Every Manufacturing Company always has Cost Reduction Agenda. While they try to improve their Product Design using Frugal Design principles, they always have Cost reduction agenda in the Product too.
The Business situation is becoming tougher and tougher for companies. The Topline and Bottom line Growth cannot be taken for granted! It has to be earned in the hard manner.
Automotive industry is going thru some tough phase. The Industry may get fragmented due to Electric Vehicles coming in. It is no longer left to a few Big companies. Few more Bigger companies like Apple, Google are entering this space. Some smaller / new Players are also entering the fray.
Manufacturing Companies across the world are trying to become more efficient using Industry 4.0 elements. The struggle to become more efficient is continuous for Manufacturing Companies.
Much like Individuals developing capabilities to do more things, Companies also need to develop Capabilities in their Companies. These Capabilities may be built around a few Practices in the Company.
Every Company needs to develop the Capability of ‘Continuous Cost Reduction’ on active basis.
I have seen many companies who get substantial Cost Reduction when they start it off for the first time. But after one /two years, the effort tapers off. They say it is no longer possible! I don’t think the Cost Reduction possibilities will dry up. The ideas to access new Possibilities may dry up.
I would like to highlight some Best Practices that can ensure Continuous Cost Reduction in a Company. Companies need to pick up a few or all of these elements and formulate their own Process. Following are some important elements in this process.
01. Cost Reduction Target: Every Company needs to have a Challenging Target for Cost reduction every Year. This Target may be there at the Company level in terms of Profitability improvement. This would be naturally broken down in to Targets for reduction of various expenses and will flow down to Various Functions in the Company. Some of the Cost Reduction Projects may be led by Cross Functional Teams. It is important to involve ALL functions in Cost Reduction effort. It should not be left to few Functions only.
02. Price Recovery: Companies need to have great focus on recovering the escalation of Expenses from Market. If there is a Raw Material price increase, if there is Power tariff increase, if you have given increments to your team, it is ideal if you can recover from the Market. The Market may comprise of individual Big Customers as well as After Market where you are addressing a bigger Market. Every Company would have its’ own constraints to recover full amount of Cost Escalation from the Market. The Competition and Customer Power will not simply allow this to happen. But still every Company needs to have a good mechanism to capture the Cost escalation and throw up information to Sales & Marketing to recover the higher Cost from the Market. Many a times a Good Software support is needed for highlighting the escalation of Costs and how much of it is being recovered from Market. This information has to be available. After this the Company will take a call as to how much it can recover from Customers and how much it cannot. I have seen many companies who simply do not know how much the Costs have gone up and how much is recovered. Resultantly they do not have control on their Profitability.
03. Cost Reduction as a KPI: Every Senior person in the Company needs to have Cost Reduction as a KPI and he has to deploy the Measures to achieve the Cost reduction to his teams. This KPI should have a reasonable weightage so that everyone takes it seriously.
04. Cost Reduction Projects: Every HOD should identify Projects to an extent of 150% of the Target that he is given. Companies may have a Guide line that at any point of time each HOD should have Projects for next 6-8 months. The Projects should have detailed Plans. This is essential to ensure the Projects are practical. Companies create some simple formats to have these details and have a sign off from all Stake holders that it is doable.
05. Brainstorming sessions: Every Company needs to have a structure for Brain Storming sessions to identify Cost Reduction Projects. Many of the Subjects may require a Cross Functional Participation. So, each HOD should work out a schedule for Brainstorming Sessions. Each Brain Storming session should have:
a. A Target for Value of Cost Reduction Projects that need to be identified in the session.
b. Advance information to Participants to come prepared.
c. Analysis of data to be sent to the Participants that will help them to understand the Cost Structure of the Product / Part.
d. Involve Supplier Partners as appropriate.
