Cost reduction

Delivering Real Value Through Cost Reduction

Need we rehash the economy’s recent performance (or lack thereof)? Who among us has not been unnerved by prolonged market degradation and an unpredictable future? In a unique time of world unity, even our global markets are responding by reducing costs. But does the necessity for cost reduction mean we must add to the more than one million layoffs announced between January and September of 2001?

Resist the propensity for knee-jerk reaction. If yours is like many organizations, simple measures like policy changes and travel restrictions have already been implemented. However, as revenues continue to stagnate or even decline, more strategic measures may become necessary. And, although reductions in workforce and arbitrary expenses may appear to be the best immediate solution, tactics that generate long-term value and entrench strategic positioning should be considered as a move to preempt such radical measures.

A Rational Look at Cost Reduction

A one-time savings is likely not the result any

company intends to achieve, yet many of us consider tactics that purport to yield such temporary results. In addition, cutting workforce and operating costs and/or centralizing capabilities may have serious implications for market positioning and meeting strategic objectives Let us propose that potential cost reduction actions should meet the following three requirements:

1. Deliver reliable short-term results

2. Deliver sustainable long-term efficiencies

3. Support – or at least avoid compromising – strategic positioning

What would you say to a reduction in cost of goods sold that starts at 3 percent in month two and then increases to 10 percent into perpetuity and leads to more demand-centered production? Perhaps supply

chain productivity should be the first line of defense when it comes to realizing sustainable cost reduction.

Supply Chain as the Means to an End: Sustainable Cost Reduction

Pick any cost model, and guess what will be at the core – supply chain productivity. Gaining productivity in the supply chain through reduced working capital and COGS, as well as improved asset utilization, yields valuable market and financial results. These areas hit the bottom line of both income statements and balance sheets, necessary steps in moving market capitalization. Now, consider a popular cost-cutting measure: work force reduction.

Supply Chain Blocking and Tackling

In the realm of cost reduction, value can be defined as short-term realization

coupled with sustainable results. Five areas that represent key components in

reducing supply chain costs in any organization include:

• Inventory reduction

• Product rationalization

• Customer segmentation

• Supplier base management

• Network optimization

INVENTORY REDUCTION

• Sustainable lowering of inventory levels without compromising customer service.

• Inventory is evidence of process efficiency; to reduce inventory, processes driving inventory must be changed.

• A one-time reduction will not lead to lasting results. Only process efficiencies will yield persistent returns.

• Process changes can also lead to greater flexibility in responding to changes in demand.

PRODUCT RATIONALIZATION

• Eliminating or outsourcing high-cost products, features and options that have low revenue or customer value.

• The key is identifying product obsolescence and retiring products, features and options based on set parameters.

• To produce sustainable results, product rationalization must become a standard in the product life cycle.

CUSTOMER SEGMENTATION

• Grouping customers on value in addition to traditional attributes and then tailoring service levels.

• Equality is not a value when value is measured as the return on costs incurred.

• Static customers in a static world only require static segmentation, but who has static customers – much                 less a static world?

SUPPLY BASE MANAGEMENT

• Aligning the supply base with supply chain strategy to reduce total costs and increase performance.

• The long-term value is in the joint commitment to results and total cost reduction.

• Measurement processes and supplier development programs are the keys to driving year-over-year cost

   reductions.

NETWORK OPTIMIZATION

• Using scenario-based models and decision support tools to determine optimal operating locations,    transportation routes and delivery schedules.

• You can know for sure that you have the right number of facilities in the right locations.

• Concepts driving network optimization create an objective, fact-based decision-making framework that     can be leveraged for many strategic decisions.

Executing Sustainability

The moral of the story is this: The job of controlling costs is never done. A continuous, focused effort is required to run an organization at optimal cost levels. Periodic supply chain reviews with a focus on people, process and technology can keep an organization primed for change. In addition to providing a medium for discussions about growth and responding to recessionary trends, such diagnostics facilitate ownership in positioning the organization for change. And in a business climate where change is the only constant, a steady hold on a company’s operations might be the best way to survive the storm.

Reference :

Authors:Tim Duffie , Kim Rash & Gary Sangmeister

A UPS Supply Chain Solutions White Paper