Cost Reduction and Cost Control

Practical ideas and expectations.

Simple Principles of Cost Reduction and Cost Control

Locate good cost reduction opportunity first; the biggest costs will yield the biggest benefits. Then eliminate waste and non-value added cost.

That's it. A simple plan. Following are specific actions to tailor the plan to your organization, it's objectives and cost structure.

JPR can assist with your cost reduction objectives at your location, and we have a how-to book that you will find useful.

Cost reduction and control are good strategies any time, with benefit likely to be much higher than the cost.

 

Jack Greene has just published, on Amazon:

Cost Reduction

How to Survive, Recover, or Thrive

Productivity Improvement for All.

For information on this Amazon book, both print and Kindle, please click on

C ost Reduction,  How to Survive, Recover, or Thrive

Preface
How to Survive, Recover, or Thrive

The immediate needs for your organization will depend on the general economy, the particular sector of the economy you participate in, and unique characteristics of the organization. You may need to survive, or to recover, or to thrive at different times of your existence. This book offers hands-on options for all economic phases, for all levels of the organization chart. Ideas for cost reduction and for good management are mixed interchangeably, just as in real life.

 

 

JPR Consulting Services

Reliable Cost Reduction Practices, detailed below

1. Pareto Principle is the basis both for cost reduction and cost control;
show me the money

2. Eliminate waste; retain value-added activity and materials.

3. Build and prioritize a list of the most effective Cost Reduction actions for your circumstances and to analyze your Cost Control status and potential. JPR is experienced in this effective practice.

4. Cost reduction and cost control employ slightly different focuses.

5. Zero in on good cost control and cost reduction with these effective techniques.

1. 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.

To apply Pareto to the twenty first century, please don't look just at direct hourly people for improvement. That is probably not where your big costs are. (Although if the process is labor constrained, unable to produce to capacity, that's another story entirely.)

Remember, show me the money.

 

2. 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.

 

 

3. JPR Services

JPR will a) build and prioritize a list of good potential Cost Reduction actions in your circumstances, and b) analyze your Cost Control status and potential improvements, during a week-long visit.

Naturally, we will apply Pareto and identify waste.

We'll observe your operation, equipment, people, processes, flow, layout, organization chart, facilities, allocations, P&L line items, material usage, output, constraints. We'll consider reports and forms especially for variance analysis.

Our report will identify the most promising and practical options for improvement in your circumstances. We will name specific improvement actions, prioritize them, and suggest how to implement them.

We consider all the possible improvement techniques objectively since we do not represent particular systems or products.

 

4. Cost reduction and cost control have a slightly different focus

Cost control and cost reduction have different objectives and scope, but are closely allied.

a. Typically, an organization will apply cost reduction techniques to
--Address a particular high cost problem or objective
--Implement a new operating model
--Raise profits or output generally
--Refine operations that have lost their sharp focus over time
--Initiate an effective, formal program to focus on costs
--Meet mandated cost reduction, perhaps from someone such as the Department of Defense

b. Cost control tends to be a continuing action, and important steps are to
--Quantify and formalize costs expected for labor, materials, overhead
--Base budgets and profit goals on formalized costs
--Collect information on actual costs as they occur, publish reports
--Create a mechanism to analyze variance; budget versus actual
--Read variances and control them on a timely basis, which may be daily or periodically.
--Tie results to remuneration, at hourly and / or management levels

 

5. Zero in on good cost control and cost reduction with these effective techniques

Cost control is a way of thinking, with overall profitability the final result.

Focus on results, not the process.
Remember, show me the money.

Organization profitability is the goal, or cost effectiveness in a governmental, health care, or non-profit setting. Consider total productivity across the organization, in the front office, the lab, the maintenance shop, construction and installation in the field, the customer service unit, and the warehouse as well as on a production floor.

 

  A. Management sets the tone for cost emphasis

1. Cut waste.
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 largest 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. Set goals and measure results. Require accountability for actions.

4. Encourage innovation, but don't ad lib.
Define how the job is to be done; specs and operator instructions and process controls. Resolve how such written statements are to be followed, from absolute compliance in pharmaceuticals and rocket ships, perhaps to less rigorous control in other products. But be careful how you allow variation, or someone may think that employee and product safety rules are relaxed as well.

In parallel, set up a formal system for people to suggest change, and an objective way to evaluate ideas and put the good ones into effect.

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. Different kinds of cost require different actions for control

 

  If you think a cost is fixed and not changeable, reconsider the assumptions. If you are willing to change assumptions, no cost is fixed.

Variable costs change according to some factor which may or not be within your control; be sure to know what the factor is and what the relationship is.

 

  C. For best results, apply proven tools

 

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 and cost will dip.

2. Work measurement Measure work to define objectively the time a job should take, for lower costs 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.

 

There's no cost or obligation to contact Jack Greene at 843-422-1298

 

 

or, e-mail us