Description
Cost Optimisation Opportunities
COST CONTROL & OPTIMISATION : OPPORTUNITIES IN TURBULENT TIMES
S.N.PANIGRAHI [email protected]
n today’s world economy characterized by falling growth, continued recession, economic uncertainties and turbulent times, costs become central focus for control. Un-predicted Pressures on prices and margins putting investor return at risk. The situation is further day by day dampening with diminished profit margins, whereas the costs of production, costs of energy and fuel , raw material , human resources and other overheads remained high and ever inflating. Thus cost control and cost reduction has become a priority agenda for all most all businesses . M ost companies are compelled to explore and exploit all possible cost reduction and productivity enhancement techniques for their very survival. Implementation of strategic and operational cost saving measures is essential to protect revenue and secure growth. Improving revenues and profits is a primary objective for all businesses and enterprises . H owever, these unfavourable developments are prompting the organisations to focus on cost reduction / cost savings. I dentifying C ost S aving opportunities, developing strategies and implementing and acting cost consciously to leverage cost saving measures to meet the corporate objectives especially in the turbulent times and volatile market conditions needs essential skill sets. Let us focus in this article some of cost saving opportunities. In the general parlance we use phrases like cost reduction, cost avoidance, cost elimination, cost control, cost consciousness, cost savings, cost optimisation etc. with some differentiation but with ultimate objective of achieving cost savings to increase profitability. We here use the phrase “cost optimisation” with scope broader, sustainable and in a holistic view. Cost optimization resulting from a situation where something is currently purchased and the cost of obtaining it is reduced or eliminated or some additional cost resulted in efficiency improvement or life time cost reduction. Some instances include: pay less, use less, eliminate the use of, use a substitute item at lower cost, and decrease a part of the acquisition. These are falling broadly in to some of the categories like reduction, reuse, re-process, elimination, modification, substitution or innovation etc. Generally the objectives of cost optimization in an organisation is associated to improve profits, increase Materials Management Review
I
efficiency / productivity, enhanced quality and service levels as well as reduce risk, increase competition, resource conservation, waste reduction / avoid destruction of value, enhancing business value, image building etc. COST OPTIMISATION OPPROTUNITIES: Companies usually implement company-wide strategies for reducing business costs. These strategies affect all direct and indirect business functions, including production processes for goods and services to administrative functions. Company wide cost reduction strategies ensure businesses receive the most benefit from these strategies. Major functional areas generally targeted for cost optimization are : Reducing Design & Product Development Costs (Any savings made at this stage will be valid for the rest of the product lifecycle) Simplify the design - reduce complexity (for ease of fabrication - for ease of assembly & easy joining and fastening - within process capabilities and reduced number of parts) Reduce the design cycle time and improve time-tomarket Consider Cost effective designs - internally or externally Consider how design costs get into product line P&Ls Automate where possible Early involvement of suppliers & purchasers Value analysis and value engineering - can identify potential savings Reducing Production Costs (On going and continuous cost saving opportunities) Improving production effectiveness and cycle time – Technological adoption Optimum utilization of production lines and
September 2013 9
production line costs Right design of production line & flow – material handling systems Just-in-Time (JIT), Six Sigma, TPM, Lean production methods Eliminating non-moving Work-in-Process (WIP) Eliminating / minimising defects and scrap and rework costs Using value-engineering tools to identify and eliminate non-value adding activities & waste Process re-engineering – Process modifications to reduce costs Scheduling to reduce underutilization costs Use of alternate material – low cost – redefining / rationalising specifications – tolerances Employee involvement – Cost reduction through Kaizen ideas – innovation Reducing Cost of Energy & Utilities (Every unit of energy saved is more than a unit generated) Establish Cost-Effective Energy Efficiency as a HighPriority Put in proper system of Measure & Target Reduction in Consumption of energy & various utilities – Metering – Data Collection – Data Analysis Energy audits to identify and evaluate