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Cost
Reduction
You clicked to this page to
address a particular cost reduction issue,
perhaps to raise profits or output,
to refine operations that have
lost their sharp focus over time or start effective new ones.
Perhaps because your organization wants to
pull out of the recession, and to guard against the double-dip possibility.
Cost reduction is a good
strategy any time, and JPR is able to help you put the strategy into effect, often pretty quickly,
with a benefit likely to be much higher than the cost.
JPR's approach to cost reduction is simple;
first we recognize the high costs with the most opportunity,
and second we define the action to take and then
take it, or lead your staff to do so.
Why should you call on an outside consultant when you have your own resources?
JPR works solely on the task, which your people usually can't do because they have a business to run.
JPR has done this before, and we have the benefit of experience and success in many situations.
But probably most
important, JPR will give an objective viewpoint; we call 'em like we see 'em, recognizing the good practices
and zeroing in on the inefficiency.
JPR arrives with no preconceptions about which of the proven approaches to cost reduction will
fit your situation and costs, but the ideas below have proven to be quite effective.
Guiding Principles of Cost Reduction
JPR typically starts to locate good cost reduction opportunity with the Pareto principle, then determines
where waste, or non-value added cost, can be eliminated.
Pareto Principle
Vilfredo Pareto, a 19th century, Neo-Classical economist
mathematically described the unequal distribution of wealth that he observed in the world around him. His
observation, known as Pareto's principle, has been profitably extended into other fields of inquiry:
in business Pareto's principle tells us that a few of the inventory items will constitute most of the
value; a few processes will give most of the trouble; a few line items will generate most of the cost; a few
constraints will control the entire pace of operations; a few misdirected efforts will create the most issues.
Expressed most simply, productivity focuses on those few items that influence the largest
result;
Show me the money.
Eliminate waste
What is waste? A March 2009 “Business Week" article presents this test:
Will a customer pay for this activity?
Will my service fail without this activity?
Will I go to jail if I eliminate this activity?
Answer "no" to all three, and the activity can essentially be defined as waste. Sounds good to me.
Cost Control and the Unique Elements of Your Situation
Cost control is a way of thinking, with cost effectiveness the primary objective.
Focus on results, not the process. And please, don’t just look at direct hourly people for improvement.
That is probably not where your big costs are. (Although if the process is constrained, unable to produce
to capacity, that's another story entirely.)
Remember, show me the money.
Cost effectiveness is just as effective in the front office, the lab, the maintenance shop,
construction and installation in the field, the customer service unit, and the warehouse as on a production
floor.
A. First, adopt a culture to emphasize cost effectiveness
1. Cut waste.
A very successful centerpiece of attention. Results count, not the process. Add value in each action
or question harshly why you take that action. Be sure to apply this concept not only to the product but
also to administration and strategy and written procedures and paperwork and electronic systems.
2. Prioritize
Management must set priorities and communicate them; focus on those few items that influence the l
argest productivity result. The person with the wrench or the mouse in their hand will do a task, and if
management does not set the priority then the worker will.
3. Set, and Monitor, Expectations
You, and I, and the people in your company want to know what is expected of them (and their work
group and the company) and how well they do against expectations. Measure productivity, and the
results. In this economy, people are more apprehensive than usual, so expectations and measurement
and communication are even more important.
4. Encourage innovation, but don’t ad lib.
And require accountability for actions. As you define how to meet these platitudes in your
organization, start with number one, cut waste. Use your management structure to build a list, prioritize,
assign actions and report results.
5. Motivate and Communicate
Maybe survival is the key motivator in your situation, in this economy. But don't forget life after the
eventual uptick. Consider both the organization and individuals, in the short term and longer range. Talk
frankly about the challenges and rewards, encourage joint efforts toward common goals, communicate,
and act in a perfectly straightforward manner.
B. Within the culture, JPR can apply a useful checklist to identify opportunity
Choose the actions that apply to your business with Pareto in mind; you will find that most can be put
into effect pretty quickly, with a benefit likely to be much higher than the cost.
Act to raise profits or output, to ease bottlenecks, to refine operations that have lost their sharp focus over time or start effective new ones. Remember that you can improve productivity by cutting cost or by adding output, or both. Often, these categories offer significant opportunity for improvement.
1. Capacity and constraints are linked; as constraints are reduced then capacity will rise.
2. Work measurement Measure work to define objectively the time a job should take, for
costing but also to set expectations.
3. Product quality Keep product quality up. Let me rephrase that; keep necessary quality up.
Just because extremely high standards are necessary in pharmaceuticals and space ships doesn’t mean
they are necessary for sunglasses and kitchen cabinets. And remember the old adage that quality is
built in, not inspected in. The capability of your process drives the quality level, not the other way around.
4. Plant and workplace layout
Layout, or the physical organization of people, materials and machines within a workspace, is at the very heart of productivity.
5. Merge or consolidate business, operation, plant or facility
If your organization faces a consolidation or merger of facilities through choice or because it has been imposed by market forces, you have an opportunity to concentrate resources necessary for effective operation and use economies of scale to minimize cost.
6. Relocate for cost reasons, or to access qualified employees or support.
It is certainly possible for a business to cost justify another facility, instead of or in addition to, for access to qualified employees or specialized vendors and support; for location-sensitive operating costs, community incentives and tax relief, a better regulatory climate.
7. Just in time or just in case materials control?
Whichever system you are using, consider how it fits today’s situation for your organization.
Thanks for the time, I hope the information was useful. JPR welcomes the opportunity to discuss your
particular application, and to figure out just how to put the theory into practice in your P&L, your balance
sheet.
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There's no cost or obligation to contact
Jack Greene at 626-375-2468
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