session • Cost of 1 change • Promotion area management • Time required to change the assortment • Number of SKUs changed during the 2-week promotion • Cost of promotion per type of promotion • 1 to 1 change of assortment • Time required to change the assortment • Number of SKUs changed • Cost of 1 change • Customer service in the store • Number of customers per 1 sales rep • Conversion rate • Average Transaction Value KPI
  122. 122. 122 Workshop – Optimizing 1 process
  123. 123. 123 Optimization means doing 3 things:  As a result of our process optimization we want to create new process flow that will help us achieve better results (when it comes to metrics, KPIs we have defined for every process) at lower cost  Before optimization starts for every process estimate the cost of 1 execution and think what are the current KPIs value for this process  The new process has to define:  New flow of activities  People carrying out the specific activity  Frequency of execution of specific process
  124. 124. 124 I have shown them also example of another process – price monitoring  KPIs  Number of price checks performed every month  Time needed to perform the price check  Cost of 1 price check  Cost positions  Time devoted by people carrying out the price check  Cost of fuel  Cost of print outs and paper  Cost drivers  Number of price checks performed every month  Distance to main competitors  Number of people doing the price check  The person doing the price monitoring
  125. 125. 125 ….and the results that they could expect from it 204,2 154,5 Current Target Example of improvements • Change of the person doing the data entry after the price check (currently store manager) • Decreasing the number of people performing the price check • Decreasing frequency Cost per 1 execution In USD
  126. 126. 126 Workshop – Timeline of the project
  127. 127. 127 At the end I showed them the timeline and explained them what we will do on the specific day Tasks 20 21 22 23 24 Overview of process – definition of KPIs and measuring the current costs Designing of new solution, testing and modifying them Final touch, creation of tools and final modification to the processes February
  128. 128. 128 Introduction to processes optimization
  129. 129. 129 Process Optimization went much better than expected It lasted 4 instead of 5 days Most of the things were done in 2 days The team changed from skeptics to deep believers Leaders of each implementation team were the driving forces I was mainly coordinating, motivating and arguing We did more than the planned scope
  130. 130. 130 As a reminder the original timeline Tasks 20 21 22 23 24 Overview of process – definition of KPIs and measuring the current costs Designing of new solution, testing and modifying them Final touch, creation of tools and final modification to the processes February
  131. 131. 131 We managed to do much more as assumed in 4 days  Tried to apply techniques they have learnt during the workshop  Measured assigned process – how long it took what where the obstacles  Looked for ways to improve Day 1 Implementation teams Me  Explained techniques and showing them the waste  Gave them tips on how to improve  I was moving between groups and sometimes talking to the leaders separately  Continued activities from Day 1  For some of the process they have implemented the quick wins in improving themDay 2  Continued activities from Day 1  Monitoring changes  We made a trip to the competitors to try to see how the process are organized there  We tried to see the pros and cons of the whole process  We came back to improving the process at the DIY  We measured the results with t he new processes Day 3  We finished the changes to the process  The team that was doing the customer service went beyond the scope and worked on improving the basket (ATV) size as well conversion rateDay 4
  132. 132. 132 The store and the processes
  133. 133. 133 The test store was 4 000 sq. m big (43 000 sq. ft.) Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  134. 134. 134 • In-bound Logistics including replenishment of the shelves As you may remember there were over 20 process that we optimized in the test store Group Process • Special orders • Direct orders • Orders from Central Warehouse (CW) • Cyclical orders • Price change management • Price change • Price monitoring • Communication between stores and Head Office • ? • Promotion area management • Promotion area management • Change of assortment • Range Change • 1 to 1 • Customer support • Selling the product at the cash till • Return of goods • Complaint from a customer • Sales via telephone • Deposit and transportation management • To be confirmed • Direct deliveries • Deliveries from Central Warehouse (CW) • Direct returns • Returns via CW • Transfers between stores • Partial stocktaking • Control of empty spaces
