Trends today, how to launch an Enterprise Cost Reduction (ECR), steps to be followed.

1. Launching Successful Cost Take
Out Program (ECR) to Achieve
Operational Excellence
Raffaele Muscetta

2. “You only find out who’s been
swimming naked when the
tide goes out.”
Warren Buffet.

3. Agenda

4. I. Main Drivers for ECR

5. “It’s not your salary that makes you
rich, it’s your spending habits.” –
Charles A. Jaffe

6. Drivers: Commodity Indexes
10000
9000
Index of Non‐Fuel
8000 Primary Commodities
(2005=100)
7000
Index of Industrial Inputs
(2005=100)
6000
Metals index
5000
4000 Average Petroleum Spot
index of UK
Brent, Dubai, amd West
3000
Texas
Copper, LME, grade A
2000 cathodes, cif Europe
1000 Zinc; LME, high grade, cif
UK
0
1980M1
1982M1
1984M1
1986M1
1988M1
1990M1
1992M1
1994M1
1996M1
1998M1
2000M1
2002M1
2004M1
2006M1
2008M1
2010M1

7. Drivers for Change…

8. In July 2009, Ernst & Young engaged an independent market research company to
conduct a survey of 561 decision-makers on the subject of ECR. The companies
surveyed represented 11 of the largest economies in the world and 11 different
industries
More than two-thirds of
businesses (86%) say
that cost consciousness
became ”extremely
important” in their
company during the last
year, compared with the
previous two years

9. Main Reasons for an ECR…

10. Among the barriers to carrying out effective ECR
there have been identified:
Companies’ unwillingness may stem from anxiety that the business will appear
weak, that competitors will take advantage of lower investment or from
management inertia.
Difficulties in ”selling” ECR to executives and to employees in general must be
overcome. Most companies have an element of competition between departments
or offices.
Each is reluctant to accept that it should lower its costs – an additional concern is
that it is a commonplace in business life that departments overspend in order to
maintain their budgets for the following year.
There is a mis perception among employees that there is often unfair treatment
during ECR programs. People react badly to lower rewards if they see executives
receiving higher rewards at the same time.
Issues of recruitment and retention are intensified during ECR. Candidates are likely
to prefer to work for a company which is expanding and increasing its
investment, whether in people or in new business.
When businesses undergo change programs, ECR is often dropped.

11. Strategic Objectives: Cash or Market Share?

12. Reasons for ECR in the future…
We are likely to see ”peak oil” in the
next 20 years and legislation to
tackle climate change.
The increased volatility that will
result from these factors means that
businesses can no longer rely on a
safety cushion in their P&L
forecasts…

13. II. Basic steps when
launching a cost out
programme

14. “Whenever you see a successful
business, someone once made a
courageous decision.”
Peter Drucker

15. Suits all?

16. Assessment
Conduct a preliminary assessment to
identify the potential savings based on:
Financial and spend data provided/available
(bottom up-top bottom).
Interviews with key stakeholders (including
manufacturing site visits, distribution
centers, etc).
Market analysis on main direct materials
Internal expertise/benchmarks from
consultants and market intelligence agencies

17. Addressable Spend
ILLUSTRATIVE

18. Spend Analysis… bottom-up/top-bottom
ILLUSTRATIVE

19. IV. Strategic Sourcing Programme
Volume Concentration Product Specification Improvement
Reduce/consolidate number of suppliers Rationalize/standardize parts
Pool volume across business units Substitute materials‐parts
Redistribute volume among suppliers Apply product value analysis‐value engineering
Combine volume from different sourcing groups Use functional/black‐box buying
Develop alliances among purchasers Examine life cycle costs
Rationalize/standardize parts Product Develop long‐term contracts
Volume
Specification
Concentration
Improvement
Best Price EvaluationExploit Create
Joint Process Improvement
Benchmark internal prices Reengineer joint processes
Renegotiate/rollback prices Buying an Optimize physical material flow
Unbundle prices and model should cost
Threaten back leverage
Power Best Price
Advantage
Joint Process
Integrate logistics
Support supplier’s operations
Use competitive bidding Evaluation Improvement improvement
Use commodity hedging/trading Use simultaneous engineering/joint R+D
Index/cap prices Develop long term contracts
Compare TCO among potential suppliers Share productivity gains
Base pricing on profitability
Develop long term contracts
Global Relationship
Sourcing Restructuring
Global Sourcing Relationship Restructuring
Expand geographic supply base Analyze core competencies
Examine new suppliers Examine strategic make vs. buy decisions
Capitalize on currency fluctuation Adjust degree of vertical integration
Take advantage of trade incentives Create market entry alliances
Optimize counter trade Establish joint ventures
Leverage second‐tier suppliers Employ strategic alliances/partnering
Establish develop key suppliers

