SSCO_Studie_Cost_out_eng_QVARTZ_01-1

Transcription

COST OUT
How to successfully cut costs
4
COST OUT
HOW TO SUCCESSFULLY CUT COSTS
Gerhard Nenning, Dimitri Belobokov, Milan Manduch, Christian Sparrevohn
Management Summary
Global competition forces companies to optimize their cost structures – even those companies that
did not have to worry about price-oriented competitors in the past due to their superior technologies
and outstanding product characteristics. Enterprises that combine innovativeness and product quality with low costs are becoming ever more common, causing repeating impacts on the own company
and cultural change with regard to its relationship to the outside world. This in turn has the corresponding implications for the company's self perception and internal interactions. This transition is
particularly difficult for companies, for which costs had previously "never been an issue", and it also
comes with its share of risks.
Cost-reduction programs are often poorly designed: they take too long and are insufficiently coordinated, which paralyzes the organization; they are too tentative, so that the people within the
company, who fight to retain the status quo prevail; or they depend too much on benchmarks, which
reduces their internal acceptance and diverts the focus from the actual sources of potential.
Temporary initiatives for a specifically targeted "Cost Out" are often a more effective way of freeing
up cash, capital and resources. What matters is the way a Cost Out program is structured and executed. Five principles help make a success of a Cost Out ...
FIVE PINCIPLES
1. "10 -100 -1000": Quickly define where you want to go 2. "Efficient, but effective": Base your approach on well-founded hypotheses 3. "Single source of
truth": Quickly ascertain the numbers 4. "Everybody follows the rules": Strictly
apply the methods and tools 5. "Get lean and stay leaner": Institutionalize cost
awareness
STERN STE WART RESE ARCH & QVART Z # 61 // C O S T O U T – H O W T O S U C C E S S F U L L Y C U T C O S T S
"10-100-1000": Quickly define where you want to go
Many cost initiatives generate short-term successes for an organization, but fail over the long term,
leaving in their wake a culture of resistance and mistrust. Bottom-line successes can often be seen
early on, but after a while these savings are eaten up by a lack of efficiency in critical areas of the
company.
The root of the problem is most often that top employees leave or that those who remain, at all levels
of the hierarchy, are preoccupied with protecting their own destinies, crippling the organization.
Program must be strategically logical and understandable
Cost-reduction measures are always accompanied by uncertainty. The management has to explain
why the cost cuts are necessary. Whether it is because there is an acute need to act ("burning platform"), the enterprise's competitiveness has to be improved or more growth is desired in the low-cost
divisions; the planned actions have to be made understandable to the staff. The entire management
must advocate the program, without exception or reservation, and the line managers have to motivate and support as good as they can.
Quickly define where you want to go and minimize the phase of uncertainty
In practice we see it time and time again: A program is announced, followed by a year of procrastination, during which the resistance becomes hardened on all fronts; the social partners feel left out and
block any proposal that comes up, the top employees leave the company for safer pastures.
Performance indicators essential to success collapse and any savings achieved are insufficient to
compensate.
The reason for this is that poor process management and an inefficient procedure coincide. Either
critical stakeholders are not integrated until it is too late and don't consider themselves to be truly
participating, or they are brought in too early and the initiative gets lost in contradictions, misinterpretations and the chaos of the irreconcilability of different standpoints.
The solution that experience tells us works best is having a sufficiently well defined target picture
that is determined early on in the piece together with the key stakeholders. This makes a structured,
efficient and participative discussion possible. A taskforce – a small group (10) of central decisionmakers – sketches a rough but tangible target picture for the organization after the Cost Out, quantifies and allocates the savings and says what levers are expected to bring improvements, how the
changes are to be made as socially acceptable as possible and when and how social partners are to
be met with.
© 2 0 1 5 // A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z 5
This target picture is communicated, challenged and refined together with the most important stakeholders (100). Only then can a larger group of decision-makers be actively integrated (1000), who are
responsible for working out the details and implementation. The 10 -100 -1000 principle has arisen
from a broad base of experience with global company groups – of course the actual number of stakeholders used in this equation depends on the size of the company and scope of the project.
FIG. 1:
S T R AT E G Y & T O P M A N A GE M E N T O P IN I O N
THE 10-100-1000 METHOD
WHO
W H AT
Core team representing
top decision makers
10
Most important managers
e.g. Lead country heads,
Heads of functions etc.
Development of target picture
defining key elements of program
Concretization of program,
final evaluation and
development of measures
10 0
Local heads of functions, country
manager, team leaders, etc.
10 0 0
Implementation lead, feedback,
reporting, fine tuning
"Efficient, but effective":
Base your approach on well-founded hypotheses
Throughout the history of cost-cutting programs, three essential approaches or variations on them
have predominated, taking turns at being more popular than the others:

