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Managing Costs We Don't Understand

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Why the existing cost saving projects have little chance of success and what can be done about it?

Never before has there been so much hype about cost saving, and never before has there been less evidence of it. We often mistake knowing the inexhaustible volume of reported data for understanding the costs, forgetting that it is not just facts that are important, but the intertwined threads and people that connect them to their ever-changing origins.

What we really need to know in order to make improvements is what these underlying processes are and how they affect a company's performance. The constantly changing interrelated causes that influence costs are mostly invisible, complex, non-linear - hard for our brains to digest and for computers to model. Instead of following a factual stream of cost data derived from financial sources and dissociated with their true origins, you should apply Disruption Diagnostics techniques that focus on authentic costs and their causes, associated with the most disruptive operational events.

"It would cost Southwest approximately 8 to 10 airplanes of flying per day if we were to add just a couple of minutes of block time to each flight in our schedule."
Greg Wells, Southwest

Built-in disruption buffers, investment in punctuality, and other inefficiencies inherent within hub and spoke operation make between 10% and 30% of total operating costs.Ongoing disruptions can account for 2-3% of variable costs especially with hub operators. One part of these costs is integrated in company's plans as an insurance against uncertainty, and another part is hidden inside the variance between planned and actual costs.

‘Delays cost the nation’s [US] economy in wasted fuel, rescheduled business meetings, and lost productivity $41 billion in 2007 alone, excluding international traffic. In 2007 airlines operating domestic flights spent $19 billion in fuel, labour and maintenance costs while aircraft sat idle or circled in holding patterns above congested airports.’
Joint Economic Committee (JEC) of the US

Disruption Diagnostics is an approach to management where unforeseen costs caused by disruptive events are diagnosed and associated with their root causes. It then becomes possible to minimise business risk by reducing costs when and where it really matters, decrease the size of operational and cost buffers in a controllable way, experience fewer 'unforeseen' events, and recover losses caused by third parties.

Disruption Diagnostics enriches the rigidly structured organisational and cost mechanisms with the fluidity of real life. As a result, your airline will become more resilient, able to bounce back more quickly when faced with unexpected events.

It is an indispensable tool for improvement in airline operational and cost efficiency, quality of service, competitiveness, and ultimately - profit.