opportunities for cost reduction Develop an energy policy and strategy Alternate energy use Training and actions to raise knowledge and awareness Developing and implementing improvement opportunities Implementing performance management systems, including the Energy Management Information System – Target Setting - Monitoring – Deviation Analysis – Corrective Actions Reducing Procurement Costs (Direct impact on bottom line) Reducing Total Cost of Ownership (TCO) Implementing Procurement Best Practices – Product Portfolio Matrix (category bsed cost reduction) Strategic Sourcing - Bench Marking, SRM (Supplier Relationship Mgt.), e-Sourcing / Reverse Auctions, Out Sourcing etc Right Source Selection - Pre-award Testing – Suppliers integration Suppliers collaboration – Understanding supplier’s cost drivers & try to eliminate Better Negotiating Contracts – Price & Commercial Terms Moving towards VMI (Vendor Maintained Inventory), PDI (Pre-Dispatch Inspection), SVE
10 September 2013
(Supplier Value Enhencement) Improving Procurement Capability – operational excellence Cost of Quality - improving supplier quality Improve on quality & time of delivery Reducing Inventories and Associated Costs (Removing facts for healthy organisational growth) Keeping right inventory - Setting safety stock levels, order points, lot sizes and lead-time Dramatically reducing inventory – Input – WIP – Finished Goods - Reduce surplus/obsolete inventory Budgeting – Limiting Spend & Locking Inventory Standardize – Substitute for standard parts Consolidate common parts Common Inventory Mgt (Across various units) Adopt tools & techniques like JIT, MRP & IT benefits – to Reduce Order Transaction Costs, Inventory Holding Costs, Safety Stock, Demand Forecasting Rationalize SKUs Postponement possibilities Reducing the Cost of Logistics (Leverage cost & service benefits) Consolidation of Service Providers Consolidation of Goods Route Planning- Scheduling – Supply Chain Debottlenecking Inbound – outbound mix planning Identifying cost trade-offs in logistics Logistics Cost – Benefit : 3 PL Rationally plan Mode of Transport / Shipment Road / Rail; Air / Sea Adopting lean and agile practices Reducing Information Management and Transaction Processing Costs (Improve information system at reasonable costs) Improving information systems performance and effectiveness - information integrity Design proper MIS to capture Cost related data & information to support the cost saving intiatives Outsourcing IT & related infrastructure – Working in Cloud environment – substantial cost saving Reducing HR related Costs Optimising the efficiency of the people management space Automate the processing of HR documents- reduce paper work – retrieval time & cost Reduce hiring cost –Thinking differently about sourcing - Tele-interviews - Achieving economies of scale by sourcing cross-functionally, avoiding Materials Management Review
‘specialist’ Cost conscious decisions related to “on-roll or outsourced” man power Reduce training costs (still improve effectiveness) by imparting online / webinar or in-house training Improving efficiency by encouraging a costconscious culture. Encouraging talent, through reward and career planning, ultimately helping to retain and develop staff and reduce the costs of attrition Cost Accounting -Support Putting in place proper Cost accounting systems Accounting for cost, time and waste - budgetary control, standard costing etc Value – based cost accounting - Cost – Benefit Analysis; Cost – Risk Analysis; Variance Analysis Activity Based Costing- Allocating overhead costs to individual Cost Centres Identify in a systematic way waste in support functions TCO, Life Cycle Costs, Benchmarking Costs COST OPTIMISATION – INTIATIATION PROCESS : The starting point for any cost optimisation programme is to have a clear, detailed and definitive view of organisational costs and clear targets for cost saving, generally initiated by Top Management . Major steps in cost optimisation programme are ; Starts with Top Management Initiative Communicate regarding Cost cutting imperatives Identify cost drivers, cost saving opportunities & measures in consultation with all the concerned Distinguish controllable and control resistant cost drivers Assess business / operational risks and adverse impact (if any) of cost optimisation measures Design a successful cost optimisation programme with proper documentation and justifying cost reduction initiatives with proper targets, measurements, means and methods of achieving cost saving by fixing responsibilities and time frame. Provide proper resource and system support to achieve the targets. Monitor implementation effectiveness & actual savings and benefits Prepare to overcoming technical, organizational, and cultural barriers during implementation. Institute proper reward system for significant cost Materials Management Review