The benchmark approach

The "Activity Value Analysis (AVA)" approach

The hypothesis-based approach
They fell in and out of favor, because experience brought the weaknesses of the previously popular
approach to light, and the belief in the future was channeled into a new concept.
6 © 2 0 1 5 // A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z
Finding the right balance
So which approach is the best? The answer is as simple as it is inconclusive: All three have their justification in a well-structured Cost Out project – when used at the right time and with a clear understanding of their possibilities and limitations.
At the heart of successful Cost Out projects are well-founded potential hypotheses that are then
refined during the course of the project.
Benchmarking highlights possible directions for the development of optimization hypotheses. It also
helps developing a basis for the dimensioning or individual organizational areas and checking the
plausibility of the measures. Its limitations lie clearly in the comparability of organizational units and
the risk of methodical differences, when gathering data for comparison.
Another, best-practice-oriented view takes cultural aspects, the specific company situation, the optimization history and experience from similar initiatives into account and together with the benchmarking creates a solid hypothesis framework. The plausibility of these hypotheses is then reviewed in
structured workshops through figures estimated for them. Typical levers are systematically checked.
The areas for optimization are then prioritized on this basis and subjected to further detailed investigations. Here, Activity Value Analysis is a commonly used tool for assessing the optimization options in
an area previously defined.
Hence, by combining the approaches, a good balance of efficiency and effectiveness can be found for
the cost initiative.
FIG. 2:
TARGET DIMENSIONING (estimate of required FTE)
Target range
152 212 297
Strategic
Holding
268 375 524
Management
Holding
537
751
1050
Parent Company Concept
239
380
604
All companies
# FTE
Low Quartile
Median
All
companies
Strategic
Holding
Mgmt.
Holding
Parent
Company C.
Finance
25
23
32
48
Accounting / Controlling
72
43
73
114
Purchasing
28
13
25
43
Tax
12
10
13
13
General corporate mgmt.
27
23
29
31
Corporate development
20
9
21
46
Audit
19
23
21
15
Communications
14
9
15
21
Legal / Compliance
27
15
30
53
IT
17
3
13
58
Sales planning
24
4
14
54
HR
35
22
38
57
Other functions
62
13
51
197
All functions
382
210
375
750
Functions
Status quo
Top Quartile
© 2 0 1 5 / / A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z BENCHMARKING AS A
BASIS FOR DIMENSIONING
SUPPORT FUNCTIONS
7
Take all optimization levers into account when forming the hypotheses
A set of optimization levers became apparent, gleaned from numerous observation points. Depending
on the specific company situation, the pertinence of these levers varies, but they arise time and time
again in a similar pattern. While the companies generally understand the levers in the operative units
quite well, and these levers typically center around throughput speed, quality, footprint efficiency,
factor costs and factor efficiency on the production side, and around portfolio decisions on the customer side, administrative levers are usually much more difficult for decision-makers to grasp, and it is
hard to estimate a realistic extent of the possible optimization.
FIG. 3:
TYPICAL LEVERS WHEN
Typical spend breakdown steel manufacturer (%, sum = 100)
OPTIMIZING PURCHASING
AT A STEEL PRODUCER
raw materials
35 – 45
energy
15 – 25
operating resources / supplies
10 – 15
FOCUS
MRO
25 – 3 0
70 – 75
3rd party spend
Personnel
5 – 10
rental fees
3 – 5
hired labor
3 – 7
insurance & consulting
2 – 3
distribution
2 – 3
others
2 – 3
Typical levers
Typical impact (%)
Forward spot buying / strategic stock mgmt.
Volume consolidation
Customer-lead price reduction
Clean sheet costing
1 – 3
Forward spot buying (direct or broker)
CHP / trigeneration (owned or leased)
Peak load management
Utilities self-generation
1 – 3
Volume consolidation
Customer-lead price reduction
Demand management /
consumption reduction
4 – 7
In- / Outsourcing
Supplier substitution towards white label
Framework contracts / catalogues
5 – 10
7 – 14
∑ 2bn EUR
The internal service relationships are often very complex, have developed over time and are rigidified
in organizational structures that make it difficult to take drastic measures. Typical levers here are:
Stop Doing or Waste Away, in/outsourcing, structural optimization, process improvement/automation, wage-cost arbitration, de-layering, standardization and bundling.
It quite obviously cannot be efficient to test all levers across all internal products. Benchmark and
experience-based hypotheses and historical values are essential here for an efficient approach.
8 © 2 0 1 5 // A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z
TYPICAL METHOD SET
OPTIMIZATION LEVERS
OPTIMIZE SERVICE PORTFOLIO / DEMAND
Review service level & volume with
“80 / 20” cost analysis approach
Stop Doing / volume optimization
Elimination of internal products / services
Use proven criteria catalogue for in- /
outsourcing to determine “Make or Buy”
In- / Outsourcing of services
Active management of external providers
MAKE OR BUY
OPTIMIZE SERVICE GENERATION
Cost structure optimization potential
Limit variety of working hour models
Optimize processes based on degree
of maturities with proven framework
Challenge levers feasibility based on
analysis and define cost-cutting measures
Scoping / Processes improvement
Standardization & automation
Determine synergies in services &
compare local vs. international effects
Internationalization
Task relocation to low-wage locations
Identify integration potential based
on analysis of typical service clusters
Multi-Tower bundling
Cross-functional bundling of tasks
Transactional services
FIG. 4:
SHARED SERVICE
OPTIMIZATION EXAMPLES
Transactional
TYPICAL ADMINISTRATIVE
LEVERS
Know-how
Eliminate local