  135. 135. 135 I will show you in detail what we did in the case of the following 4 process Price change Shelf replenishment Advising customers Cash till and info point
  136. 136. 136 Price change
  137. 137. 137 Price change is the process of changing the price tags. It generated 7% of cost in the test store but generated 16% of all savings CC: Wikimedia
  138. 138. 138 Let’s have a look how the price change process looks Printing and preparation of new price tags Price tag distribution Change of price tags  Done by an Office Specialist  Around 300-400 changes per day  Office Specialist calls 4- 7 Sales Reps to the Office and hands them over the price tags  Sales Reps change prices in their departments  A lot of problems were caused by lack of tools and infrastructure (scissors, ladder, pallet truck, dustbin etc.) CC: Wikimedia
  139. 139. 139 In the test store all sales rep had to go to the office for the new price tags Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  140. 140. 140 In the first iteration we made the specialist from the office chase the sales reps Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  141. 141. 141 Later we introduced pigeonholes for every department, so the specialist had to leave the new price without looking for the specific sales rep Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  142. 142. 142 We have increased the number of tools an infrastructure
  143. 143. 143 292 107 Before After The change in the process was giving quite big potential savings Cost of 1 price change In USD per change 6 124 2 249 Before After Change in monthly cost in the test store In USD  Given the number of stores (70) this could give potential savings of USD 3.3 M
  144. 144. 144 Shelf replenishment
  145. 145. 145 Before we proceed to results have a look what the typical store employee does during his 8 h work 31% 29% 21% 18% 100% Sales advising Shelf replenishment Transport and movement Others Total
  146. 146. 146 5-6 times a day the sales rep would go to the warehouse to see whether there is something for their department Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  147. 147. 147 We totally changed the order – we made the Warehouse specialist 2 a day bring the thing to specific departments Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  148. 148. 148 We have increased the number of tools an infrastructure CC: Flickr
  149. 149. 149 We have drastically improved the internal logistics within the store by placing all necessary equipment in the store
  150. 150. 150 25 18 Before After The change in the process was giving quite big potential savings Cost of 1 replenishment to the shelf In USD per pallet 23 311 17 280 Before After Change in monthly cost in the test store In USD  Given the number of stores (70) this could give potential savings of USD 5.1 M
  151. 151. 151 Advising customers
  152. 152. 152 Most of the time sales rep advice customer on what product they should choose 31% 29% 21% 18% 100% Sales advising Shelf replenishment Transport and movement Others Total
  153. 153. 153 The test store was 4 000 sq. m big (43 000 sq. ft.) Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  154. 154. 154 There are plenty of problems in advising properly customers Customers couldn’t find the sales reps Sales reps were hiding from customers Sales reps didn’t know what creates the margin Sales reps didn’t help each other The products were grouped by types and not according to purchasing logic Sales reps didn’t know how to increase the basket Sales reps were trained to say “Can I help you with something”
  155. 155. 155 In the set-up we have seen in the test store was far from optimal. Customer had to literally hunt for the sales rep Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  156. 156. 156 Therefore, we have divided the space into fast and slow area and put the sales reps in the peak our in the main alley Warehouse Offices Slow warehouse /store racks (shelving) Cash Till Employee Customer Fast warehouse /store racks (shelving)
  157. 157. 157 Summing up we totally changed the advising process by implementing the following changes: We removed the sales reps from the smaller alleys into the smaller alley We assigned them to specific area We divided the areas into fast and slow ones We had different goals for fast and slow areas We did a bit of cross selling (suggested products and VM) We changed the starting text of sales reps We introduced hot hours during which everybody was advising