reduction initiatives & achievements. CONCEIVING COST OPTIMISATION – STRATEGIC TO OPERATIONAL Cost optimization covers cost reduction, cost avoidance / elimination waste prevention, optional analysis (alternative use) and innovation as well as cost control methods that ensures value retention or creation; explore full potential of underutilised benefits / resources by adopting suitable process of identifying cost optimization opportunities, analysing them, creating a methodology and program structure to implement, monitor and then drive out and track the deliverables, benefits, cost savings and sustainability. A well-conceived cost optimisation strategy enables organisations to capture maximum value in the form of direct savings and inculcate a culture of value creation and minimising waste. In order to improve profitability and sustain in ever increasing competitive market every business enterprise is striving for adopting a right strategy for substantial and sustained cost savings. Cost optimisation may be addressed at three levels : Strategic: Core planning – long term, Corporate decisions, Policy initiatives : like cut out unprofitable business / operations; adoption of new technology Tactical: Short term actions and plans aligned with the strategic plan: like reorganise and reallocate resources Operational : short-term ways of achieving milestones during a given operational period implementation objectives and timetables like improving performance of processes; scheduled completion COST INDICATORS : Important parameters / measurement indeces for cost optimization in any manufacturing unit are cost per unit (Rs/unit), man-hours/unit, units produced/unit time, break down time (%), change over time (min/hrs), waste (%), defectives (%), fuel consumption (k therms / unit), electricity consumption (kwh/unit), water consumption (kltrs /unit), inventory turnover (%), lead time (min/hrs / days) etc. TOOLS & TECHNIQUES – MEANS & METHODS OF COST OPTIMISATION : Some of the tested and proved Tools & Techniques – Means & Methods of cost Optimization are : BUDGETARY COST CONTROL : Methodical control of
September 2013 11
an organization’s operations through establishment of standards and targets regarding expenditure, and a continuous monitoring and adjustment of performance against them. LIFE CYCLE COSTING : Life cycle costing is a method of economic analysis for all costs over the full life span or a specified period of a good, service, structure, or system. It includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life. TOTAL COST OF OWNERSHIP (TCO) : TCO is financially calculated number that estimates the total direct and indirect costs of owning an assets. TCO analysis includes total cost of acquisition and operating costs. A TCO analysis is used to gauge the viability of any capital investment. TARGET COSTING :Target costing is a process of determining the actual cost price of any product or service after considering the desired profit margin behind the same. Target Cost = Expected selling price – Desired profit ACTIVITY BASED COSING : Activity based costing is the use of activity based costing to improve operations and to eliminate non-value added cost. The main goal of ABM is to identify and eliminate non-value added activities and costs. KAIZEN COSTING : Kaizen costing focuses on reducing costs by setting achievable goals in cost reduction in continual and gradual improvement through small activities, rather than large or radical improvement through innovation or large investment technology. MANAGEMENT AUDIT : It is performed to examine, review and appraise the various policies and functions of the management on the basis of certain standards. It attempts to evaluate the performance of various management processes of an organization. It is used to facilitate cost reduction by identifying waste and inefficiency and recommending a corrective action. VALUE CHAIN: The value chain is the linked set of value creating activities all the way from basic raw materials’ sources, component suppliers, to the ultimate end-use product or service delivered to the customer. VALUE ANALYSIS : Value analysis is the identification of waste and unnecessary cost
12 September 2013
BUSINESS PRECESS-RE-ENGINEERING: Re-engineering is a complete redesign of process with an emphasis on finding creative new ways to accomplish an objective. The aim of business process reengineering is to improve the key business process in an organization by focusing on simplification, cost reduction, improved quality and enhanced customer satisfaction. STRATEGIC SOURCING : A systematic and fact based approach for optimizing an organization’s supply base and improving the overall value proposition. This is a method of managing procurement processes for an organization in which the procedures, methods and sources are constantly re-valuated to optimize value to the organization. SUPPLIER RELATIONSHIP MANAGEMENT (SRM) It is a process in business by which an organization systematizes its