Cost Analysis – Operations
By Eric Johnson
As we think through cost analysis opportunities, whether during times of crisis or during routine analysis, a key focal point is reducing extraneous costs to the business while maintaining the tools, processes, and skill sets that provide the value proposition to the customer.
After hearing rumors in the marketplace that a new market entrant was poised to potentially steal market share in its home market, the COO of a concrete manufacturer decided to embark on a cost cutting initiative in anticipation of two potential scenarios; the first being a preemptive strike in lowering prices to give the new entrants difficulty in establishing a foothold. The second was a more defensive approach, in the event the new entrants become the aggressors and reactionary business action was required.
The biggest question was where to reduce cost. Upper-level management had already envisioned multiple scenarios and each of them seem to have an impact on the customer experience. One of the key things the COO thought wise to do was to internally publicize the initiative to reduce costs. In this case the focus was on reducing costs within operations where it was felt could grant the greatest impact. The COO spread this desire in both town hall meetings and in internal meetings with subordinates. This centralized the messaging and reinforced that this was a top down directive with bottom-up solutioning and received support across management. The CEO also set up a costing task force that spanned rank and set up an anonymous email inbox for individuals to make suggestions without fear of politics or retribution.
The first group of emails to the inbox centered around complaints or were off topic, but over the course of a two-week period, the task force centered on three viable ideas out of dozens submitted. The task force set in motion a three-week plan for implementation. They were able to implement ideas around scrap recapture and recycling, quality control in the production process, and a new process for speeding up ideas into execution, which largely developed out of the task force itself. Previous attempts at ideation were always mired in politics and complexity, buoyed by the fact that the company was in an industry that doesn’t exactly overflow with innovation and change.
Hard benefits culminated in a 17% increase in operating margin, 26% decrease in production process time for their second highest demand product. Soft benefits centered around increased ownership of the process amongst front line workers, greater perception of transparency from leadership and reduced complexity in moving ideas from concept to execution. Like all initiatives, nothing is completely perfect; there were certain aspects of the changes that were still in motion at the designated completion date. However, the COO wanted this to be a flexible approach and inspirational; the winds generated by the initial cost reduction results inspired dedication in completion of the remaining initiatives.