  158. 158. 158 This is an example of tasks to be performed depending on the hour / sales level Period Sales level Warehouse specialist Sales Reps 7-8 Low Deliveries from Central Warehouse (CW) Shelf replenishment / Cleaning 8-9 Low Supplying goods to specific location Shelf replenishment / Cleaning 9-10 Average Supplying goods to specific location Shelf replenishment / Cleaning Partial customer service (advises) 10-11 Average Supplying goods to specific location Shelf replenishment / Cleaning Partial customer service (advises) 11-12 Big Receiving goods Only customer service (advises) 12-13 Big Receiving goods Only customer service (advises) 13-14 Average Supplying goods to specific location Shelf replenishment / Cleaning Partial customer service (advises) 14-15 Average Supplying goods to specific location Shelf replenishment / Cleaning Partial customer service (advises) 15-16 Big Receiving goods Only customer service (advises) 16-17 Big Receiving goods Only customer service (advises) 17-18 Big Only customer service (advises) 18-19 Average Shelf replenishment / Cleaning Partial customer service (advises) 19-20 Average Shelf replenishment / Cleaning Partial customer service (advises) 20-21 Low Shelf replenishment / Cleaning Partial customer service (advises)
  159. 159. 159 On Day 2 by changing the service standard we managed to increase the conversion 60% 46% 59% 41% 49% 65% 48% 75% 11-12 12-13 15:30-16:30 11-12 12-13 16-17 17-18 Hours with old service model 18-19 Day 1 of the Test Day 2 of the Test Conversion rate in the store
  160. 160. 160 On specific transaction we saw the result of the new service model, but it is difficult to trace it on aggregated data as at different hours come customers with different needs 79 27 43 66 70 49 63 57 11-12 12-13 15:30-16:30 11-12 12-13 16-17 17-18 18-19 Day 1 of the Test Day 2 of the Test Hours with old service model Average basket USD per transaction
  161. 161. 161 We also interviewed customers who excited without buying any products. Most of them were still at the browsing / wondering phases or did not find the specific product they were looking for 36% 45% 18% 29% 57% 14% Lack of required goods Just browsing Others Day 1 of the Test Day 2 of the Test
  162. 162. 162 1,67 1,32 Before After The change in the process was giving quite big potential savings Cost of 1 servicing customer In USD per customer 15 652 12 357 Before After Change in monthly cost in the test store In USD  Given the number of stores (70) this could give potential savings of USD 2.8 M
  163. 163. 163 Cash till and info point
  164. 164. 164 The test store was 4 000 sq. m big (43 000 sq. ft.) Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  165. 165. 165 The test store was 4 000 sq. m big (43 000 sq. ft.) Warehouse Offices Warehouse /store racks (shelving) Cash Till Employee Customer
  166. 166. 166 We organized also the work of cashiers and info Point. Cashier 2 and 4 will be taking place at the cash till only when the number of people in the queues is above 3 Hours Manager of Customer Service Info Point 1 Info Point 2 Cashier 1 Cashier 2 Cashier 3 Cashier 4 Total number of people 7-8 1 1 2 8-9 1 1 1 3 9-10 1 1 1 3 10-11 1 1 1 1 4 11-12 1 1 1 1 4 12-13 1 1 1 1 4 13-14 1 1 1 1 4 14-15 1 1 1 1 1 1 1 7 15-16 1 1 1 1 1 5 16-17 1 1 1 1 4 17-18 1 1 1 1 4 18-19 1 1 1 3 19-20 1 1 1 3 20-21 1 1 1 3 21-22 1 1 1 3
  167. 167. 167 Other things that we have noticed
  168. 168. 168 We proposed some changes that could help them further improve the results Lower inventory and get rid off empty space New products for the empty space Creation of new format  There is big potential to lower inventory and get rid off empty space  This can be achieved by series of changes  Smaller shelves / spaces for things like nails, screws etc. It makes sense to introduce standard packages (shorter time for stocktaking, easier to change the assortment)  Decreases the minimal quantity of shipment from Central Warehouse – packages instead of panels  Decrease the space occupied by panels  Smaller space for carpets (use fixtures)  Introduce new products at least loosely connected with your business or your customers  Sub-renting / subletting the space to other operators / retailers  You can create a smaller format with smaller shelves and higher frequency of supplies  This will drastically lower the costs of servicing and increase the sales density  You could achieve roughly the same sales with smaller space and less people