interactions supply organizations. Can be implemented through software, making it possible for organizations to effectively perform business transactions, request goods or services and automate the entire process between the organization and its suppliers JUST-IN-TIME (JIT) SYSTEM : Aims to reduce inventory holding and it’s associated costs. VMI (VENDOR MAINTAINED INVENTORY) : A business model where the vendor monitors and takes full responsibility of the buyer’s inventory. TOTAL QUALITY MANAGEMENT (TQM) : A comprehensive and structured approach to organizational management that seeks to improve the quality of products and services through ongoing refinements in response to continuous feedback. COST OF QUALITY : The “cost of quality” isn’t the price of creating a quality product or service. It’s the cost of NOT creating a quality product or service. Total Quality Costs = Cost of Conformance + Cost of nonconformance BENCH MARKING : An effective method of measurement by comparing quality of an organization’s existing policies, strategies, programmes, methods and performance levels with those of other organizations or other sub-units within the same organization. Key success factors for sustainable cost optimisation are strategic commitment from top management; setting a clear target and fixing the responsibility; developing Materials Management Review
/ adopting suitable systems, tools & infrastructure (IT) for measuring cost elements; clearly identifying cost drivers and opportunities for cost optimization; include tactical & strategic cost optimization initiatives; engaging all the concerned departments; inculcating a culture of cost consciousness and continuous improvement. Cost optimization aims to reduce the baseline costs of the business, while maintaining acceptable service levels and risks. Cost optimization must be done in such a way that it does not impact adversely other areas or undermine the organization’s efforts to capitalize on future growth opportunities. Organizations should therefore differentiate between cost optimization and indiscriminate cost-cutting. Moreover cost optimization should be a priority for all companies regardless of the economic cycle; the reality is that when times are good, it’s on the back burner, and during a downturn, it becomes critical. Some cost cutting measures are short term like temporarily lose weight on a crash diet, but in order to maintain an ideal weight, one must adopt a healthy lifestyle and diet over the long term, similarly sustainable cost optimization is an ideal fit for long time benefits. Arbitrary cost-cutting often delays optimization, because investments / resources that would normally yield better results in the long-term are either dropped or differed or delayed resulting in missed opportunities for future prospects. Cost is associated with every activity and every process and operation. Cost optimization is ensuring reduction of TOTAL COST of Business – Small & Big. Many businesses fail because of overspending on many activities often considered as small. There are cases of wasting money on small scale expenses like the purchase of small office supplies or stationaries, business travels, courier service bills, some other administrative expenses and more. If added up together they take a big chunk of money out of the business budget. So cost optimisation measures shall be initiated across the organisation and across all the departments. There may be hidden icebergs, which need to bring to surface and attack it. Common cost optimisation pitfalls are lack of top management commitments, lack of overall understanding of organisational costs, having no clear cost drives and targets for sustained cost savings, not well designed strategies and poor implementation of plans, cost discipline is not embedded into the organisational culture etc.
CONGRATULATIONS
SHRI. H.K SHARMA
Shri H.K.Sharma, National Councillor of Delhi Branch has been elevated to the Rank of Deputy Director General, Supply Division DGS&D, Ministry of Commerce & Industry. Shri. H.K Sharma is a graduate in Electrical Engg. From IIT Roorkee, & L.L.B from Delhi University. He has done diploma in International Purchasing & Supply Chain Management from International Trade Centre Geneva, Switzerland. Shri. Sharma started his carrier with Tata Consulting Engineers and worked for Procurement of Equipments for a Thermal Power Project in Gujarat form 1981 to 1983. Thereafter, he joined Indian Supply Service ( A constituent of Indian Engineering Service) in 1983 and has vast experience of over three decades in various aspects of Procurement. He is been a faculty in Purchase and Contract Management, Legal Aspects and Supply Management with various institutions like IIMM, DGS&D, ISTM, IIFT and DHTI to name a few and was instrumental in publishing the book Public Buying by IIMM. Shri Sharma is an and lover of Hindi, English & Urdu Poetry. We wish all the success in his life.
