A system for cost reduction
/What if my next quarter forecast is looking overly optimistic and we will need to cut more, faster? Which ones and how?
In multiple client engagements we’ve helped clients implement a Cost Leadership Initiative (CLI) methodology that combines decision analysis (to select the right cost reduction projects), a common planning methodology (to get consistent project planning and tracking), and a reporting system (to manage the execution) so that savings are achieved on or before the target commitment dates.
Typical cost reduction questions
Critical Success Factors (CSF) in deploying a CLI
We've learned that the success factors include:
a clear/fact-based prioritization of cost reduction projects,
accurate schedules that describe the work that needs to be done, changes needed to be implemented, how long it takes, when it needs to get done, and the people assigned responsibility to get it done,
a way to aggregate the financial savings data with the schedule data (i.e. when projects start/finish, estimated and actual), and finally
a way to continually refresh the schedule and financial data so you can track trends (i.e. are we going to hit our cost reduction target or fall short?)
CLI Program implementation plan
Below is an example of a very successful CLI Program that hit its $15M annually savings target ahead of schedule and in the end exceeded the cost savings target (year after year). This example illustrates a cost reduction trend chart we developed that aggregated schedule and financial information into a management dashboard.
CLI Dashboard (trend chart) we developed to track the cost reduction projects
The idea was to use this tool to forecast savings and to track performance of savings to schedule, similar to the way an Earned Valuesystem tracks cost/schedule performance. Only in this case, instead of tracking "cost" we were tracking "savings" returned through the completion of over 400 CLI Projects.
Unfortunately, I can't show much more of the model due to the proprietary nature of the data, but the idea was that this "aggregator" would automatically collect financial information in terms of cost savings and schedule performance and integrate them so that the management team could track trends.
Since it was an Excel database, it was easy to slice and dice the data for the various audiences in the 11 Lines of Business and the multiple layers of executive management watching closely to see that the goals were realized.
Predicated on "fact-based" prioritization of projects
The foundation of the CLI method is accurate fact-based prioritization of the cost reduction/savings projects. Using a decision modeling tool, we built a series of models with the management and technical team members to determine which of the 400 projects would generate the fastest savings in the shortest amount of time. We also wanted those projects that would have the least impact on business operations.
The result were eight projects that generated 80% of the first year's savings. The prioritization model then set the Starts Control sequence for the remaining 392 projects, sequenced based on their contribution to the ranked business objectives. On average there were about 35 projects active at one time during the phased roll-out.
These eight projects permitted a narrow focus of limited resources on just the projects that would generate the greatest benefit. The result was that the team hit their first year cost savings target in 6 months.
Predicated on "Real" Project Schedules
The system would have failed if the schedules (i.e. start and finish dates for projects) were not accurate and current.
We developed a "project template" system that commonly defined each CLI Project with less than 40 macro activities. These templates were customized (<1hr) and deployed quickly. Every week 10 Project Managers would Refresh these schedules with the implementation teams, taking about 15 minutes per project. Accurate and current project start and finish dates were automatically fed into the CLI "aggregator" to drive the trend savings charts.