Cost Analysis

Whether in manufacturing, industry or the service sector, understanding where the waste from the production of goods and services lies is key to cost reduction. Our starting point is to take a comprehensive set of cost data and to subject it to detailed analysis.

Our approach is thorough and starts with an overall understanding of the existing cost base as well as the current cost pressures on the organisations.

Budgeting

As an approach to cost reduction, the creation of a realistic, realisable budget is often the best starting point. Our support for clients focuses on two key areas:

• Establishing a budget that has a sound rationale and is based on current market conditions and organisational infrastructure;
• Ensuring manager and staff buy-in to the budget to provide the best chances of successful delivery.

We typically use Zero Based Budgeting (ZBB) as a technique for planning and decision-making without just allocating finances to departments or functions. This reverses the working process of traditional budgeting by asking individual managers to justify their budgets in advance rather than allocating them a sum of money to be spent. This means that the budget process is intrinsically linked to departmental management and is not just something undertaken by the finance section every year.

We start with a thorough understanding of the transactions that each department is expected to have to perform in a year. For each transaction a certain amount of resource is required and therefore for an annual volume the total manpower can be calculated. For example if it is known that a service engineer can perform 7 visits per week and therefore 315 in a 45 week year; if there are 1,000 installations to be visited then this tells the manager that 3 full-time inspectors are needed to complete that series of activities. The situation rapidly becomes more complex as the number of tasks is increased but the technique is the same.

As the total number of departmental activities builds up using cost is often an easier method of calculating total resource.

Interestingly the justification of the resource required for these transactional or regular activities is not the most difficult bit. It is normal that when building a zero based budget (sometimes called "bottom up budgeting") there is a significant difference between the zero based budget calculated and the budget traditionally given year on year. This is because the work of management can be difficult to calculate in this way but this leads to useful discussions about what these posts contribute and often illustrates where many of the cost reductions can be made when trying to protect front line services.

Procurement

The procurement processes in many large organisations often suffer from a series of issues that can lead to excessive waste and costs. In examples of ValueAdding.com's work this excess cost can account for anything between 3-5% of the £200m+ total spend for many organisations.

Detailed investigation often reveals weakness in the understanding and use of the systems and policies, and limited implementation of procurement best practice. A small range of examples include:

Purchase to Pay

• Invoices not being consolidated to reduce accounting resource costs;
• The value/risk of spend not matched to the tendering and authorisation process. A lighter process should be used for smaller amounts;
• Supplier invoices not matching the agreed contracted price;
• Procurement cards not being used for ALL low-value transactions to reduce handling costs;
• More than 10% of orders without a PO number causing increased reconciliation time.

Policy

• Processes and procedure not rigorously enforced via an internal senior Procurement Board;
• Not all contracts being logged in a corporate database preventing procurement activity to be planned and contract management to be proactive;
• Unknown magnitude of the third-party spend, how much is spent in the local area to fuel local economic growth and highlight priorities.

Contractual

• Year-on-year supplier requests for price increases are not being systematically refused;
• Contracts without a clause for year-on-year price reduction, through process improvement at the supplier.

Internal processes

• E-tendering system not being used to reduce the amount of procurement resource distracted onto administrative tasks;
• Contract Procurement Regulations not encouraging framework agreements and procurement cards.
• Internal budgets not matching organisational structure to drive individual accountability and track third-party spend;
• Best practice and updated policies and procedures not regularly publicised internally via newsletters, meetings and training.

Skills and Training

• Staff not receiving procurement training or commercial awareness beyond how to use the software.

The causes of the above examples often accumulate over time through:

• Internal organisational change;
• Differences between directorates within the same organisation;
• Changes in the supply market; new suppliers and different offerings;
• Failing to keep up to date with corporate procedures, policy and government guidelines on best practice.