Materials Management Review
September 2013
13
doc_827277347.pdf
Cost Optimisation Opportunities
COST CONTROL & OPTIMISATION : OPPORTUNITIES IN TURBULENT TIMES
S.N.PANIGRAHI [email protected]
n today’s world economy characterized by falling growth, continued recession, economic uncertainties and turbulent times, costs become central focus for control. Un-predicted Pressures on prices and margins putting investor return at risk. The situation is further day by day dampening with diminished profit margins, whereas the costs of production, costs of energy and fuel , raw material , human resources and other overheads remained high and ever inflating. Thus cost control and cost reduction has become a priority agenda for all most all businesses . M ost companies are compelled to explore and exploit all possible cost reduction and productivity enhancement techniques for their very survival. Implementation of strategic and operational cost saving measures is essential to protect revenue and secure growth. Improving revenues and profits is a primary objective for all businesses and enterprises . H owever, these unfavourable developments are prompting the organisations to focus on cost reduction / cost savings. I dentifying C ost S aving opportunities, developing strategies and implementing and acting cost consciously to leverage cost saving measures to meet the corporate objectives especially in the turbulent times and volatile market conditions needs essential skill sets. Let us focus in this article some of cost saving opportunities. In the general parlance we use phrases like cost reduction, cost avoidance, cost elimination, cost control, cost consciousness, cost savings, cost optimisation etc. with some differentiation but with ultimate objective of achieving cost savings to increase profitability. We here use the phrase “cost optimisation” with scope broader, sustainable and in a holistic view. Cost optimization resulting from a situation where something is currently purchased and the cost of obtaining it is reduced or eliminated or some additional cost resulted in efficiency improvement or life time cost reduction. Some instances include: pay less, use less, eliminate the use of, use a substitute item at lower cost, and decrease a part of the acquisition. These are falling broadly in to some of the categories like reduction, reuse, re-process, elimination, modification, substitution or innovation etc. Generally the objectives of cost optimization in an organisation is associated to improve profits, increase Materials Management Review
I
efficiency / productivity, enhanced quality and service levels as well as reduce risk, increase competition, resource conservation, waste reduction / avoid destruction of value, enhancing business value, image building etc. COST OPTIMISATION OPPROTUNITIES: Companies usually implement company-wide strategies for reducing business costs. These strategies affect all direct and indirect business functions, including production processes for goods and services to administrative functions. Company wide cost reduction strategies ensure businesses receive the most benefit from these strategies. Major functional areas generally targeted for cost optimization are : Reducing Design & Product Development Costs (Any savings made at this stage will be valid for the rest of the product lifecycle) Simplify the design - reduce complexity (for ease of fabrication - for ease of assembly & easy joining and fastening - within process capabilities and reduced number of parts) Reduce the design cycle time and improve time-tomarket Consider Cost effective designs - internally or externally Consider how design costs get into product line P&Ls Automate where possible Early involvement of suppliers & purchasers Value analysis and value engineering - can identify potential savings Reducing Production Costs (On going and continuous cost saving opportunities) Improving production effectiveness and cycle time – Technological adoption Optimum utilization of production lines and
September 2013 9
production line costs Right design of production line & flow – material handling systems Just-in-Time (JIT), Six Sigma, TPM, Lean production methods Eliminating non-moving Work-in-Process (WIP) Eliminating / minimising defects and scrap and rework costs Using value-engineering tools to identify and eliminate non-value adding activities & waste Process re-engineering – Process modifications to reduce costs Scheduling to reduce underutilization costs Use of alternate material – low cost – redefining / rationalising specifications – tolerances Employee involvement – Cost reduction through Kaizen ideas – innovation Reducing Cost of Energy & Utilities (Every unit of energy saved is more than a unit generated) Establish Cost-Effective Energy Efficiency as a HighPriority Put in proper system of Measure & Target Reduction in Consumption of energy & various utilities – Metering – Data Collection – Data Analysis Energy audits to