Cost Reduction Analysis: Tools and Strategies by Steven M. Bragg

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Cost Reduction Analysis: Tools and Strategies
By Steven M. Bragg
Cost Reduction Analysis: Tools and Strategies

About the Author xi
Preface xiii
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
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
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
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

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 sourcebook for how to maximize profi ts using a successful system of cost reduction.

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