  169. 169. 169 Summary of savings achieved in the test store
  170. 170. 170 After groups estimated the cost of specific project, we had to use it and estimate the cost of the store by process Group 1 - Logisticsv2 Group 2 - Customer Servicev2 Group 3 – Othersv2 Cost of the store by processes - Summary of processesv2
  171. 171. 171 1,8 6,0 3,9 1,5 3,8 3,3 8,4 28,8 The test store shows that significant savings can be achieved 12,7 17,3 6,1 2,6 6,2 15,7 27,1 87,7 Direct deliveries Deliveries from Central Warehouse (CW) Price change Price monitoring Cash till operations Advices at the selling store area Total monthly costs In ‘000 USD Potential savings In ‘000 USD Total  Potential savings are USD 29K (32% of all addressable costs)  We assume that 50% of those savings can be achieved we can reduce the number of FTE in the store by 4 Others
  172. 172. 172 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  173. 173. 173 Make-or-buy analysis
  174. 174. 174 Make-or-buy analysis – Introduction
  175. 175. 175 Make-or-buy analysis is extremely important tool that will help you decide in a rational way what you should do in-house and what to buy
  176. 176. 176 Just as a reminder we are using the following framework Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts
  177. 177. 177 One of the ways to optimize the process and costs is to carry out make-or-buy analysis Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts Simplify and optimize processes Replace Opex with capex (analyze Opex vs capex tradeoff) Make it or buy it analyses and if needed outsource or buy outside
  178. 178. 178 Theory of make or buy is simple so in this section I will go directly to 3 case studies Car vs Uber Make-or-by course – Consulting Firm What work should you delegate?
  179. 179. 179 Total cost of ownership
  180. 180. 180  All the cost related to owning or using a specific item / thing  It will also include the cost of lost opportunity i.e. money not earned due to spending time on repairing the thing Total cost of ownership = Let’s start with a short definition
  181. 181. 181  Cost of buying a car  Insurance  Fuel  Cost of maintenance including repairs & parts  Time wasted on maintenance, parking etc.  Other i.e. parking tickets, traffic ticket etc. Let’s compare the cost of owing a car and using a rideshare / taxi / cab service  Cost of rideshares
  182. 182. 182 Car vs Uber – Introduction
  183. 183. 183 Let’s imagine that you were to decided whether it makes more sense to buy a car or to use Uber
  184. 184. 184 We will consider 3 scenarios Consider 3 scenarios In scenario 1 you use the car just to get to work In scenario 2 you use it also for buying and visiting friends In scenario 3 you also travel on weekends
  185. 185. 185 Let’s see what is the difference for # of days during which you use the car during the month Scenario 1 - just to get to work  20 Average # of km per day covered  50 Scenario 2 - work, shopping, friends  26  70 Scenario 3 - work, shopping, friends, weekends  30  90 % probability of scenario  50%  30%  20%
  186. 186. 186 A few hints on what costs you should take into consideration for the own car option Purchasing of the car & financing Maintenance Insurance Fuel Parking Other costs i.e. traffic tickets
  187. 187. 187 Make-or-buy courses – Case Introduction
  188. 188. 188 Imagine that you have to analyze for a consulting firm whether it makes sense or not to produce online course devoted to Data Science
  189. 189. 189 A few information about the firm that we will be analyzing They have 15 on the lowest position – Business Analysts & Associates They have 3 PM and 2 Directors Every year 50% leaves You have to train all new employees
  190. 190. 190 A few information about the Make option The course will take 250 hours to prepare & 50 hours every year for modification The delivery will take 30 hours each time In the group there can be 5 people Associate / BA costs EUR 21 per hour. Director EUR 62 per hour
  191. 191. 191 A few information about the Buy option The course can be also created & delivered by external person It this case each delivery will costs EUR 3 800 per group In the group there can be 5 people Associate / BA costs EUR 21 per hour. Director EUR 62 per hour
  192. 192. 192 Delegating some work to others – Case Introduction
  193. 193. 193 We are back to Maria. Using previous case study we will try to decide which activities she should delegate using the make-or-buy analysis.