Published in: Business

Managing Costs We Don't Understand

  1. 1. How to unlock unexplored potential for cost saving and improve airline profitability Jasenka Rapajic, Astute Aviation Introduction to Event Based Management
  2. 2. Astute AviationIntroduction to Event Based Management
  3. 3. Never before has there been so much hype about , and never before has there been of it. Astute Aviation Introduction to Event Based Management
  4. 4. We often mistake knowing the inexhaustible volume of reported data for understanding the costs, forgetting that it is that are important, but the and that them to their ever- changing origins. Introduction to Event Based Management Astute Aviation
  5. 5. Still we look at costs as numbers, unaware of their like effort, resources, services, efficiency, missed opportunities, knowledge, and communication. Introduction to Event Based Management Astute Aviation
  6. 6. What we really need to know in order to make improvements is and how they affect a company's performance. Introduction to Event Based Management Astute Aviation
  7. 7. If you are responsible for projects aimed at keeping operating costs down and find it in planned costs, you should know that this is because cost causation and measured by traditional cost tracking methodologies inherited from the industrial era. Introduction to Event Based Management Astute Aviation
  8. 8. The constantly changing that influence costs are mostly invisible, - hard for our brains to digest and for computers to model. Introduction to Event Based Management Astute Aviation
  9. 9. This is why major cost cutting programs usually end up with laying people off, creating new sources of , and making the business and people . Introduction to Event Based Management Astute Aviation
  10. 10. What can you do about it? Introduction to Event Based Management Astute Aviation
  11. 11. Instead of following a factual stream of cost data derived from financial sources and dissociated with their true origins, you should apply techniques that focus on authentic costs and their causes, associated with the . What drives these changes? Introduction to Event Based Management Astute Aviation
  12. 12. Disruption events represent segments of real life situations when business 'happens' – where and where their and . Passing the means keeping the business . Introduction to Event Based Management Astute Aviation
  13. 13. How many airlines are failing the ‘test of reality’ and how much does this cost the industry? Introduction to Event Based Management Astute Aviation
  14. 14. Built-in inherent within hub and spoke operation make between of total operating costs. Operational disruptions take of operating costs over a year. Is this possible? Something has to be done! Introduction to Event Based Management Astute Aviation
  15. 15. "It would cost Southwest approximately if we were to add just a to each flight in our schedule." Greg Wells, Southwest Look at this… what about hub airlines? The on the route between London Heathrow and Paris Charles de Gaulle take an of aircraft utilisation each day. Introduction to Event Based Management Astute Aviation
  16. 16. Aircraft damaged on ground is the cause of longest and most costly operational disruptions. Industry losses are estimated at $10billion ($4billion in 2003). Flight Safety Foundation Indirect costs related to flight disruptions caused by unserviceable aircraft could be 8-36 times higher than direct costs of aircraft repair. Marsh Losses to airlines must be much higher as they cannot provide good evidence for indirect costs of damage Introduction to Event Based Management Astute Aviation
  17. 17. ‘ in wasted fuel, rescheduled business meetings, and lost productivity in 2007 alone, excluding international traffic. In 2007 airlines operating domestic flights spent , labour and maintenance costs while aircraft sat idle or circled in holding patterns above congested airports.’ Joint Economic Committee (JEC) of the US Let’s see how Event Based Costing can help. Introduction to Event Based Management Astute Aviation
  18. 18. What is Event Based Costing? Introduction to Event Based Management Astute Aviation
  19. 19. is an approach to management where caused by are diagnosed and associated with their . Introduction to Event Based Management Astute Aviation
  20. 20. Event Based Costing focuses on of and their intangible causes. . Introduction to Event Based Management Astute Aviation
  21. 21. To take full advantage of Event Based Costing, you need to focus on the . This will allow you enough time to go deeper instead of wider and get to the roots of avoidable causes. costs events Introduction to Event Based Management Astute Aviation
  22. 22. It then becomes possible to minimise business risk by when and where it really matters, the size of in a controllable way, experience , and caused by third parties. EBC COSTS DISRUPTION S Introduction to Event Based Management Astute Aviation
  23. 23. Causes and consequences of operational disruptions spread across multiple functions and processes connecting data and people. Introduction to Event Based Management Astute Aviation
  24. 24. By embracing the principles of Event Based Costing, you build an understanding of and discover between functions and processes as they happen, without depending on biased 'translators‘. Introduction to Event Based Management Astute Aviation
  25. 25. You also get a better insight into the experience of , crucial for preventing the loss of a company's reputation and ultimately the in the longer term. Introduction to Event Based Management Astute Aviation
  26. 26. Let us look at two real life examples Introduction to Event Based Management Astute Aviation
  27. 27. EXAMPLE 1 Let's look at how an European airline identified and responded to findings related to one of its strategic oversights Introduction to Event Based Management Astute Aviation
  28. 28. Unexplainable increase in planned costs Public criticism over increased number and length of disruptions THE PROBLEM EXISTINGCOST CUTTING OPTIONS Departmental costs already squeezed below tolerable levels Occasional cost saving projects never brought lasting results Laying people off no longer an option EXAMPLE 1 – Part 1 ONGOINGCOST SAVING DISCUSSIONS Indecisiveness about how best to tackle cost reduction prompted the airline to apply the principles of Event Based Costing to understand unreported issues missing from company reports. Introduction to Event Based Management Astute Aviation
  29. 29. Most costly disruption events identified over past three months. Main cause identified as reduced stock of aircraft spare parts - strategic move to cut maintenance costs. The process included 11 departments from operational to strategic, resulting in invaluable insights into areas in need of improvement. MAIN DISRUPTION COSTS • aircraft rentals (or passengers and spare parts • commercialand technical aircraft positioning • accommodationand transfer of crew and passengers • transport by other carriers • passenger compensations • additional advertising to soothe the effects of bad publicity Insufficient stock of spare parts generated £770,000 in calculable disruption costs. The problem remained undiscovered for about 9 months, suggesting much higher operational losses The company re-examined and balanced their spare part polices and continued to monitor disruptive events following the EBC principles. EXAMPLE 1 – Part 2 Introduction to Event Based Management Astute Aviation
  30. 30. EXAMPLE 2 This example shows the benefits of Event Based Costing used for recovery of disruption losses caused by third parties – in this case related to aircraft damaged on ground. Introduction to Event Based Management Astute Aviation
  31. 31. THE INCIDENT The fuselage of a B747 was damaged by a catering truck at an outstation on a long-haul route. The aircraft was temporarily repaired by a third party and ferried back to home base where it remained out of service for 5 days. AIRCRAFT OUT OF SERVICE DISRUPTED PASSENGERS Full effects of 5 days’ long passenger disruptions included in calculation EXAMPLE 2 – Part 1 Introduction to Event Based Management Astute Aviation
  32. 32. After thorough analysis based on principles of Event Based Costing, the full cost impact of knock- on effects came to in losses caused by the third party, ready to support claims for loss recovery. INDIRECT COSTS OF AIRCRAFT DAMAGE Event Based Costing INDIRECT COSTS OF AIRCRAFT DAMAGE Airline estimate The value of indirect losses was estimated at based on the average, generic values normally used to perform the loss- of-aircraft-use analysis. (The airline spent on direct cost of aircraft repair). EXAMPLE 2 – Part 2 Introduction to Event Based Management Astute Aviation
  33. 33. To sum up…To sum up… Introduction to Event Based Management Astute Aviation
  34. 34. enriches the rigidly structured organisational and cost mechanisms with the fluidity of . This may seem a modest step, but there are for keeping the most damaging causes of operational and cost inefficiencies under control. Introduction to Event Based Management Astute Aviation
  35. 35. plan improvement disruptions As a result, your airline will build , able to bounce back when faced with . It will also by reducing self-induced uncertainty, and of operational losses. Introduction to Event Based Management Astute Aviation
  36. 36. Event Based Costing brings to decision making at all organisational levels - something that current management practices and information systems cannot offer. It is an for improvement in airline operational and cost , and ultimately - . PROFIT Introduction to Event Based Management Astute Aviation
  37. 37. Jasenka Rapajic Astute Aviation Attuning Plans With Reality To find out how you can benefit from Event Based Costing, get in touch. www.beyonddisruptions.blogspot.com jasenka@astuteaviation.com www.astuteaviation.com Introduction to Event Based Management Astute Aviation

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