STAGES IN COST STAGES IN COST REDUCTIONREDUCTION

Dennis Geyer

Geyer Management AssociatesTel: 925 246 9887

Email: dgeyer@geyermanagement.com© Copyright 2007

2007 Geyer Management Associates2

Stages in Cost Reduction

Cost Cutting

Cost Management

Cost Design

Cost Positioning

2007 Geyer Management Associates3

Stage 1. Cost Cutting

Cost Cutting involves cuts in spending based on arbitrary criteria.

Costs are divided into committed and discretionary categories.

Cuts target discretionary before committed; large before small; expedient before sensitive.

Performance measured against historical standards.

2007 Geyer Management Associates4

Limitations of Cost Cutting

Impairs critical constraint resources Sacrifices long-term strategic objectives Induces “padding” of budgets Demoralizes employees & supplers Reduces customer service Expansion/contraction cycles create waste Influenced by politics not mission Lack of organizational learning

2007 Geyer Management Associates5

Stage 2. Cost Management

Cost Management involves a systematic approach to cost reduction that involves an understanding of relevant cost drivers.

Costs are organized by resources, activities, and cost objects.

Reductions achieved by eliminating unused capacity, nonvalue-added activities, and reducing activity cycle times.

Performance measured against long-term target standards.

2007 Geyer Management Associates6

Standard vs. Kaizen Costing

Standard Costing focuses on controlling costs by setting realistic standards in cost performance for each period and monitoring deviations from these performance standards.

Kaizen Costing focuses on reducing costs by setting achievable goals in cost reduction for each period and monitoring progress towards these goals.

2007 Geyer Management Associates7

Standard vs. Kaizen Costing

Standard CostingStandard Costing

Goal to meet cost performance standard

Standards set annually Compare actual with standard

costs Investigate when standards

not met Managers & engineers set

standards Assumes process stability

Standard CostingStandard Costing

Goal to meet cost performance standard

Standards set annually Compare actual with standard

costs Investigate when standards

not met Managers & engineers set

standards Assumes process stability

Kaizen CostingKaizen Costing

Goal to achieve cost reduction standard

Standards set monthly Compare actual cost reduction

with target Investigate when target cost

reduction not achieved Workers set kaizen standards Assumes continuous

improvement

Kaizen CostingKaizen Costing

Goal to achieve cost reduction standard

Standards set monthly Compare actual cost reduction

with target Investigate when target cost

reduction not achieved Workers set kaizen standards Assumes continuous

improvement

2007 Geyer Management Associates8

Stage 3. Cost Design

Cost Design involves an evaluation and redesign of the internal value chain. It seeks to improve the relationship among resources required and work performed to satisfy customer requirements.

Costs are organized by process and subprocess.

Reductions achieved by eliminating redundancy and conforming to operational strategy.

Performance measured against best-in-class standards of performance.

2007 Geyer Management Associates9

Internal Value Chain Design

Fleet Maintenance

Aircraft Operations

Full-Service Airline Discount Airline

Advertising

On-Board Service

Aircraft Operations

Fleet Maintenance

Baggage Handling

Gate Operations

Counter Operations

Ticketing Offices

Advertising

Airport Operations

2007 Geyer Management Associates10

Stage 4. Cost Positioning

Cost Positioning involves an evaluation and redesign of the external value chain. It seeks to improve the relationship among supply chain members to enhance competitiveness.

Costs are organized by links in the value chain.

Reductions achieved by consolidation of links, sharing information, better coordination, and exploiting synergies among supply chain members.

Performance measured against strategic objectives such as market share and price targets.

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External Value Chain Design

Customer

Suppliers

Customer

Retailer

Wholesaler

Suppliers

Online Merchandiser

Shipper

Shipper

Shipper

Shipper

Traditional Merchandiser

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Comparison of Stages

Stages Cost CuttingCost

ManagementCost Design Cost Positioning

Basis arbitrary spending cuts

understanding cost drivers

redesign internal value chain

redesign external value chain

Objective Achieve cost reduction targets

Satisfy customer requirements

Enhance company competitiveness

Enhance s. chain competitiveness

Time Horizon Short Term Medium Term Long Term Long TermPerspective Internal Internal Internal ExternalCost Measurement classified into

committed & discretionary

organized by resources, activities, & cost objects

organized by links in the internal value chain

organized by links in the external value chain

Reduction Methodology Reduce discretionary, large & expedient costs

Eliminate unused capacity, NVA activities & reduce cycle times

Eliminate redundancy & conform to operational strategy

Consolidate links, share information, coordination, & synergies

Performance Standards Historical standards Long-term standards Best-in-class standards

Strategic objectives

Common Tool Standard Costing Kaizen Costing Activity-Based Planning

Strategic Cost Management