identify and evaluate opportunities for cost reduction Develop an energy policy and strategy Alternate energy use Training and actions to raise knowledge and awareness Developing and implementing improvement opportunities Implementing performance management systems, including the Energy Management Information System – Target Setting - Monitoring – Deviation Analysis – Corrective Actions Reducing Procurement Costs (Direct impact on bottom line) Reducing Total Cost of Ownership (TCO) Implementing Procurement Best Practices – Product Portfolio Matrix (category bsed cost reduction) Strategic Sourcing - Bench Marking, SRM (Supplier Relationship Mgt.), e-Sourcing / Reverse Auctions, Out Sourcing etc Right Source Selection - Pre-award Testing – Suppliers integration Suppliers collaboration – Understanding supplier’s cost drivers & try to eliminate Better Negotiating Contracts – Price & Commercial Terms Moving towards VMI (Vendor Maintained Inventory), PDI (Pre-Dispatch Inspection), SVE
10 September 2013
(Supplier Value Enhencement) Improving Procurement Capability – operational excellence Cost of Quality - improving supplier quality Improve on quality & time of delivery Reducing Inventories and Associated Costs (Removing facts for healthy organisational growth) Keeping right inventory - Setting safety stock levels, order points, lot sizes and lead-time Dramatically reducing inventory – Input – WIP – Finished Goods - Reduce surplus/obsolete inventory Budgeting – Limiting Spend & Locking Inventory Standardize – Substitute for standard parts Consolidate common parts Common Inventory Mgt (Across various units) Adopt tools & techniques like JIT, MRP & IT benefits – to Reduce Order Transaction Costs, Inventory Holding Costs, Safety Stock, Demand Forecasting Rationalize SKUs Postponement possibilities Reducing the Cost of Logistics (Leverage cost & service benefits) Consolidation of Service Providers Consolidation of Goods Route Planning- Scheduling – Supply Chain Debottlenecking Inbound – outbound mix planning Identifying cost trade-offs in logistics Logistics Cost – Benefit : 3 PL Rationally plan Mode of Transport / Shipment Road / Rail; Air / Sea Adopting lean and agile practices Reducing Information Management and Transaction Processing Costs (Improve information system at reasonable costs) Improving information systems performance and effectiveness - information integrity Design proper MIS to capture Cost related data & information to support the cost saving intiatives Outsourcing IT & related infrastructure – Working in Cloud environment – substantial cost saving Reducing HR related Costs Optimising the efficiency of the people management space Automate the processing of HR documents- reduce paper work – retrieval time & cost Reduce hiring cost –Thinking differently about sourcing - Tele-interviews - Achieving economies of scale by sourcing cross-functionally, avoiding Materials Management Review
‘specialist’ Cost conscious decisions related to “on-roll or outsourced” man power Reduce training costs (still improve effectiveness) by imparting online / webinar or in-house training Improving efficiency by encouraging a costconscious culture. Encouraging talent, through reward and career planning, ultimately helping to retain and develop staff and reduce the costs of attrition Cost Accounting -Support Putting in place proper Cost accounting systems Accounting for cost, time and waste - budgetary control, standard costing etc Value – based cost accounting - Cost – Benefit Analysis; Cost – Risk Analysis; Variance Analysis Activity Based Costing- Allocating overhead costs to individual Cost Centres Identify in a systematic way waste in support functions TCO, Life Cycle Costs, Benchmarking Costs COST OPTIMISATION – INTIATIATION PROCESS : The starting point for any cost optimisation programme is to have a clear, detailed and definitive view of organisational costs and clear targets for cost saving, generally initiated by Top Management . Major steps in cost optimisation programme are ; Starts with Top Management Initiative Communicate regarding Cost cutting imperatives Identify cost drivers, cost saving opportunities & measures in consultation with all the concerned Distinguish controllable and control resistant cost drivers Assess business / operational risks and adverse impact (if any) of cost optimisation measures Design a successful cost optimisation programme with proper documentation and justifying cost reduction initiatives with proper targets, measurements, means and methods of achieving cost saving by fixing responsibilities and time frame. Provide proper resource and system support to achieve the targets. Monitor implementation effectiveness & actual savings and benefits Prepare to overcoming technical, organizational, and cultural barriers during implementation. Institute proper reward system for significant cost Materials Management Review