  194. 194. 194 Below some information on Maria and meal preparation She earns EUR 40 per 1 hour after deducting taxes She cooks every day. It takes 1 hour to prepare a meal She uses food that costs per meal EUR 5 She can order food to be delivered at price EUR 10
  195. 195. 195 Below some information on Maria and how she cleans the house She cleans the house every week. It takes 4 hours to clean. She can hire somebody to clean instead of her 1 cleaning would cost EUR 60
  196. 196. 196 Below some information on Maria and how he does shopping She shops every second day. It takes her 2 hours per 1 visit. She can order online and save 1.5 hour per 1 purchase Delivery would cost on average 5 EUR per delivery
  197. 197. 197 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  198. 198. 198 Investment analysis
  199. 199. 199 Investment analysis – Introduction
  200. 200. 200 Investments can help you reduce costs. You can also reduce some investment / big expenses by looking at their efficiency
  201. 201. 201 Just as a reminder we are using the following framework. Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts Eliminate fully certain expenses Change specification – use less of certain thing Change specification – use cheaper substitute Standardized the process using the best practice Automate with software Automate with machine Simplify and optimize processes Replace Opex with capex (analyze Opex vs capex tradeoff) Make it or buy it analyses and if needed outsource or buy outside Renegotiate contracts with current suppliers Change the supplier Change the form of using (i.e. owing something instead of leasing)
  202. 202. 202 A lot of actions require investment analysis Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts Eliminate fully certain expenses Change specification – use less of certain thing Change specification – use cheaper substitute Standardized the process using the best practice Automate with software Automate with machine Simplify and optimize processes Replace Opex with capex (analyze Opex vs capex tradeoff) Make it or buy it analyses and if needed outsource or buy outside Renegotiate contracts with current suppliers Change the supplier Change the form of using (i.e. owing something instead of leasing)
  203. 203. 203 Theory is relatively simple so in this section I will go directly to case studies Cost reduction Investment – Retail Cost reduction Investment – Ceramic Tiles
  204. 204. 204 Theory is relatively simple so in this section I will go directly to case studies Efficiency of customer acquisition in consulting firm Efficiency of methods to motivate 3rd party sales reps Sell non-core assets – cosmetics firm
  205. 205. 205 Investments – General thoughts
  206. 206. 206 Apart from capacity increase there are 4 main reasons why you do investment Investments Replacement Required by the customer Reducing costs Removing bottlenecks Total cost of Ownership / Usage – comparison Margin that may be lost if you don’t do the investment Margin that can be gained if you do the investment Change in labor costs Change in materials and related costs Change in energy & other utilities costs Margin gained thanks to the removal of the bottlenecks Reduction of costs related to production Reduction of other costs (not related to production) Change in maintenance costs
  207. 207. 207 To decide whether something makes sense or not we compare Capex and Benefits Capex Benefits? Cash outflow / Negative cash flow Cash inflow / Positive cash flow ?
