Flevy.com - Cost Reduction


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This document discusses various cost reduction methodologies and concepts, including the following: Process Optimization, Strategic Sourcing, Shared Services, Business Process Outsourcing.

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Flevy.com - Cost Reduction

  1. 1. Cost Reduction PresentationThis document discusses various cost reduction methodologies and concepts,including the following: Process Optimization, Strategic Sourcing, Shared Services,Business Process Outsourcing
  2. 2. Cost Reduction Strategies have become the focus of executive managementdue to global economic challenges External Drivers for Cost Reduction  Increased Marketplace Competition – Competitors providing similar products at lower prices  Fear of Recession – Less cash flow in the marketplace  Rising Costs of Production – Increasing cost of Energy and Material  Inflation – Declining value of currency and/or rising prices of goods and services  Increased pressure from Investors and Boards of Directors – Missed Revenue Targets – Mergers and Acquisitions The Burning Platform: $1 = $6.87 $1 of cost reduction = $6.87 of new sales when viewed from the impact to the bottom line 3
  3. 3. The Savings Realization Matrix may reveal a focus on several cost reductionstrategies… for example, Strategic Sourcing In many cases, there is lost cost Key Elements of a Successful maximization simply due to a lack of Strategic Sourcing Program centralized insight into which suppliers are providing work to each business unit Visible – This insight would lead to opportunities to Leadership consolidate vendors to deliver the same work Commitme Standardized but for less based on volume discounting Vision nt Repeatable Processes Typically, there is inconsistent accountability tracking of whether suppliers are meeting deliverables within Strategic Value agreed upon Service Level Agreements Based Sourcing Technology which can lead to excess costs Outcome Enablement Most importantly, organizations may lack an understanding of the contractual cost Risk drivers that would otherwise give the Manageme Innovation client clear insight as to what “levers” can nt be pulled to reduce costs Strategic Sourcing assessments typically identify a variety of “quick-wins” and measure the alignment of key elements against best practices 5
  4. 4. Agenda Overview of Cost Reduction Process Optimization Strategic Sourcing Shared Services Business Process Outsourcing 7
  5. 5. Process Optimization assessments across people & process has become abasic focus cost reduction Process Optimization: Activity-Based Costing indicates the Costs of Total Bank • Measures the cost and financial performance of Activities and Objects Expenses How much activities, resources, and cost objects do we Book costs to appropriate spend? Cost Cost Cost Cost Cost cost centers • Assigns resources to activities and activities to cost Center 1 Center 2 Center 3 Center 4 Center 5 objects based on their use, and recognizes the casual Drive cost relationships of cost drivers to activities center costs What to activity Activities Activities Activities Activities Activities based do we do? process cost pools Cost Inputs Process Costs Cost Objects Reporting Customer For which Drive pool Product Product Product Product Product costs to Raw Material Related products do Costs A B C D E Activities Customer Groups we do it? objects Product Profitability Product 1 Manufacturing Package / Product 2 Costs Distribution Activities Product 3 ABC ABM Product 4 Packaging/ Distribution A c tiv ity -B a s e d C o s tin g in d ic a te s th e A c tiv ity B a s e d M a n a g e m e n t Manufacturing Costs Product Related C o s ts o f A c tiv itie s a n d O b je c ts fo c u s e s o n u n d e rs ta n d in g Activities Customer Profitability W H Y and H O W W ELL Customer 1 R esou rces W h a t is u s e d to d o Direct Business Customer 2 Center/ w ork W hy? W h a t? H o w W e ll? Customer 3 Marketing Manufacturing Packaging/ Costs Activities Distribution C o st P e r fo r m a n c e (W h a t w o r k ) is d o n e D r iv e r s A c tiv itie s M ea su res R&D Costs A c tiv itie s Support Activities Process Costs Sales & Mktg. W hy R&D (W h a t w o r k ) Corporate Product Groups T o w h a t, o r fo r is w o r k d o n e o r Pkg/Dist C o s t O b je c ts w h o m is w o r k d o n e w h a t im p a c ts a n is d o n e H o w w e ll Charges New Product Mfg a c tiv ity ’s c o s t, is w o r k d o n e Development tim e , o r q u a lity Activities 9
  6. 6. Phase 1 Focus Interviews help spotlight where costs do not align with value Level 1 Insights Delivered Detailed discussion Components Underlying issue discovery Internal Focus Interviews Headline cost reduction opportunities Hypothesis guidance Level 2 Insights Delivered Broader opportunities in cost reduction Priority cost components and watch outs Awareness Services Purchase Delivery Manage Evolve Subject Matter Interviews Detailed option flesh out What is the What are tier 1 Where does What is the How should What opportunities awareness must have purchasing preferred delivery accounts be are there to tighten perception of services? reside? model? managed? the relationship? services offered? Which services Who are the key What part(s) of What push vs. pull What are the What is the does customer decision makers/ the overall services should be broader priority awareness of believe can be Influencers? service suite enabled? services that could Level 3 broader service effectively does the be streamlined? What is the What are the key Insights Delivered suite? enabled? spend customer wish to Service Level keep internal? How do How will breakdown? Agreements to Questions customers customer maintain? Focused discussion perceive the purchasing competitive patterns evolve? Prioritization of key value add areas across landscape? experience External Customer Mapping to costs of operation for cost/ value Focus Interviews mapping Including internal and SME inputs to shape the discussion helps open up customer experience insights and areas where spend is not valued 11
  7. 7. Interviewing, benchmarking, and other techniques are used to identify bottomup savings opportunities measured against your current state processes Acquisition Illustrative Macro Process Overview = Indicative Pain Points Acquisitions, Marketing & Sales Asset Creative Services Management Consumer Marketing SKU Sales Planning Management Research Media Advertising Business Intelligence & Publicity Promotions Planning Budget / Planning Category Management Bus. Decision Collaborative Post Event Knowledge Data Integrity Framework Forecasting Analysis Management Manufacturing Distribution Merchandiser Supply Chain Demand & Transformation Supply Matching “Inbound” Product Pre- Production WIP Inventory Planning VMI Retail Returns Credit & Planning Invoicing Management Visibility “Outbound” Merchandising Management Deductions Mnmt “Prod. Config” Pick, Pack & Customer Ship Planning Service Manufacturing Manufacturing Assembly FG Inventory Order Assembly & VMI Deliveries & Distribution Planning Visibility Management Distribution Inventory Sourcing Non VMI Planning Pre Replenishment Procurement Deliveries release 13