reduction initiatives & achievements. CONCEIVING COST OPTIMISATION – STRATEGIC TO OPERATIONAL Cost optimization covers cost reduction, cost avoidance / elimination waste prevention, optional analysis (alternative use) and innovation as well as cost control methods that ensures value retention or creation; explore full potential of underutilised benefits / resources by adopting suitable process of identifying cost optimization opportunities, analysing them, creating a methodology and program structure to implement, monitor and then drive out and track the deliverables, benefits, cost savings and sustainability. A well-conceived cost optimisation strategy enables organisations to capture maximum value in the form of direct savings and inculcate a culture of value creation and minimising waste. In order to improve profitability and sustain in ever increasing competitive market every business enterprise is striving for adopting a right strategy for substantial and sustained cost savings. Cost optimisation may be addressed at three levels : Strategic: Core planning – long term, Corporate decisions, Policy initiatives : like cut out unprofitable business / operations; adoption of new technology Tactical: Short term actions and plans aligned with the strategic plan: like reorganise and reallocate resources Operational : short-term ways of achieving milestones during a given operational period implementation objectives and timetables like improving performance of processes; scheduled completion COST INDICATORS : Important parameters / measurement indeces for cost optimization in any manufacturing unit are cost per unit (Rs/unit), man-hours/unit, units produced/unit time, break down time (%), change over time (min/hrs), waste (%), defectives (%), fuel consumption (k therms / unit), electricity consumption (kwh/unit), water consumption (kltrs /unit), inventory turnover (%), lead time (min/hrs / days) etc. TOOLS & TECHNIQUES – MEANS & METHODS OF COST OPTIMISATION : Some of the tested and proved Tools & Techniques – Means & Methods of cost Optimization are : BUDGETARY COST CONTROL : Methodical control of
September 2013 11
an organization’s operations through establishment of standards and targets regarding expenditure, and a continuous monitoring and adjustment of performance against them. LIFE CYCLE COSTING : Life cycle costing is a method of economic analysis for all costs over the full life span or a specified period of a good, service, structure, or system. It includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life. TOTAL COST OF OWNERSHIP (TCO) : TCO is financially calculated number that estimates the total direct and indirect costs of owning an assets. TCO analysis includes total cost of acquisition and operating costs. A TCO analysis is used to gauge the viability of any capital investment. TARGET COSTING :Target costing is a process of determining the actual cost price of any product or service after considering the desired profit margin behind the same. Target Cost = Expected selling price – Desired profit ACTIVITY BASED COSING : Activity based costing is the use of activity based costing to improve operations and to eliminate non-value added cost. The main goal of ABM is to identify and eliminate non-value added activities and costs. KAIZEN COSTING : Kaizen costing focuses on reducing costs by setting achievable goals in cost reduction in continual and gradual improvement through small activities, rather than large or radical improvement through innovation or large investment technology. MANAGEMENT AUDIT : It is performed to examine, review and appraise the various policies and functions of the management on the basis of certain standards. It attempts to evaluate the performance of various management processes of an organization. It is used to facilitate cost reduction by identifying waste and inefficiency and recommending a corrective action. VALUE CHAIN: The value chain is the linked set of value creating activities all the way from basic raw materials’ sources, component suppliers, to the ultimate end-use product or service delivered to the customer. VALUE ANALYSIS : Value analysis is the identification of waste and unnecessary cost
12 September 2013
BUSINESS PRECESS-RE-ENGINEERING: Re-engineering is a complete redesign of process with an emphasis on finding creative new ways to accomplish an objective. The aim of business process reengineering is to improve the key business process in an organization by focusing on simplification, cost reduction, improved quality and enhanced customer satisfaction. STRATEGIC SOURCING : A systematic and fact based approach for optimizing an organization’s supply base and improving the overall value proposition. This is a method of managing procurement processes for an organization in which the procedures, methods and sources are constantly re-valuated to optimize value to the organization. SUPPLIER RELATIONSHIP MANAGEMENT (SRM) It is a process in business by which an organization systematizes its interactions supply organizations. Can