“shadow organization”
Outsourcing of activities
not strongly connected
to business
Improve management
of external spend
Optimize personnel cost
structure by moving jobs
to different pay grades
Avoid exceptions such
as various working
hour models
Reduce overlaps
and redundancy
across organization
ø-savings of 20 – 30%
ø-savings of 15 – 25%
Expert tasks
Waste Away is often a very powerful lever in the field of support. One proven procedure is integrating
internal clients into the prioritization of the services received. Alongside prioritization, simulating
relinquishment scenarios is a common method: "What services would you forego, if you could only
use 20, 30 or 50% of the current products?" The internal clients themselves provide the answer to the
question of which services have priority. These results are then compared with the cost of providing
the service. Experience shows that with support functions, typically 20% of the internal and particularly complex products can be done away with – depending on the extent of the optimization, without
the performance of the organization suffering tangibly.
© 2 0 1 5 / / A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z 9
"Single source of truth":
Quickly ascertain the numbers
If controllers are asked how much turnover a unit has, they generally answer the question with a question: "Which turnover do you mean?" In complex organizations, key figures are often not defined in a
standard way, which makes it difficult to properly analyze the cost structure, evaluate possible optimization levers and control the degree of their implementation. This often leads to confusion and contradictory information – especially when figures come into play that had previously been less central,
allowing more leeway for interpretation.
Define measurement standards for the initiative
It has to be determined how all key elements of performance and efficiency measurement are to be
defined in an initiative. For instance, are supplier-related delays to be taken into account when measuring throughput times? The answer is yes and no – it depends on what exactly you want to measure.
There are numerous of such differences. It has to be considered, where what makes sense and is
possible, and clear standards have to be defined on this basis.
Institutionalize a clear understanding of the figures
Clear standards particularly help achieving a unified understanding of the issue as it pertains to the
object being measured. In larger Cost Out projects, however, it is extremely important to keep control
over the assessments. Unrest often arises, because parallel analyses of a decentral division generate
contradictory results, and in the process that follows, it becomes clear that things were understood
differently, that varying and unclear assumptions were made, or that quite simply, logical errors found
their way into the assessment. But once information is in circulation, it is difficult to gain control over
them.
The more sensitive the situation is, the more important it is that all flows of information are consistent
with one another. A proven method for achieving this is giving a certain unit the central responsibility
for all analyses and evaluations. This unit then gathers input from outside when required, while taking
into account that differences in the data are accounted for and made transparent.
1 0 © 2 0 1 5 // A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z
This demands communication by the management that clearly shows which analytical fields of responsibility are located where, and how precisely the inquiry process is structured. In complex
projects, a data management group is generally set up in the project management office. In most
cases, the cost of centralized handling is more than compensated for by preventing internal frictional
losses in the decentralized data management.
FIG. 5:
PROVEN ORGANIZATION
EXECUTIVE COMMITTEE
Key decisions and issues resolution
FOR STAYING IN CONTROL
Bi-weekly reporting and escalation
TRANSFORMATION OFFICE
OF THE NUMBERS IN
THE PROJECT
PMO
Overall project coordination
COORDINATION
SCHEDULE
REPORTING / MEETINGS
TEAM DATA QUALITY &
REPORTING
FINANCE
HR
Team repres.
HR
CORE TE AM
Te a m r e
Team repres.
FINANCE
Data aggregation,
consolidation,
coherence and
reporting
TEAM LEADERSHIP
Team repres.
p re s.
Facilitate organizational
readiness and support Executive
Team in their leadership
HR
GOVERNANCE
COMM.
CHANGE MGMT.
COMMUNICATION
TEAM IMPROVEMENT
Tracking and challenging
of measures
EXPERTS / CHALLENGER
TRACKING
MEASURES & ACTIONS
"Everybody follows the rules":
Strictly apply the methods and tools
Two key reasons why potentials cannot be adequately gathered in projects are a lack of specialist
leadership and the special treatment of individual divisions. Because a situation is special or of particularly high/low importance, some divisions are given freedoms that lead to target conflicts in several
dimensions: Objectives are not ambitious enough, potentials are not (sufficiently) identified, measures
collide with other important initiatives or are not integrated adequately or in sufficient quality into the
regular implementation reports.
Definition of methods and tools
It is important to determine, which units are to be included in the project, how measures are identified,
defined in detail and consolidated, and how they are to be included in the tracking of the implementation.
Here, structural tools are used such as the integration into the regular communication and standardized project structures, as are methods-related elements for identifying and specifically defining
areas of potential. All divisions are included in the benchmarking, if there are comparative values
available, optimization hypotheses are conceived and consolidated for all divisions, and measures are
recorded centrally for all divisions and subjected to the same substantiation standards. This is the only
way, potentials can be properly exploited.
FIG. 6:
DEFINITION OF
1 Total measure effects
2. COST TYPE
DIMENSIONS OF
COGS



