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Cost Out Programs

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Trends today, how to launch an Enterprise Cost Reduction (ECR), steps to be followed.

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Cost Out Programs

  1. 1. Launching Successful Cost Take Out Program (ECR) to Achieve Operational Excellence Raffaele Muscetta
  2. 2. “You only find out who’s been swimming naked when the tide goes out.” Warren Buffet.
  3. 3. Agenda
  4. 4. I. Main Drivers for ECR
  5. 5. “It’s not your salary that makes you rich, it’s your spending habits.” – Charles A. Jaffe
  6. 6. Drivers: Commodity Indexes 10000 9000 Index of Non‐Fuel  8000 Primary Commodities  (2005=100) 7000 Index of Industrial Inputs  (2005=100) 6000 Metals index 5000 4000 Average Petroleum Spot  index of UK  Brent, Dubai, amd West  3000 Texas Copper, LME, grade A  2000 cathodes, cif Europe 1000 Zinc; LME, high grade, cif  UK 0 1980M1 1982M1 1984M1 1986M1 1988M1 1990M1 1992M1 1994M1 1996M1 1998M1 2000M1 2002M1 2004M1 2006M1 2008M1 2010M1
  7. 7. Drivers for Change…
  8. 8. In July 2009, Ernst & Young engaged an independent market research company to conduct a survey of 561 decision-makers on the subject of ECR. The companies surveyed represented 11 of the largest economies in the world and 11 different industries More than two-thirds of businesses (86%) say that cost consciousness became ”extremely important” in their company during the last year, compared with the previous two years
  9. 9. Main Reasons for an ECR…
  10. 10. Among the barriers to carrying out effective ECR  there have been identified: Companies’ unwillingness may stem from anxiety that the business will appear  weak, that competitors will take advantage of lower investment or from  management inertia. Difficulties in ”selling” ECR to executives and to employees in general must be  overcome. Most companies have an element of competition between departments  or offices. Each is reluctant to accept that it should lower its costs – an additional concern is  that it is a commonplace in business life that departments overspend in order to  maintain their budgets for the following year. There is a mis perception among employees that there is often unfair treatment  during ECR programs. People react badly to lower rewards if they see executives  receiving higher rewards at the same time. Issues of recruitment and retention are intensified during ECR. Candidates are likely  to prefer to work for a company which is expanding and increasing its  investment, whether in people or in new business.  When businesses undergo change programs, ECR is often dropped.
  11. 11. Strategic Objectives: Cash or Market Share?
  12. 12. Reasons for ECR in the future… We are likely to see ”peak oil” in the next 20 years and legislation to tackle climate change. The increased volatility that will result from these factors means that businesses can no longer rely on a safety cushion in their P&L forecasts…
  13. 13. II. Basic steps when launching a cost out programme
  14. 14. “Whenever you see a successful business, someone once made a courageous decision.” Peter Drucker
  15. 15. Suits all?
  16. 16. Assessment Conduct a preliminary assessment to identify the potential savings based on: Financial and spend data provided/available (bottom up-top bottom). Interviews with key stakeholders (including manufacturing site visits, distribution centers, etc). Market analysis on main direct materials Internal expertise/benchmarks from consultants and market intelligence agencies
  17. 17. Addressable Spend ILLUSTRATIVE
  18. 18. Spend Analysis… bottom-up/top-bottom ILLUSTRATIVE
  19. 19. IV. Strategic Sourcing Programme Volume Concentration Product Specification Improvement Reduce/consolidate number of suppliers Rationalize/standardize parts Pool volume across business units Substitute materials‐parts Redistribute volume among suppliers Apply product value analysis‐value engineering Combine volume from different sourcing groups Use functional/black‐box buying Develop alliances among purchasers Examine life cycle costs Rationalize/standardize parts Product  Develop long‐term contracts Volume  Specification  Concentration Improvement Best Price EvaluationExploit Create Joint Process Improvement Benchmark internal prices Reengineer joint processes Renegotiate/rollback prices Buying an Optimize physical material flow Unbundle prices and model should cost Threaten back leverage Power Best Price  Advantage Joint Process  Integrate logistics Support supplier’s operations  Use competitive bidding