be implemented through software, making it possible for organizations to effectively perform business transactions, request goods or services and automate the entire process between the organization and its suppliers JUST-IN-TIME (JIT) SYSTEM : Aims to reduce inventory holding and it’s associated costs. VMI (VENDOR MAINTAINED INVENTORY) : A business model where the vendor monitors and takes full responsibility of the buyer’s inventory. TOTAL QUALITY MANAGEMENT (TQM) : A comprehensive and structured approach to organizational management that seeks to improve the quality of products and services through ongoing refinements in response to continuous feedback. COST OF QUALITY : The “cost of quality” isn’t the price of creating a quality product or service. It’s the cost of NOT creating a quality product or service. Total Quality Costs = Cost of Conformance + Cost of nonconformance BENCH MARKING : An effective method of measurement by comparing quality of an organization’s existing policies, strategies, programmes, methods and performance levels with those of other organizations or other sub-units within the same organization. Key success factors for sustainable cost optimisation are strategic commitment from top management; setting a clear target and fixing the responsibility; developing Materials Management Review
/ adopting suitable systems, tools & infrastructure (IT) for measuring cost elements; clearly identifying cost drivers and opportunities for cost optimization; include tactical & strategic cost optimization initiatives; engaging all the concerned departments; inculcating a culture of cost consciousness and continuous improvement. Cost optimization aims to reduce the baseline costs of the business, while maintaining acceptable service levels and risks. Cost optimization must be done in such a way that it does not impact adversely other areas or undermine the organization’s efforts to capitalize on future growth opportunities. Organizations should therefore differentiate between cost optimization and indiscriminate cost-cutting. Moreover cost optimization should be a priority for all companies regardless of the economic cycle; the reality is that when times are good, it’s on the back burner, and during a downturn, it becomes critical. Some cost cutting measures are short term like temporarily lose weight on a crash diet, but in order to maintain an ideal weight, one must adopt a healthy lifestyle and diet over the long term, similarly sustainable cost optimization is an ideal fit for long time benefits. Arbitrary cost-cutting often delays optimization, because investments / resources that would normally yield better results in the long-term are either dropped or differed or delayed resulting in missed opportunities for future prospects. Cost is associated with every activity and every process and operation. Cost optimization is ensuring reduction of TOTAL COST of Business – Small & Big. Many businesses fail because of overspending on many activities often considered as small. There are cases of wasting money on small scale expenses like the purchase of small office supplies or stationaries, business travels, courier service bills, some other administrative expenses and more. If added up together they take a big chunk of money out of the business budget. So cost optimisation measures shall be initiated across the organisation and across all the departments. There may be hidden icebergs, which need to bring to surface and attack it. Common cost optimisation pitfalls are lack of top management commitments, lack of overall understanding of organisational costs, having no clear cost drives and targets for sustained cost savings, not well designed strategies and poor implementation of plans, cost discipline is not embedded into the organisational culture etc.
CONGRATULATIONS
SHRI. H.K SHARMA
Shri H.K.Sharma, National Councillor of Delhi Branch has been elevated to the Rank of Deputy Director General, Supply Division DGS&D, Ministry of Commerce & Industry. Shri. H.K Sharma is a graduate in Electrical Engg. From IIT Roorkee, & L.L.B from Delhi University. He has done diploma in International Purchasing & Supply Chain Management from International Trade Centre Geneva, Switzerland. Shri. Sharma started his carrier with Tata Consulting Engineers and worked for Procurement of Equipments for a Thermal Power Project in Gujarat form 1981 to 1983. Thereafter, he joined Indian Supply Service ( A constituent of Indian Engineering Service) in 1983 and has vast experience of over three decades in various aspects of Procurement. He is been a faculty in Purchase and Contract Management, Legal Aspects and Supply Management with various institutions like IIMM, DGS&D, ISTM, IIFT and DHTI to name a few and was instrumental in publishing the book Public Buying by IIMM. Shri Sharma is an and lover of Hindi, English & Urdu Poetry. We wish all the success in his life.
Materials Management Review
September 2013
13
doc_827277347.pdf