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STAGES IN COST REDUCTION Dennis Geyer Geyer Management Associates Tel: 925 246 9887 Email: [email protected] © Copyright 2007 Stages in Cost Reduction Cost Positioning Cost Design Cost Management Cost Cutting 2 2007 Geyer Management Associates Stage 1. Cost Cutting Cost Cutting involves cuts in spending based on arbitrary criteria. Costs are divided into committed and discretionary categories. Cuts target discretionary before committed; large before small; expedient before sensitive. Performance measured against historical standards. 3 2007 Geyer Management Associates Limitations of Cost Cutting 4 Impairs critical constraint resources Sacrifices long-term strategic objectives Induces “padding” of budgets Demoralizes employees & supplers Reduces customer service Expansion/contraction cycles create waste Influenced by politics not mission Lack of organizational learning 2007 Geyer Management Associates Stage 2. Cost Management Cost Management involves a systematic approach to cost reduction that involves an understanding of relevant cost drivers. Costs are organized by resources, activities, and cost objects. Reductions achieved by eliminating unused capacity, nonvalueadded activities, and reducing activity cycle times. Performance measured against long-term target standards. 5 2007 Geyer Management Associates Standard vs. Kaizen Costing Standard Costing focuses on controlling costs by setting realistic standards in cost performance for each period and monitoring deviations from these performance standards. Kaizen Costing focuses on reducing costs by setting achievable goals in cost reduction for each period and monitoring progress towards these goals. 6 2007 Geyer Management Associates Standard vs. Kaizen Costing Standard Costing 7 Kaizen Costing Goal to meet cost performance standard Standards set annually Compare actual with standard costs Investigate when standards not met Managers & engineers set standards Assumes process stability 2007 Goal to achieve cost reduction standard Standards set monthly Compare actual cost reduction with target Investigate when target cost reduction not achieved Workers set kaizen standards Assumes continuous improvement Geyer Management Associates Stage 3. Cost Design Cost Design involves an evaluation and redesign of the internal value chain. It seeks to improve the relationship among resources required and work performed to satisfy customer requirements. Costs are organized by process and subprocess. Reductions achieved by eliminating redundancy and conforming to operational strategy. Performance measured against best-in-class standards of performance. 8 2007 Geyer Management Associates Internal Value Chain Design On-Board Service Aircraft Operations Aircraft Operations Fleet Maintenance Fleet Maintenance Baggage Handling Gate Operations Counter Operations Airport Operations Ticketing Offices 9 Advertising Advertising Full-Service Airline Discount Airline 2007 Geyer Management Associates Stage 4. Cost Positioning Cost Positioning involves an evaluation and redesign of the external value chain. It seeks to improve the relationship among supply chain members to enhance competitiveness. Costs are organized by links in the value chain. Reductions achieved by consolidation of links, sharing information, better coordination, and exploiting synergies among supply chain members. Performance measured against strategic objectives such as market share and price targets. 10 2007 Geyer Management Associates External Value Chain Design Customer Customer Shipper Retailer Shipper Shipper Wholesaler Shipper 11 Suppliers Suppliers Traditional Merchandiser Online Merchandiser 2007 Geyer Management Associates Comparison of Stages Stages Basis Performance Standards Historical standards understanding cost drivers Satisfy customer requirements Medium Term Internal organized by resources, activities, & cost objects Eliminate unused capacity, NVA activities & reduce cycle times Long-term standards Common Tool Standard Costing Kaizen Costing Objective Time Horizon Perspective Cost Measurement Reduction Methodology 12 Cost Management Cost Cutting arbitrary spending cuts Achieve cost reduction targets Short Term Internal classified into committed & discretionary Reduce discretionary, large & expedient costs 2007 Cost Design Cost Positioning redesign internal value chain Enhance company competitiveness Long Term Internal organized by links in the internal value chain Eliminate redundancy & conform to operational strategy redesign external value chain Enhance s. chain competitiveness Long Term External organized by links in the external value chain Consolidate links, share information, coordination, & synergies Strategic objectives Best-in-class standards Activity-Based Planning Strategic Cost Management Geyer Management Associates