20. Draft Savings Estimates.. & Strategies
ILLUSTRATIVE

21. Indirect Spending (SG&A Costs): Focus

22. Where to Start?

23. Sourcing Waves…
ILLUSTRATIVE
Steel
W1 W2 W3
Surfactants
Easy of Implementation: Contract life span, switching costs, organizational sensitivity, sourcing groups technical
complexity, supply market complexity, level of spend

24. Define a timeline ILLUSTRATIVE
Organizational Commitment and Board Level sponsorship are crucial for program success

25. III. Organizational set up
and Financial Transparency

26. Governance Approach
ILLUSTRATIVE
A clear project organization at all levels needs to be in place for the success of the project

27. Loading the Program… Tracker
ILLUSTRATIVE

28. Weekly/Systematic Reporting
ILLUSTRATIVE
Different ways of
reporting could be
drafted at this stage.
Suggested best
practice is to have
ILLUSTRATIVE weekly reviews per
saving initiative
and/or Wave, showing
the degree of
execution or
implementation (DoE
or DoI), which can be
presented in a color
code form as per side
chart…

29. VI. Enablers and KPI’s

30. Degree of Implementation
ILLUSTRATIVE
Savings that are reflected at EBIT level and clearly traceable. Clear
and robust ERP set up to facilitate the traceability and data gathering

31. ECR… Results….

32. IV. DO’s and DON'ts of a
successful implementation

33. To counter some of the concerns when
rolling out ECR….
DO’s: They should refer to the process as ”cost optimization” rather than cost
reduction (see “From reduction to optimization”). DONT’s: Executives with not
enough patient, and that have not developed a communications strategy (that
could stresses the improvements achieved through ECR and what they mean for
the enterprise as a whole).
DO’s: Time must be set aside for the change process to take effect, creating an
environment where employees feel like they are being treated fairly. DONT’s:
Costs saved in one part of the business that are not invested elsewhere, so that
there is still a sense of expansion and optimism.
DO’s: Executives must have enough humility to accept where cuts need to be
made, rather than DONT’s: playing competitive games with their colleagues over
budget levels.
DO’s: And finally, cost reduction and optimization need to become a
routine, normal part of business operations, DONT’s: rather than something which
is identifiably short-term and done only in response to a crisis.
DO’s: Clear definition of all terms used during the program (i.e: savings
definitions, degree of implementation or execution, etc) and Responsibilities: RACI
Chart. DONT’s: while this can be adjusted during the progress of the program not
having it defined at first is setting for failure the entire program.
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34. Reasons for non sustainable process
Lack of sufficient monitoring and tracking
Allowing tactical cost reductions to push
out strategic reductions
Making size a higher priority than
profitability
Losing focus on cost reduction as
expansion gets under way or the business
model changes

35. In General, to achieve Cost
Reductions, businesses must:
• Look carefully at standardization and
centralization possibilities, especially when an
outsourcing agent can achieve better
economies of scale to reduce costs
• Address all operational areas, both back and
front office, with the objective to make the
organization as flexible and agile as possible to
reflect the economic fluctuations other time
• Track costs carefully to help ensure that they
rise more slowly than revenues to improve
margins

36. Conclusion
Identify the key reasons for an
ECR
Develop a Plan and Communicate
Build Data
Establish a team and governance
Follow up and measure
Track compliance!!

37. Thanks… Q&A?
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