**Cost Reduction Analysis: Tools and Strategies**

**Contents **

About the Author xi

Preface xiii

PART I PRIMARY AREAS OF COST REDUCTION 1

CHAPTER 1 The Cost Reduction Process 3

Introduction 3

Need for Cost Reduction 4

Advantages of Cost Reduction 7

Disadvantages of Cost Reduction 8

Cost Reduction Politics 8

Cost Reduction Priorities 9

Cost Reduction Tools 11

Process Analysis 21

Process Analysis Tools 24

Key Cost Reduction Questions 28

Cost Reduction Reports 29

Metrics 34

Summary 34

CHAPTER 2 Selling and Marketing Cost Reduction 37

Introduction 37

Customer Mix Analysis 37

Customer Class Analysis 39

Sales Region Analysis 39

Dropped Customer Analysis 42

Price Setting with Throughput Analysis 44

Sales Productivity Analysis 46

Sales Effectiveness Analysis 48

Salesperson Analysis 49

Finding Throughput Problems in Sales 51

Sales Process Flow 53

Sales Deduction Systems 55

Collections by the Sales Staff 56

Marketing Cost Reductions 56

Sales and Marketing Metrics 59

Summary 60

CHAPTER 3 Product Analysis 61

Introduction 61

Target Costing 61

Targeted Price Increases 72

Eliminate Unprofi table Products 73

Add New Products 81

Outsource Products 83

Product Rework Costs 85

Custom Product Costs 86

Product Metrics 88

Summary 90

CHAPTER 4 Production Cost Reduction 91

Introduction 91

Throughput Analysis 91

Product Line Complexity 92

Production Flow 92

Cellular Manufacturing 93

Continuous Flow 94

Monument Equipment 94

Quick Changeovers 95

Assembly Line Confi guration 96

Assembly Line Length 96

Container Sizes 97

Source Inspection 97

Control Chart Analysis 98

Mistake Proofi ng 101

Expediting 102

Maintenance Planning 102

Machinery Standardization 103

Machinery Assignment 103

Metrics 103

Summary 104

CHAPTER 5 Payroll Cost Reduction 107

Introduction 107

Analysis for a Workforce Reduction 107

Cost of a Workforce Reduction 117

Alternatives to a Workforce Reduction 120

Manage Payroll Expenses at the Hiring Stage 123

Combat Institutionalized Pay Increases 125

Restructure Commissions 128

Restructure the Workforce 129

Hire Contractors 131

Other Types of Payroll Cost Reduction 132

Worker Adjustment and Retraining Notifi cation

Act 133

Payroll Cost Metrics 133

Summary 134

CHAPTER 6 Benefi ts Cost Reduction 137

Introduction 137

Benefi ts Administration 137

Disability Insurance 139

Life Insurance 140

Medical Insurance 140

Pensions 144

Seasonal Bonuses 147

Sick Time 147

Snacks 148

Training 148

Vacation Time 150

Wellness Programs 151

Workers’ Compensation Insurance 151

Miscellaneous Perquisites 153

Free Benefi ts 153

Metrics 154

Summary 154

PART II PROCUREMENT COST REDUCTION 157

CHAPTER 7 Procurement Cost Reduction 159

Introduction 159

Standard Procurement Process Flow 160

Procurement Cards 161

Evaluated Receipts System 164

Additional Procurement Process Flow Changes 168

Supplier Consolidation 171

Supplier Relations 174

Additional Cost Reduction Considerations 177

Metrics 179

Summary 180

CHAPTER 8 Spend Analysis 181

Introduction 181

Spend Database 181

Spend Analysis 184

Spend Analysis Reports 190

Spend Analysis Rollout 193

Third-Party Spend Management Systems 194

Low-Cost Spend Management Systems 195

Metrics 196

Summary 197

CHAPTER 9 Maintenance, Repair, and Operations Analysis 199

Introduction 199

Problems with MRO Cost Reduction 199

MRO Cost Reduction Methodology 200

Distributor’s Viewpoint 208

Metrics 209

Summary 209

PART III ASSET REDUCTION 211

CHAPTER 10 Inventory Analysis 213

Introduction 213

Inventory Purchasing 213

Inventory Receiving 217

Inventory Storage 217

Bill of Materials 221

Obsolete Inventory 222

Miscellaneous Topics 225

Metrics 227

Summary 228

CHAPTER 11 Fixed Asset Analysis 229

Introduction 229

Fixed Asset Acquisition Analysis 229

Fixed Asset Installation Reporting 235

Postinstallation Audit 237

Outsourcing Alternative 237

Lease versus Buy Decision 238

Feature Reduction Analysis 239

Asset Commoditization 241

Monument Analysis 241

Facility-Specifi c Considerations 242

Fixed Asset Retention Analysis 243

Fixed Asset Maintenance Analysis 243

Fixed Asset Location Tracking 244

Fixed Asset Condition Tracking 245

Fixed Asset Metrics 245

Summary 247

PART IV SPECIAL TOPICS 249

CHAPTER 12 Throughput Analysis 251

Introduction 251

Theory of Constraints 251

