The client for this three-month engagement was a major, US-based household products company. The engagement encompassed two primary deliverables:
- a description of the client’s historical efforts to improve work flow and reduce costs; and
- an overview of current work simplification and cost reduction opportunities within the General Office functions of the client’s largest division.
The client’s departmental liaisons representing each of the areas within the division’s executive management team are as follows. Consultant contact with the liaisons focused on the current and past work simplification efforts and on coordination within their department. The consultants solicited input from over thirty individuals to understand the nature, impact, and priority of each opportunity. These individuals assisted the consultants in the preparation of summary-level flow charts of key or core processes.
In general, these efforts were been within functional areas. This limited scope has limited the financial and pace impacts of these historical efforts.
Division General Office staff and management identified over 130 opportunities for improving the way the client did its work. The consultants consolidated these opportunities to a list of eighty. These eighty range from the broad and general to the narrow and specific.
The Division’s Directors and their direct reports ranked the eighty opportunities using ABC-like analysis. They then prioritized those ranked as the “A” or top priority opportunities. Three cross-tabulation views of these rankings were provided by Functional Group/Department, by SBU, and by position for use as tools for the Management Committee to use in prioritizing efforts within their own area or SBU to improve pace, performance, and the effectiveness of Division’s management and staff.
There were two broad categories of opportunities: those that are far-reaching and cross-functional, and those that are narrower in scope and that predominantly deal with only one or a few functional areas. The highest priority opportunities, as identified by Division’s directors, were those which were multi-functional. There were other opportunities, however, which needed to be addressed because they would have a noticeable impact on the day-to-day activities of Division General Office management and staff.
The Top Priority Opportunities
Thirty-six opportunities were identified by at least one individual as being a “top priority” opportunity. Three opportunities were identified by the Division’s Directors or their designees as “top priority” to be pursued. These are:
1. Simplify the Forecast process and subprocesses to reduce multiple sets of numbers, level of detail, and frequency of update; to eliminate multiple reconciliations and duplication of effort; to improve timeliness, accuracy, and coordination of inputs and outputs. Simplify the forecasting of promoted items.
We saw a one-time opportunity to reduce capital requirements for finished goods inventory by up to $10,000,000 with an additional annual savings of $1,200,000 in inventory carrying costs for finished goods and an undetermined analogous savings associated with raw materials. The client expected to also see a reduction in expediting and “surge” costs. Division Manufacturing General Office staff suggested the expediting and “surge” opportunity exceeds $2 million annually.
2. Simplify/reengineer the Written Recommendation process to eliminate duplication; to reduce the level of detail, sign-off, “bulk,” and labor intensity; and to eliminate altogether where unnecessary; to focus on the key elements required for Management approval; to increase pace; to improve timing of management input and higher-level buy-in. Simplify the (cross-functional) approval process. Clarify decision-making authority and roles between key management levels to reduce effort required to obtain approval while simultaneously increasing business building activity pace.
We saw an opportunity to reduce labor costs and cycle time associated with the recommendations. This impact will be “soft” in nature because we anticipated savings in staff time being absorbed by activities not currently performed.
3. Simplify/shorten the New Product Development, the Product and Packaging Improvement (Brand Improvement) processes, and the New Label and Label Change processes.
We saw the impact here as an opportunity to apply Work Simplification to the already-improved Product Development processes to reduce cycle time to typically less than eighteen months from reportedly close to three years. Enhanced responsiveness to the marketplace should yield significant additional competitive and financial benefits.
A worthwhile “World Class” target for inventory turns for Division’s product line was fifty-two (approximately a 150% improvement). This represented a reduction in finished goods inventory of approximately $10 million.
Raw material inventory is generally in the neighborhood of $15 million. Through improved supplier lead times and forecasting, raw material inventory could be reduced by one-half to two-thirds of current levels. This is a reduction in raw material inventory of a range of $7.5 million to $10 million. Some of this inventory was not specifically considered the Division’s inventory.
In addition to releasing capital of from $17.5 to $20 million, savings would result from reduced inventory handling costs. Assuming average inventory handling costs of 11.4% (based on $40 per pallet divided by the current inventory valued at cost), this reduction in inventory handling costs would be within a range of $2 million to $2.3 million annually with expediting and “surge” providing an additional $2 million annually.
An additional $400,000 in identified savings associated with improved Forecasting was included in the above inventory-related savings.
Activity analysis suggested that “Long Range Planning and Forecasting” by client Brand Management costs approximately $.9 million annually. Forecasting and Production Planning by Manufacturing’s General Office management and staff cost somewhat less than that. Sales Planning and Forecasting costs by field and General Office Sales management and staff could be somewhat less than Manufacturing’s costs. Estimated total labor associated with Forecasting and Production Planning was in a range of between $1 million and $1.5 million annually. Ten percent or more of these annual costs, within a range of $100,000 to $150,000 annually, was indicated as realistic for savings associated with improving forecasting.
Although actual expediting costs are “buried” within the Division’s cost systems, up to $700,000 annually was estimated as potential savings in expediting costs. Expediting costs include changeovers, redeployment, and material upcharges. The consulting team recognized that labor savings in the plants would only be captured to the extent that expediting results in overtime.
Total savings associated with improving forecasting is thought to fall within a range of $2.4 million to $3.7 million annually plus a one-time reduction in capital requirements for inventory of from $10 million to $20 million.
|One-Time||Hard Savings||Soft Savings|
|Finished Goods Inventory||$10,000,000|
|Inventory Carrying Costs, Annual, Finished Goods||1,200,000|
|Expediting and “Surge” Costs, Annual||1,300,000||700,000|
|Management Labor, Annual, Written Recommendations||190,000|
|Raw Material Inventory||3,750,000|
|Inventory Carrying Costs, Annual, Raw Material||427,500|
|Inventory Carrying Costs, Annual, Remnant @ 11.4%||45,600|
|Sales Planning and Forecasting Labor||100,000|
|Total Projected Potential Savings||$14,150,000||$2,973,100||$990,000|
Total Savings Potential: $18,113,100 of which $3,963,100 is “annual” in nature