Cost Reduction Technique with ERRANT concept

Cost Saving or cost reduction management is part of the regular cycle in managing supply chain activities.  When I was the managing manager in dealing with cost reduction activities, there are few challenges faced by us.

Example as following:-

1.       Unable to proceed due to lack of technical knowledge
2.       Do not understand the processes
3.       Held up by rigid technical specification
4.       Fear of making error of judgment when switching to cheaper option
5.       Comfort zone of team members or stakeholders in the company, resulting in objection to       reduce cost unnecessarily

The key to cost reduction is always be open to ideas, review option, or solution to the problem, be objective instead of subjective to the issue on hand and most importantly, get away from the comfort zone.

People are reluctant to move away from the comfort zone due to the fear of any changes made will reflect badly on them or the refusal to be challenging that certain option to reduce cost is possible.

For example, when I was a Production Manager in a chemical plant operation, one of the biggest issues is the cost of operation.

•      High number of head count
•         Low output compare to other factories in the region
•        High wastage's

I was a newly appointed to the post of production manager and the first action we did was to review and what can be done.

We could not eliminate any of the processes or reduce the head count. Therefore, obviously, we cannot replace anyone.

However, I realize that we can reduce the cycle time to produce the product drastically with close monitoring and target setting. In addition, we proceed to introduce key performance indexes to be measure against achievement and we work slowly to reduce the cycle time of production with training, equipment upgrade, and aligning the product produced to the equipment we need to upgrade.

True enough, our productivity went up and cost reduces.  But we also reward extrinsically and intrinsically the employees who made these happen. 

The above example happened more than 25 years ago and I attempt to repeat it again with another company where, this time, I was the Procurement Manager of the company.

I use the same structure of cost reduction for material purchases and other related area and this time, over a period of 5 years of activities, we saved almost Ringgit Malaysia 6.0 million.

It goes back to the same structure of elimination process, reduction, replacement, aligning the process, work slowly for those issues, which need time to progress and target setting.

It works well!

In this article, I reproduce the cycle, which I used in the process of cost reduction as following:-

•       Eliminate – review which processes or material, which can be targeted for eliminate from the operation.  Most of us will find this is not possible, but we are looking at some task or process, which can be made redundant or combined with other process.  Example, during the process of purchasing material, we realize that we need to purchase two separate components from a particular supplier, in which we will assemble it on our production floor. What can be consider is that, what is the possibility of the supplier produce and assemble it before delivery? What will be the cost of the supplier compare to your own cost?
•       Replace – if we cannot eliminate a expensive material required for the product, can we replace it with a substitute? For example, can a material with a certain plastics be replace with a cheaper plastics but still able to maintain the same quality standard for the product to function? I manage to repeat this replace methodology numerous occasions without any reduction in quality.
•       Reduce – if the elimination and replace is not possible, then let look at the process parameter.  Where is the possibility of reducing the usages or wastages?  Alternatively, if this is a formula issue, can the material use be reduce and replace with another material also used in the formulation?
•       Align – what is the possibility to align the cost of the material or processes? It will be surprising to notice that, there are incident where the cost of an identical or almost identical part has cost variances. It can also not be the same part, but sometimes suppliers tend to play around with pricing. There could be two different parts or component with difference design but similar processes or cost, but due to pricing techniques, offer a vastly different cost to you.  As a procurement person or involve in technical evaluation of material or processes, the need to understand every single operation involve is important. Cost analysis data need to be utilized and costing technique such as Should Costing can be implemented.
•       Nibble – can you reduce the cost gradually if the above steps becoming impossible? There are suppliers who held firm to their pricing or processes, which are difficult to control. Kaizen concept (meaning continuous improvement) technique will be an asset to achieve continuous cost improvement.
•        Target – set a realistic target for the cost reduction or elimination project and each cost reduction initiative should have a measurement system in place to check the progress.

And we need to always remember this sad news, cost reduction management is never finish. It just like removing garbage from the stream, it never ending. People throw money away without realizing the impact until much later if there is no real cost management in a business organization.