Operational Aspects of the Theory of

Constraints 252

Nature of the Constraint 254

Defi nitions for the Financial Aspects of the

Theory of Constraints 256

Financial Aspects of the Theory of

Constraints 257

Opportunity Cost of Operations 259

Locating the Constraint 260

Management of the Constrained Resource 264

Types of Policy Constraints 268

Constraint Buffer 270

Production Scheduling 273

Batch Sizes 278

Capacity Reduction Analysis 279

Work Center Utilization 280

Metrics 280

Summary 282

CHAPTER 13 Cost Reduction in Mergers and Acquisitions 283

Introduction 283

Integration Timing 283

Integration Planning 284

Synergy Realization 286

Integration Manager 290

Integration Team 291

Integration Communications—Internal 292

Integration Communications—External 293

Employee Integration—Qualifi cation Assessment 294

Employee Integration—Job Positioning 296

Employee Integration—Relocations 297

Employee Integration—Key Employees 297

Layoffs 300

Compensation Integration 301

Sales Integration 302

Process Integration 303

Technology Integration 304

Metrics 305

Integration Pacing 306

Summary 307

Index 309

**Preface **

A central concern of any company is how to reduce its costs, since any cost reduction fl ows straight into profi ts. However, cost reduction must be accomplished without impacting customer loyalty or reducing the ability of the organization to achieve its long – term goals. Thus, the real issue is how to carefully pare away unnecessary costs while maintaining a robust organization. Cost Reduction Analysis shows how to do this. It describes a variety of cost reduction tools and the issues associated with using them, and then goes on to describe various forms of cost reduction in key expense areas, such as sales and marketing, production, payroll, and benefits.

The book is divided into four sections. In Part I, we address the primary areas of cost reduction. This begins with a discussion of the need for cost reduction, a multitude of cost reduction tools, and process analysis. It continues with specifi c cost reduction opportunities in the areas of sales and marketing, product design, production, payroll, and benefi ts. In Part II, we cover the major cost reduction area of procurement. Coverage begins with a number of methods for improving the procurement process to reduce operational costs and then continues with discussions of spend management and the more specialized area of maintenance, repair, and operations spending.

Part III addresses asset reduction, which indirectly impacts cost reduction. The fi rst chapter describes a broad array of techniques for reducing a company ’ s investment in inventory while the next chapter delves into the best forms of analysis to follow when deciding whether to invest in a fixed asset.

Finally, Part IV describes two special topics that are extremely important in the realm of cost reduction. The fi rst topic is throughput analysis, where a company centers its activities on its use of the bottleneck operation that drives its overall level of profi tability. All cost reduction decisions should be based on how they impact the productivity of this bottleneck. The second topic is how to reduce costs in an acquired company by maximizing and successfully implementing cost – related synergies. These chapters are liberally sprinkled with examples to clarify concepts and also include a variety of metrics that are specifi cally designed to monitor cost reduction progress.

The book answers a multitude of questions involving cost reduction, such as:

_ How do I calculate the productivity of a salesperson?

_ How do I design a product to minimize its cost?

_ When should I eliminate a product?

_ Can cellular manufacturing reduce my production costs?

_ How do I decide whom to lay off?

_ How do I avoid institutionalized pay increases?

_ What alternatives do I have for maximizing the cost effectiveness of my benefi ts package?

_ How does an evaluated receipts system streamline my process fl ow?

_ How do I use a spend database to reduce costs?

_ How do I restructure my capital spending process so that I buy only the fi xed assets that I really need?

_ How can I manage my bottleneck operation to maximize my profi tability?

In short, Cost Reduction Analysis is the ideal source book for how to maximize profi ts using a successful system of cost reduction.