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Cost Control, Cost Reduction after you cherry pick; get serious about Productivity Improvement

Guest post by: Jack Greene

Article Overview: Cherry pick, gather the low hanging fruit. That's good Cost Control advice, but then what? Especially if a double dip recession is upon us and cost reduction is paramount. To reach the next level of productivity improvement may be a bit harder, but the results can benefit your organization structurally over time. This article explains some actions and their value. For a deeper analysis, my Amazon book called Cost Reduction; Survive, Recover, Thrive offers actions for any phase of the economy, for all levels of the organization chart. It is listed on Amazon, search by the title please. It is available in a Kindle edition as well as paperback.

Cost Control, Cost Reduction after you cherry pick; get serious about Productivity Improvement



Cherry pick, gather the low hanging fruit. That's good Cost Control advice, but then what? Especially if a double dip recession is upon us and cost reduction is paramount. To reach the next level of productivity improvement may be a bit harder, but the results can benefit your organization structurally over time. This article explains some actions and their value.

For a deeper analysis, my Amazon book called Cost Reduction; Survive, Recover, Thrive offers actions for any phase of the economy, for all levels of the organization chart. It is listed on Amazon, search by the title please. It is available in a Kindle edition as well as paperback.

JPR has several other articles to point out many first-level cost reductions here on Evan Carmichael and on our web pages. This article will suggest less obvious but effective actions, to identify potential, set out a plan, and show operating relationships with other cost elements.

Which of your products or services are the most profitable, which the least? Once you know that, the obvious solution is to focus sales efforts on the profitable at the expense of the less profitable, maybe even "prune" those with low or negative profit. "Product Pruning" was an ITT term, from the years I was there, and a very effective tactic in any economy.

There are at least two problems that often interfere with pruning. The most serious will be that you don't have a costing and reporting system in place to quantify costs by product. And before you tell me you have such a system in place, be sure that it is based on engineered direct costs for labor and materials, and that your overhead allocation mechanism is accurate. Your operating people know that all products and services do not use resources equally, that some run smoothly and some don't so be sure the standard cost reflects that imbalance. Especially don't "smear" allocations across departments or plants. JPR does engineer labor and material cost, but for overhead, a modern Activity Based Costing system will work wonders.

The second issue might be the reluctance to act on the knowledge you have, to eliminate the unprofitable. Your sales group will protest, "our customers love that product!" Of course they do, if you supply it to them below cost.

There are several possible actions to take if a product's cost seems out of line. Recheck the standard cost calculations and allocations. Re-engineer features or material or specs, to pull out production problems. Consider features, are there any for which the marketplace is not willing to pay? (This is a real example of non-value added cost, if you want to include a feature for which you can't charge.) Even (gasp) consider your expected standard margins. Is this such a good product that you might modify a margin to attain an acceptable selling price? If sales is adamant about the high potential for a product, ask them to commit to a higher sales volume, then re-calculate overhead cost at the revised volumes; what is the margin now?

The key to the preceding discussion is that your organization had better know what the real costs are or else you will not be able to make decisions accurately. Then the cost reduction strategy will become practical, and your knowledge will point the way to cost controls, the cost reductions, productivity improvement, manufacturing cost reduction.

Can you introduce new products or services quickly and consistently?

A few elements of new product introduction constitute good practice, from my experience in designing processes, directing, and planning facilities for the elements of spec control, model shop, pilot plant, process development, sign off by all concerned, and first - lot - to - stock manufacturing.

1. Set dates considering what work is to be done, not arbitrarily.

2. Identify the work to be done, the deliverables, the signoffs at the end of each step, and do not move forward until these are accomplished.

3. Match quality levels to the process capability; what it can accomplish routinely and repetitively.

4. New products often call for new features, which may cause more than their share of problems.

5. Transitions and handoffs often are sticking points; assure that the "owner" of the previous phase has completely discharged his duties before holding the next "owner" responsible. And don't fail to allocate responsibility.

6. New product introduction occurs within a day-to-day operation, often with people who have parallel responsibility. Management must therefore make clear where priorities lie.

Measure work so that you have the knowledge to manage successfully

Objectively define the time required for work elements, to serve as a basis for many management tools, and to state and reduce costs directly:

• quantify expectations from people and processes, and communicate them

• determine staffing levels as output levels rise or fall

• assign and schedule work to people and equipment based on expectations

• identify and manage constraints; in equipment, process, facility

• balance individual workloads in lines or work groups for optimum performance

• perhaps you will want to offer pay related to output; labor incentives

Work measurement also provides tools to manage your business better

• calculate actual capacity the operation can produce

• develop standard cost models for products and services

• justify equipment and automation acquisition

• meet the Sarbanes Oxley Act for financial understanding of costs

• adjudicate disagreements about workload, assignments

• analyze variance to find problems

• estimate potential benefit from changes beforehand

Is your production forecast frozen for next month? If the answer is no, if you allow late changes, you will likely cause operating problems that will slow output and raise actual cost. There may be benefits too, so the topic is not a black and white issue; these factors will affect the decision.

Two primary cost elements respond negatively to late schedule changes. One is the incidence of changeover, the other is the possibility that materials will not be available when needed. If capacity is a consideration, it also may suffer as constraints may not be kept busy. And inventory space will likely increase.

But changeover and materials are the main considerations; both can increase down time. Changeover incidence and elapsed time per incidence both cut the time that a crew has to produce, but the crew cost is not cut. When a product is scheduled, there will be a normal cycle time to receive, test or inspect, release to the line, stage (and this is true with Just in Time or Just in Case). Change the schedule and the cycle time may make the material unavailable.

On the other hand, schedule changes may be performed to meet customer requests, or to gain a new customer, to satisfy a sudden market opportunity. As any responsible management should, consider the variables and act accordingly. A recent client promised customers to ship an order in a week, and made this a major part of its business model, because many competitors would not match the performance. To fulfill their commitments, this company tailored its materials handling and manufacturing to routinely deal with change.

Good luck,

Jack Greene

Jackson Productivity Research Inc.

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