  208. 208. 208 We usually use the NPV or IRR to decide whether the investment makes sense NPV IRR
  209. 209. 209 Cost reduction investment –Retailer – Introduction
  210. 210. 210 Imagine that you are working for a fashion discounter that operates a retail chain in Easter Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
  211. 211. 211 Cost reduction investment –Retailer – Solution
  212. 212. 212 Just as a reminder you are working for a fashion discounter that operates a retail chain in Eastern Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
  213. 213. 213 Let’s have a look how to show the results from the change to LED bulbs in the Power Point 15 624 1 250 620 17 494 3 636 13 858 NPV of Difference in electricity costs NPV of Difference in bulb costs NPV of Difference in labor costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
  214. 214. 214 Cost reduction investment –ceramic tile producer – Introduction
  215. 215. 215 Imagine that you are working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
  216. 216. 216 Cost reduction investment –ceramic tile producer – Solution
  217. 217. 217 Just as a reminder you are working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
  218. 218. 218 Let’s have a look how to show in Power Point the results from the introduction of robots to ceramic tiles factory 156 890 37 566 16 657 102 668 27 273 75 396 NPV of Difference in labor costs NPV of Difference in electricity costs NPV of Difference in maitenance costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
  219. 219. 219 How to motivate 3rd party sales reps – Case Introduction
  220. 220. 220 Let’s imagine that you have to decide which method to support sales reps that work for retailers will be the best one Your competitors are using different methods to support sales reps that work for retailers You don’t use any of them Estimate which methods makes sense
  221. 221. 221 Let’s see what methods are using other producers of domestic appliances Your customer LG Electrolux Braun Samsung Bosch Philips Others Loyalty programsContestsTrainings Incentive trips Uses the method Doesn’t use the method
  222. 222. 222 When choosing the right mix of methods you have to take into account 3 things Return on Investment (ROI) Capacity of the method Other limitations
  223. 223. 223 How to motivate 3rd party sales reps – Solution
  224. 224. 224 Just as a reminder you have to decide which method to support sales reps that work for retailers will be the best one Your competitors are using different methods to support sales reps that work for retailers You don’t use any of them Estimate which methods makes sense
  225. 225. 225 Just as reminder there are 4 major things that producers are using to support sales at retailers stores Your customer LG Electrolux Braun Samsung Bosch Philips Others Loyalty programsContestsTrainings Incentive trips Uses the method Doesn’t use the method
  226. 226. 226 From the calculations we did in the Excel we can see that the best return is on Trainings, followed by Incentive Trips 512% 275% 67% 400% Trainings Contests Loyalty Program Incetive Trips
  227. 227. 227 Let’s have a look how to show in Power Point the impact on the sales 900 135 45 135 60 1 275 Current Sales Trainings Impact Contests Impact Loyalty Program Impact Incetive Trips Impact Future Sales Impact on Sales – different methods to support the 3rd party sales force In millions of USD
  228. 228. 228 Let’s have a look how to show in Power Point the impact on the net margin 180 23 7 11 10 230 Current Sales Trainings Impact Contests Impact Loyalty Program Impact Incetive Trips Impact Future Sales Impact on Net Margin – different methods to support the 3rd party sales force In millions of USD
  229. 229. 229 Sell non-core assets – Introduction
  230. 230. 230 By non-core assets we mean things that you do not need for your core business. You may have different strategy Non-core Do we use the assets for current operations? Non-core assets that are for some reason used today  Spin-off into a new business if they are above the market average in operating those assets  Check whether they give you some competitive advantage with respect to customers, suppliers of employees  Go through make-it-or-buy-it analysis to see whether you are the best owner of this business  Try to improve the utilization of those assets Non-core assets that you do not need  Spin-off into a new business if they are above the market average in operating those assets (have high % EBITDA or ROA, ROCE)  Try to improve the utilization of those assets  Sell the assets if they are below the market standards Asset that remained from glorious past or give you room for growth  Keep them  If possible rent them Core assets currently heavily used  Optimize usage  Look for efficiency gains and cost cutting  Apply lean manufacturing and theory of constraints to use them to the fullest potential Core Not-used Used
  231. 231. 231 In the next few lectures we will use the case study of cosmetics producer Cosmetics producer
  232. 232. 232 Sell non-core assets – Case Introduction
  233. 233. 233 Let’s imagine that you have to decide what to do with not used core assets and non-core assets of a cosmetics producer A big production site in Poland Only 1 factory used There are some non- core assets