06. Involving SMEs: Every Company needs to have a hierarchy of Cost Reduction methods. While the Buyers would be pushing for Volume discounts, there should be some effort in challenging bigger things in the Company. May be Design of the Product may be redone to cut the costs by 1/3rdor the Dealer Model may be challenged in some areas to sell directly to the Customers. Every Company should have their own share of these Big Bang ideas and they may decide to involve some Subject Matter Experts (SMEs) from outside. These Brain storming sessions may be conducted with some notice and may carry on for a few sessions. Involving outside agencies like IITs / Technical Universities across the world in this effort is a good idea. These efforts will ensure that the Cost reduction effort will continuously happen in a company and it will not dry up after couple of years.
07. Involving Supplier Partners: The Cost Reduction has to be driven along with the Supplier Partners. Companies that want to take the ‘full benefit of a Supplier’s effort’ will not get much cooperation from the Suppliers. The Company needs to behave in a mature manner and look at the Medium-term benefit. Supplier Partners should be supported by the Company by training them, exposing them to new practices in technology and process. Companies who invest in to this will reap the Benefits from this type of philosophy.
08. Training of the Teams: If a company wants to do some serious Cost reduction, then it should identify the Competencies that its’ staff need to have and Train them to develop these competencies. Some examples of Competencies that are required are:
a. Ability to understand the Cost Sheets.
b. Product knowledge
c. Manufacturing Process Knowledge
d. Lean Principles
e. VA / VE
f. Frugal Engineering
It would be good to develop E-Learning material on these topics and keep training the Team members continuously. Training and Re-Training is needed in this area.
09. Involvement of All Employees: There should be processes in the Company to involve all employees in the effort of identifying ideas for Cost reduction. It would be good to develop a Mobil app for this and encourage all employees to keep contributing on a continuous basis. This type of Ideas Database can help a Company to maintain a Continuous flow of ideas and Cost Reduction.
10. Motivational means: Companies need to be liberal in rewarding the Employees for implementing great Projects. The practice that Facebook / WhatsApp etc. follow in this regard is a good example. Facebook rewards anyone who finds a bug in a handsome manner. Due to this incentive, there are always lots of committed hackers who are searching for a bug in Facebook. This is a win /win situation.
11. Spend time every day: All important Functions that are involved in Cost reduction should set up a War room for Cost reduction and ask the Teams to meet EVERY DAY for 45 minutes to push the Cost reduction Projects. Teams have to meet every day to ensure focus on the Cost reduction. This is a very important practice, if you want Cost Reduction to gain focus in your Company. The War room should have all the Parts, facilities to strip down the parts / products.
12. Bench marking: It would be good to encourage a practice of Bench marking the Products / Parts / Processes across the world. Every company can learn from others if the companies are open to let others in. It can’t happen with competitors. But, you can learn from Customers and Suppliers. Many companies get the Parts / Products and conduct a Strip Down Analysis to gain more insights.
13. Continuous activity: Cost reduction has to be looked at as a perennial activity in a Company. It has to go beyond the Annual Target. There should be Quarterly Target and the activity has to go beyond a Financial year as the Company may want to have Projects ready and identified for next 6 months.
14. Metrics: The Cost Reduction should have Lag and Lead indicators. While Department wise and Companywide target may be the Lag indicators, Practices like Brain Storming sessions, Daily War room meetings, Benchmarking, Strip down analysis etc. can be the Lead Indicators. It is very important to monitor the health of the Process of the Cost reduction.
15. Cost Council: It is good to formulate a Cost Council in the Company with senior people in it. This Council should set Bench marks with the Competition and Market for Price, Costs. This Council should formulate ideas for achieving Cost Competitiveness on a continuous basis. This Cost Council should be there at all levels in the Organization with its members conducting reviews at all levels. The CEO or Finance Head can become the leader for this Council.
There can be more ideas.
Individually the above ideas may be in practice in many companies. But what is needed is to put them together and formulate them in to a Competency for the Company. It will become a Competency for the Company if the individual elements are practiced regularly and a good result is coming regularly. Cost Competitiveness is very important for every Company. By putting together your own way of managing the Cost Reduction in your Company and practicing it continuously, you develop it in to a Competency for the Company.
Is Cost Reduction a strong Competency of your Organization?