The big reductions in Operating Costs don’t come from Operations!
The big reductions in Operating Costs don’t come from Operations!
Often, even when a holistic, strategic approach to identify true reductions in Operating Costs is adopted, it focusses purely on the various functions that comprise Operations, linking Production, Warehousing, Supply Chain Management and so on. After all, that’s where the costs are incurred, so it makes sense, right?
Wrong! If we step back and look at how operating costs are made up, it becomes clear that the vast majority of the cost of Operations is a result of the consequences of decisions made elsewhere in the organisation. To take a few examples:
The specification of what the customer wants is determined elsewhere, perhaps by marketing or sales
The concept and details of a product design will be determined by engineering
The design of a production method and factory layout will be determined by manufacturing engineering, themselves constrained by the design of the product
Suppliers and logistics are determined by procurement and supply chain
Studies repeatedly show that anything between 70 and 90% of the cost of a product or service are fixed by decisions made before it reaches operations. This famous diagram from Munroe & Associates illustrates the effect:
This illustrates that, while the actual cost represented by product design as a percentage of the final cost is small, the influence of decisions made by product design is huge. Not only that but, the further the product goes through the specification–design–development–production engineering journey, the more costly and time–consuming it becomes to change those decisions to reduce operating cost, shown graphically below.
Operations will see the opportunity, but can do little about it!
The net result of the above is that, while the majority of the effects of these decisions will manifest themselves in Operations, Operations are not always able to take action themselves. What they can do, with the right mechanisms in place, is identify the opportunities for input into a broader, ‘whole system’ effort to reduce operating costs.
A ‘whole system’ approach
An effective and impactful approach to reducing operating cost therefore requires working across the business as a whole to tackle opportunities at three levels:
Improvements that can be made locally without adverse impact elsewhere.
Improvements that can be made to the product or service that require action by other areas and can be accomplished by changes to the current product, production facility or service in a cost effective manner (i.e. deliver a positive total cost impact over the life of the current product/facility/service).
Improvements that can only be made cost effectively at the conceptual design stage of a new product, facility or service.
For such an approach to work, several elements are needed:
A ‘system’ where everyone identifies opportunities and they are recorded for action.
Functions, departments, teams and individuals are open to opportunities identified elsewhere but where they are best placed to take action.
There are mechanisms in place that ‘allow’ actions to be taken that are best for the business as a whole.
What’s it worth?
While such a system may take some time to implement and for the bigger opportunities to filter through to tangible operating cost savings, the potential is huge – up to 10x the savings that are possible through looking at operations alone derived from:
Cost impact of product/service operating decisions understood and implemented in design in a cost–effective way.
Wider supplier choice through design understanding supplier capability, leading to lower cost options.
Product designed for ease of production, supply chain operation etc, directly impacting operating cost.
Fewer compromises to meet project and product/service cost targets.
Ready to explore further?
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