  234. 234. 234 Let’s have a look how their production site and how it looks like Factory 1 Factory 2 Kindergarten Hotel Core assets Non-core assets
  235. 235. 235 Sell non-core assets – Case Solution
  236. 236. 236 Just as a reminder. We are trying to decide what to do with not used core assets and non-core assets of a cosmetics producer A big production site in Poland Only 1 factory used There are some non- core assets
  237. 237. 237 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  238. 238. 238 Reduce usage
  239. 239. 239 Reduce usage – Introduction
  240. 240. 240 You can achieve a lot by reducing how often you use something or change its specification. We will discuss in this section this area of savings
  241. 241. 241 Just as a reminder we are using the following framework Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts
  242. 242. 242 In reduce of usage we have 3 options. We will discuss them in details in this Cut costs Reduce usage Automate Optimize process and costs Renegotiate contracts Eliminate fully certain expenses Change specification – use less of certain thing Change specification – use cheaper substitute
  243. 243. 243 We will do 3 cases studies in this section Eliminate fully certain expenses – Consulting firm case study Use less of certain thing – Cosmetics producer case study Use cheaper substitutes – Drugstore chain case study
  244. 244. 244 We will do 3 cases studies in this section and I will also discuss in more details the 3 methods of reducing usage Eliminate fully certain expenses – Consulting firm case study Eliminate fully certain expenses – Tips Use less of certain thing – Cosmetics producer case study Use less of certain thing – Tips Use cheaper substitutes – Drugstore chain case study Use cheaper substitutes – Tips
  245. 245. 245 Eliminate fully certain expenses – Case Introduction
  246. 246. 246 Imagine that you are analyzing a newly bought company that is providing Data Science services. Your boss wants you to look at usage and decide what to reduce
  247. 247. 247 A few information about the firm that we will be analyzing The company has 500 Data Scientists You got data on what Software and tools they use Eliminate things they don’t use
  248. 248. 248 Use less – Cosmetics Producer – Case Introduction
  249. 249. 249 Now we will have a look at a cosmetics producer and we will try to measure how much they can save by using less. We will look at 3 areas of their activities
  250. 250. 250 Below some information about the firm we will be analyzing They want to minimize number of bottles they use The are considering visiting less frequently customers They want to move 2 offices into 1 bigger office Check how much they can save
  251. 251. 251 Use cheaper substitutes – Drugstore chain – Case Introduction
  252. 252. 252 You were asked to help the drugstore chain find potential savings by introducing cheaper substitutes. You have picked 4 potential topics
  253. 253. 253 A few information about the firm that we will be analyzing They have 4 000 stores They want you to analyze Head Office costs In Head Office you have picked 3 topics: water, tea & coffee, paper You have also decide to have a look at boxes they use for the e-commerce
  254. 254. 254 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Cost Reduction for Managers & Management Consultants $190 $19 Click here to check my course
  255. 255. 255 Spend less
  256. 256. 256 Spend less – Introduction
  257. 257. 257 In this section we will discuss useful ways that will help you spend less and save more money General framework for spending less Analysis of your expenses / spending Detailed discussion of methods to spend less Cases studies & examples how to apply them Other useful things that will help you spend less & save money
  258. 258. 258 General framework for spending less
  259. 259. 259 Just as reminder in the first step we want to spend less to increase our savings Income Expenses Savings=- Savings x # of years = Total savings Total savings x 1 + increase in value in % = Total wealth
  260. 260. 260 As you may remember we have the following general framework How to build your wealth Earn more Spend less Be more productive Add new revenue streams Invest wisely your money Choose your life partners wisely Manage your kids properly
  261. 261. 261 In this section we will get deeper into ways to spend less How to build your wealth Earn more Spend less Be more productive Add new revenue streams Invest wisely your money Choose your life partners wisely Manage your kids properly Reduce usage / frequency of using / purchasing Eliminate some expenses Renegotiate prices & find cheaper provider Calculate Total Cost of Ownership (TCO) Adjust your choices and behavior using TCO & tradeoffs Be healthy & in shape Calculate the value of your time Do make it or buy it analysis using value of your time Measure happiness per 100 USD spent & adjust your choices Reduce expensive liabilities Repurpose assets that don’t generate income Check the endgame of an action and is it worth it
  262. 262. 262 Why you need data on what you spend your money?
