Organizing a Cost- Reduction program
The Bottom Line
* You need a multidisciplinary team to attain significant cost- reduction. Support from the top helps greatly.
* Encounter resistance to the cost reduction effort
* There are risks associated with cost – reduction opportunities
* Meet at least once a week
* Maintain an action plan to create and sustain reduction momentum.
* Someone who writes well and is good in capturing details should take notes and publish meeting minutes no later than one day after each meeting. The meeting minutes should be sent to the chief executive, the team members, and the head of each department. Doing this keep others in the loop, and it keeps the effort alive.
* The meeting minutes should include “living” task list. Team members should provide input regarding the status of each task in the meeting, and the person preparing the meeting minutes should update the task list to show current status.
* The team members should discuss cost- reduction ideas in a free- flowing manner. The ideas may come from the team members or from others in the company. All of the ideas should be captured on a paper. After discussing all of the ideas, the team should decide if each idea should be pursued. If the team thinks an idea has a merit, in most cases it will go to the affected department manager.
Key Questions: 1.) Do we have a cost – reduction effort in place? 2.) Do we have cost – reduction targets? 3.) How do we identify and eliminate unnecessary costs? 4.) What obstacles will we encounter, and how will we get around them?
COST PAERTO ANALYSIS * Identifying and ranking all of the organizations current costs is best presented on a department-by-department basis, and by overhead cost categories for the entire company. It’s important to do this for each department and by overhead cost category to identify where the greater opportunities exist. Within the manufacturing area, for example, labor and material costs are probably higher than other costs, and based on that, they probably have greater cost – reduction opportunities. Smaller cost categories will also offer opportunities ( and there may be low- hanging fruit that the team wants to grab), but in general the larger costs categories offer greater opportunities when seeking cost reductions. * Let’s assume the manufacturing department reviews its monthly operating costs when they receive them from the Finance : From the Excel File Show it in a Chart * Based on the information presented, it is obvious that material and labor, are the largest cost categories. Logic dictates that seeking cost reduction opportunities in these areas offers the best potential. Cost reduction Target. * Once the analysis has been completed for each department and for the company’s overhead costs, the team can then brainstorm reduction activities in these areas. * The team should not limit to the largest cost categories. There will be opportunities in the lower cost areas that come from other people’s suggestion as well as the cost reduction team members. The team should consider them.
ACCESSING NECESSITY * The next action is identifying the magnitude and evaluating the necessity of each item. This is best done on a department – by-department basis for overhead costs.
Table. Cost Necessity Assessment COST DRIVER | ANNUALIZED COST | CLASSIFICATION | RISKS | DECISION | Specific Materials | 1000000 | Necessary | None | Keep, but reduce cost | Labor | 900000 | Necessary | None | Keep, but reduce cost | Maintenance | 800000 | Necessary | None | Keep, but explore outsourcing | Electricity | 700000 | Necessary | None | Keep, but reduce cost | Fuel | 600000 | Necessary | None | Keep, but reduce cost | Training | 200000 | Nice to Have | None | Keep, but reduce cost | Department Party | 100000 | Unnecessary | Morale Impact | Keep |
Cost Reduction Action Plan Maintaining and updating an action item list is critical. It assures that each cost-r education concept is captured on paper and retained until it has been objectively evaluated, and either discarded or implemented. It’s important because it identifies who needs to do what, by when they need to do it, and current status.
Table1.3
Concept # | Concept | Required Actions | Assignee | Required Completion date | Implementation Cost | Estimated Annualized Savings | Risks | Status | 1 | Reduce Labor Cost | Develop and Implement Labor Standards | | | | | None | | | | Develop and implement efficiency measurement system | | | | | Morale; Inaccurate Standards | | | | Flowchart production process to identify cost reduction opportunities | | | | | None | | | | | | | | | | | | | | | | | | | |
WHO SHOULD DO THIS WORK The Cost reduction can’t do everything. In fact, by itself the team wont be able to evaluate or implement most of the ideas. The team is a catalyst. It has to work with others in the organization to gain support, evaluate ideas, and where appropriate , implement cost reduction actions.
RISKS Risk has to be a key part of the decision process when evaluating every cost reduction concept. In assessing risk, there are three questions to consider: 1.) Have we done this before 2.) What can go wrong if we do this? 3.) What are the things we need to do to prevent bad things from happening?
If the concept being considered has been implemented elsewhere, or of it consists of smaller actions that have been done before, the risk is probably minimal. If neither condition exists, the organization needs to aggressively and objectively identify all potential consequesnces ( not just the planned savings) and take steps to manage..
BOILING HOUSE 1.) De- silting of spraypond 2.) Painting Works to be done 4 days after the final shutdown- PRF for personnel who will conduct the paintings 3.) Lubricants 4.) RVF- continous steaming/ heating
