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Turning Overhead Expenses Into Profits 2 Agnew 011110
1. Turning Overhead Expense Savings into Profits Jim Agnew Director Expense Reduction Analysts (407) 299-8845 JAgnew@ExpenseReduction.com
2. Presentation Objectives Why all the focus on reducing expenses? Opportunities for cost reduction Developing a culture of saving Expense management fallacies and challenges Expense management strategies Best practices in expense reduction process
3. The World is Flat…. The Pressure is ON! World forces are driving prices lower Customers commoditizing ALL products YOUR competition is keeping ALL expenses as low as possible to gain pricing advantage WHAT ARE YOUR SAVINGS GOALS??
4. Non-Core costs Rarely Get Respect Senior Mgmt focuses on revenue growth, margin integrity and controlling payroll and direct costs. Senior Mgmt does not have time to focus here
5. Trends Within Mid-Sized Companies Lack a formal sourcing or procurement organization 38% Uncertain how to begin strategic sourcing initiative 50% 0% 20% 40% 60% 80% 100% Typical firm applies strategic sourcing to only 1/3 of spending Insufficient sourcing costs U.S. firms $134 billion per year Source: Aberdeen Group. Tim A. Minahan, "Sourcing in the Mid-Market: The Supply Management Echo Boom". 2006
6. CFOs Recognize the Issue… Believe managingindirect expenses is an important strategy for improving their business Said “lowering costs from suppliers” is one of their biggest challenges in expense management Lack aggregated data to negotiate with Suppliers Believe they are not getting the best prices 67% 50% 59% 78% Source: CFO Magazine
7. Column1 Today 20% CostReduction EquivalentIn Sales Revenue $ 100 $ 100 $ 140 Direct operating costs $ 35 $ 35 $ 49 Labor costs $ 35 $ 35 $ 49 Non-core indirect costs $ 20 $ 16 $ 28 Net profit $ 10 $ 14 $ 14 After tax (40%) $ 6 $ 8 $ 8 Business Value = 6 P/E $ 36 $ 48 $ 48 Lowering Non-core Costs Can be VERY Profitable… A 20% cost reduction = 40% increase in Net Profit $4Min expense savings = $40M in revenue
8. Non-Core Savings Opportunities Office Supplies Transport Freight & Parcel Waste & Recycling Merchant Card Fees PayrollProcessingFees Telecom Voice & Data Printing FactorySupplies Records Mgmt Cleaning Service & supplies Uniforms Temp Labor Leasing Packaging 8
9. Expense Category AvgSavings General Business Insurance 21% Freight 18% Office Supplies 35% Small Package Freight 20% Temporary Labor 20% Packaging 21% Merchant Card Fees 33% Factory Consumables 22% Telecommunications 26% Printing 20% Typical ERA Savings Results………….
10. Some Expense Management Challenges Believing suppliers are looking out for your best interests 5 companies with same supplier don’t get the same price Supplier loyalty doesn’t equate to best price or service No benchmark data & No time to monitor Expense Management Challenges “Level” playing field between buyer &supplier is a misnomer Multiple suppliers Multiple order points Staff and Management has limited time to address non-strategic costs Employees with limited purchasing experience make the buying decisions We are doing an excellent job of cost control on your own 10
11. Effective Cost Management Requires Multiple Skills CategoryKnowledge Supplier Insights ProcurementExperience Analytical Skills Market Benchmark Data Political Skills 11
12. Expense Management Strategies Avoid aggressive vendor “management” with frequent re-negotiations and pricing pressure Not sustainable…service will suffer Ultimately, you become less valuable to suppliers Increase buying power Buy together? Negotiate together? Buy alone? Develop deeper, longer-term supplier relationships (as you would with strategic costs) Fewer, more professional negotiations w/RFPs Negotiate with senior supplier management Allow for cost-driven price increases
13. Adopt a Drip Culture! Attend to every leaky tap Focus and question, constantly check Eliminate waste, without cutting necessity Integrate savings into your business planMake it part of the culture! RULES: No cost is sacred Is this cost necessary at all? Recycle and reuse Record expectations – then double Ensure implementation Monitor/record results
14. The Truth Is – Most Companies Won’t Find the time to pursue non-core savings Too much happening to look beyond “critical” tasks each day Actively engage in effective supplier negotiations on non-core costs Time / talent/ expertise / energy not there Suppliers maintain an advantage in the buy-sell relationship Realize the bottom line impact opportunity available from non-core savings Unprofessional negotiations Negotiate with sales reps instead of management Allow for price increases based on local market input
15. The ERA Process Yields Predictable Results Our statistics* show: Savings in 90% of projects An average cost savings of 20% Realize 100% of predicted savings Product quality and Service remain constant or improve Additional “soft cost” benefits increase overall bottom line impact *Based on more than 14,000 Worldwide ERA projects over 14 years
16. When you Engage Expense Reduction Analysts, you get…….. Knowledge, Information, Support Real category/industry expertise and experience Access to aggregated (benchmark) pricing data Detailed analysis of past and future spend activities Transparency in all phases of project Implementation support; on-going auditing of results Compensation based on delivered success Results Faster completion More savings Improved bottom line
17. Summary Non-core expense control critical to success Put in the effort if you want results Know the category and industry Monitor your results, catch errors Adopt the culture of savings Thank You