  263. 263. 263 What gets measured gets managed Peter Drucker
  264. 264. 264 There are plenty of reasons why you have to first see on what you spend currently your money You will know how much money you spend every month You will see what is the structure of your costs You will be able to identify so called one-offs You can set priorities You will know which categories you will have to analyze in details Awareness helps you already spend less You can set daily limits that will help you get quick wins You will know which habits / believes you will have to deal with
  265. 265. 265 How to get data on how you spend your money
  266. 266. 266 Let’s start with the goal. You want to see on what categories you spend money and how much they make in your monthly spending
  267. 267. 267 There are 4 approaches to gather data on how much you spend and on what Fill in data in Excel by categories Fill in data in Excel – every spending a separate entry Use data from your bank account  You create a matrix in Excel – the rows are categories, the columns are months  Manually you put data every time you spend them in the proper cell  You create a table in which you put every spending.  Every spending is a separate row  For every spending you put not only the amount but also the date of the spending and you pick the category  You can use the table to create all sort of reports  You can either do the analysis directly in your banking system by adding to every spending the category of spending  You can also download the data from the banking system and analyze them in Excel Other specialized tools for analyzing your spending  Mobile apps like: Mint, Pocket Guard, YNAB  Other similar tools that aggregate your data from different banking account and the data that you put in manually
  268. 268. 268 There are 4 approaches to gather data on how much you spend and on what Fill in data in Excel by categories Fill in data in Excel – every spending a separate entry Use data from your bank account  You create a matrix in Excel – the rows are categories, the columns are months  Manually you put data every time you spend them in the proper cell  You create a table in which you put every spending.  Every spending is a separate row  For every spending you put not only the amount but also the date of the spending and you pick the category  You can use the table to create all sort of reports  You can either do the analysis directly in your banking system by adding to every spending the category of spending  You can also download the data from the banking system and analyze them in Excel Other specialized tools for analyzing your spending  Mobile apps like: Mint, Pocket Guard, YNAB  Other similar tools that aggregate your data from different banking account and the data that you put in manually
  269. 269. 269 The fist method would look roughly like this in practice
  270. 270. 270 The second method would look roughly like this in practice Date Amount spend In USD Reason Month Category 01/06/2019 400Mortgage 6Flat related expenses 01/06/2019 100 Fees for the appartment 6Flat related expenses 01/06/2019 50Electricity 6Flat related expenses 01/06/2019 12Netflix 6Entertainment 01/06/2019 40Internet + HBO 6Entertainment 01/06/2019 30Phone 6Phone 03/06/2019 15Bachata 6Sport 10/06/2019 15Bachata 6Sport 17/06/2019 15Bachata 6Sport 24/06/2019 15Bachata 6Sport 04/06/2019 80Groceries 6Daily expenses 11/06/2019 60Groceries 6Daily expenses 18/06/2019 70Groceries 6Daily expenses 25/06/2019 90Groceries 6Daily expenses 03/06/2019 25Lunch outside 6Dinning out 04/06/2019 25Lunch outside 6Dinning out 05/06/2019 25Lunch outside 6Dinning out 06/06/2019 25Lunch outside 6Dinning out 07/06/2019 30Lunch outside 6Dinning out 10/06/2019 25Lunch outside 6Dinning out 11/06/2019 25Lunch outside 6Dinning out 12/06/2019 20Lunch outside 6Dinning out 13/06/2019 25Lunch outside 6Dinning out 14/06/2019 25Lunch outside 6Dinning out 17/06/2019 30Lunch outside 6Dinning out 18/06/2019 25Lunch outside 6Dinning out
  271. 271. 271 There are 4 approaches to gather data on how much you spend and on what Fill in data in Excel by categories Fill in data in Excel – every spending a separate entry Use data from your bank account Other specialized tools for analyzing your spending
  272. 272. 272 Personal Finance using Management Consulting Hacks Practical Guide presentation For more details on how to spend less in private level check my presentation
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