MEASURES



RESPONSIBILITY
1
R&D
personnel
non-personnel

other
personnel
non-personnel
other
2 Transparency about

Business
unit
4. 2
INTERSECTION
Division
split by organizational
level
OTHER
3. PRODUCT / PROJECT
ASSESSMENT
1. ORGANIZATIONAL LEVEL
personnel
non-personnel

other
SG&A
Sector
function
measure effects on
specific organizational
level, on cost type and
on product-group
split by product / project
groups to incorporate
market fluctuations
(indicative)
split by cost types
MARKET DYNAMICS
3
P&L EFFECTS
1 2 4
© 2 0 1 5 // A L L R I G H T S R E S E R V E D F O R S T E R N S T E W A R T & C O . A N D Q V A R T Z
The example of a global company underlines the importance of strict methods: After several unsuccessful attempts at reducing costs, a program was installed, in which all administrative divisions were
analyzed using the same principle. The procedure was based on the standardized division of responsibilities into expertise-oriented and administrative tasks. This was the first method to expose that a
large share of the administrative tasks were carried out by internal experts. A clear separation enabled
the existing potential to be estimated on the basis of past experience (approx. 25% cost reduction in
administrative tasks) and facilitated a specific assessment of a broad base of possible and relevant
improvement levers. Examples such as this repeatedly confirm the need for a strict method without
any exceptions that are not clearly justified within the framework of the method.
FIG. 7:
2. Range transfer food
3. Range transfer NF
4. IM integration
5. Personnel and social
6. Personnel development
7. Communication / advertising
8. Procedures market
9 Auditing / market transition
10. Logistics structure
11. Synergy controlling
12. Procurement
13. Coordination administration
14. Advertising
15. Utilization
16. Quality assurance
INDIVIDUAL RESPONSIBLE
1. Remodeling
EXAMPLE OF PRESCRIBED
SUBPROJECT
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
METHOD FOR TRACKING
PROJECT PROGRESS
1 SUBPROJECT LEADER
2DEPUTY
3 TEAM MEMBERS
4STRUCTURING
5 TARGETS, SCHEDULE
6IMPLEMENTATION
25%
50%
75%
100%
7STATUS
"Get lean and stay leaner":
Institutionalize cost awareness
Experience shows that the difference between Cost Out and a mere cost reduction lies in particular in
the desire to keep the costs at an adequate level over the long term instead of merely cutting them
once to meet immediate financial goals. If adjustments are not also made in the service culture and
efficiency-evaluation processes, reduced costs are simply rebuilt elsewhere, or even worse in the
same place, and this time with buffers, in order to be prepared for the next cost reduction.
Achieve operative excellence and institutionalize continuous improvement.
From blue collar to white collar: Also anchor excellence in the administrative divisions
In particular, manufacturing organizations have already internalized Lean and Six-Sigma principles in
their operations, and they are usually in the process of consolidating them within the company. Kaizen,
Genda, Bushido, Hoshin and Poka-Yoke are different expressions and results of the "Toyotism" that
is already part of the everyday workings of many efficiency-oriented industrial companies. But most
of them find it difficult to transfer these principles to the administrative or service fields. The product
portfolio is highly complex, customer satisfaction is difficult to distil into just a few core elements,
costs and benefits of individual elements are often difficult to grasp and it is almost impossible for the
staff involved to optimize them internally, as the internal need is often not questioned and the product
quality or efficiency of its creation is difficult to assess.
MASTERING COMPLEXITY
TOYOTA
PRODUCTION SYSTEM
LEAN
MANAGEMENT