Evaluation Improvement improvement Use commodity hedging/trading Use simultaneous engineering/joint R+D Index/cap prices Develop long term contracts Compare TCO among potential suppliers Share productivity gains Base pricing on profitability Develop long term contracts Global  Relationship  Sourcing Restructuring Global Sourcing Relationship Restructuring Expand geographic supply base Analyze core competencies Examine new suppliers Examine strategic make vs. buy decisions Capitalize on currency fluctuation Adjust degree of vertical integration Take advantage of trade incentives Create market entry alliances Optimize counter trade Establish joint ventures Leverage second‐tier suppliers Employ strategic alliances/partnering Establish develop key suppliers
  20. 20. Draft Savings Estimates.. & Strategies ILLUSTRATIVE
  21. 21. Indirect Spending (SG&A Costs): Focus
  22. 22. Where to Start?
  23. 23. Sourcing Waves… ILLUSTRATIVE Steel W1 W2 W3 Surfactants Easy of Implementation: Contract life span, switching costs, organizational sensitivity, sourcing groups technical  complexity, supply market complexity, level of spend
  24. 24. Define a timeline ILLUSTRATIVE Organizational Commitment and Board Level sponsorship are crucial for program success
  25. 25. III. Organizational set up and Financial Transparency
  26. 26. Governance Approach ILLUSTRATIVE A clear project organization at all levels needs to be in place for the success of the project
  27. 27. Loading the Program… Tracker ILLUSTRATIVE
  28. 28. Weekly/Systematic Reporting ILLUSTRATIVE Different ways of  reporting could be  drafted at this stage.  Suggested best  practice is to have  ILLUSTRATIVE weekly reviews per  saving initiative  and/or Wave, showing  the degree of  execution or  implementation (DoE  or DoI), which can be  presented in a color  code form as per side  chart…
  29. 29. VI. Enablers and KPI’s
  30. 30. Degree of Implementation ILLUSTRATIVE Savings that are reflected at EBIT level and clearly traceable. Clear and robust ERP set up to facilitate the traceability and data gathering
  31. 31. ECR… Results….
  32. 32. IV. DO’s and DON'ts of a successful implementation
  33. 33. To counter some of the concerns when rolling out ECR…. DO’s: They should refer to the process as ”cost optimization” rather than cost reduction (see “From reduction to optimization”). DONT’s: Executives with not enough patient, and that have not developed a communications strategy (that could stresses the improvements achieved through ECR and what they mean for the enterprise as a whole). DO’s: Time must be set aside for the change process to take effect, creating an environment where employees feel like they are being treated fairly. DONT’s: Costs saved in one part of the business that are not invested elsewhere, so that there is still a sense of expansion and optimism. DO’s: Executives must have enough humility to accept where cuts need to be made, rather than DONT’s: playing competitive games with their colleagues over budget levels. DO’s: And finally, cost reduction and optimization need to become a routine, normal part of business operations, DONT’s: rather than something which is identifiably short-term and done only in response to a crisis. DO’s: Clear definition of all terms used during the program (i.e: savings definitions, degree of implementation or execution, etc) and Responsibilities: RACI Chart. DONT’s: while this can be adjusted during the progress of the program not having it defined at first is setting for failure the entire program. 33
  34. 34. Reasons for non sustainable process Lack of sufficient monitoring and tracking Allowing tactical cost reductions to push out strategic reductions Making size a higher priority than profitability Losing focus on cost reduction as expansion gets under way or the business model changes
  35. 35. In General, to achieve Cost Reductions, businesses must: • Look carefully at standardization and centralization possibilities, especially when an outsourcing agent can achieve better economies of scale to reduce costs • Address all operational areas, both back and front office, with the objective to make the organization as flexible and agile as possible to reflect the economic fluctuations other time • Track costs carefully to help ensure that they rise more slowly than revenues to improve margins
  36. 36. Conclusion Identify the key reasons for an ECR Develop a Plan and Communicate Build Data Establish a team and governance Follow up and measure Track compliance!!
  37. 37. Thanks… Q&A? 37

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