Increasing flexibility

Synchronous flow production

Dynamic, value-added structures

Standardized plants

Lean and healthy / Lean and flexible

Quality in volatile, flexible processes

Increasing penetration rates

Lean logistics

Lean development

Lean services
SIMPLIFYING COMPLEXITY
FIG. 8:
Opening in the direction
of individual production /
customer variability
LEAN MANAGEMENT
DEVELOPMENT TRENDS
Digitalization
Networking
Opening to the entire
value-added chain /
supporting functions /
services
That is why the anchoring of principles like Lean and Six Sigma in companies marks most of all a
cultural change. The employees are asked and trained to always ask, whether complex performances are really necessary, whether the side demanding them is aware of the cost-benefit ratio,
and whether and how one could possibly provide necessary performances better and more quickly,
and how they can be continuously improved upon.
In essence, the extension of the Lean method to encompass white-collar areas is based on avoiding
six sources of waste. These are displayed in Figure 9.
FIG. 9:
SIX SOURCES OF WASTE
ELIMINATE "OBVIOUS" WASTE
1. OVER
PROCESSING
MINIMIZE "HIDDEN" WASTE
Elimination of process
steps possible?
2. OVER
"PRODUCTION"
Every deliverable along
the process really needed?
3. WAITING FOR
UP- / DOWNSTREAM INFO
Are all information accurate
and just in time available?
4. UNNECESSARY
INVOLVEMENTS
T YPICAL
SOURCES OF
" WASTE"
5. NUMBER OF
ITERATIONS
6. INFORMATION
OVERLOAD
Which interfaces or #
of stakeholders during
process to reduce?
Which arbitration
loops to avoid?
Separation between
relevant / irrelevant
information possible?
In practice, every organization decides what elements suit its management model and culture best.
Ultimately, the goal is always the same – to establish a process of constant self-optimization in all
functions. These principles are embedded in the daily work through workshops, seminars and by creating applicable institutions and incentive systems. The objectives are often to obtain clarity and pervasiveness in the management process, efficiency and organizational and process transparency.
Clarity and consistency are the marks of a stringent structure, from the overall strategy down to the
individual processes, and they demand lean management from the bottom up.
Efficiency aims at achieving a clearly defined self-adjustment mechanism at each level of management. Here, clear escalation management is set up for exceptional cases, and the compression of the
relevant information is managed.
Transparency enables the standardizing of information, communication and procedures, helping to reduce errors and improve efficiency. An adequate KPI system secures continuous monitoring and hence
supports continued improvement.
SUMMARY
Irrespective of their causes, cost reduction programs are often an inherently unpleasant topic. While
they are a strategic necessity for the institution or company, they have negative consequences for
many staff members. Paradoxically, this uncomfortable truth leads to the situation that many top
managers shy away from concentrating their resources to ensure the best possible planning and execution of these processes. They hide the responsibility in a budgeting process or delegate it as far
down the hierarchy as possible, sometimes even underpinning it with ambitious benchmarks. All too
often, savings achieved are only of a temporary nature, or falsely designed from the outset, leading to
the cost reductions hitting the enterprise at its core.
But there are also managers, who see the savings efforts as an opportunity to reshape the way their
company thinks and acts. They consider them to be a chance to strengthen leadership competencies or
a tool for more growth. Here, approaches are used that are precisely tailored to the customer, in line
with the company's strategy and culture, and the upshot is generally lasting results and considerably
higher cost awareness levels throughout the organization.
If done correctly, cost-reduction programs can improve the productivity of a company with just a few
staff, thus reducing the need to repeat them again and again every year.

SSCO_Studie_Cost_out_eng_QVARTZ_01-1

Transcription

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