“Revisiting how we manage operating costs” by Washington A. Roqueza (November 16, 2009)

SUITS THE C-SUITE By Washington A. Roqueza
Business World (11/16/2009)

For most companies, the approaching holiday season signals the fiscal year-end — a time to prepare financial reports. Many companies likely anticipate lamentable financial statistics, what with the gloomy global economic conditions that marked the start of 2009, exacerbated locally by a string of natural disasters.
While normally ignored when the economy is flourishing, many companies are now going back to something very basic to improve the bottom line: managing operating costs. We have seen a number of organizations initiate immediate measures to manage their operating costs for the past several months since the global financial crisis came in late last year.

What can be done to achieve cost efficiency during these uncertain times?
Here are some key guidelines and suggestions that can be adopted to manage your operating costs regardless of the size or nature of your business.

First, a company must understand its “cost pie.” Find out what your major operating cost components are in terms of materials, labor, overhead costs. For manufacturing companies, materials would at least be 50% of total cost of goods, while labor and overhead combined would account for the balance. For service organizations, labor and overhead would account for a larger portion of operating costs.

Once the cost pie has been determined, there is a need to develop cost management strategies and action steps for each cost component:

Materials costs — This requires a value analysis of materials and supplies. There is also need to improve demand planning and sales forecasting, inventory planning and procurement function (through supplier programs, vendor accreditation, e-Procurement applications, etc.), warehousing and distribution activities, as well as other logistics-related activities. Morever, it would be good to automate and integrate these supply chain functions.

Labor costs — Try to remove non-value added activities through work simplification and process improvement. Upgrade skills and adopt multi-skilling. Evaluate outsourcing opportunities for non-core processes and operations. It would be prudent to establish and use performance measures (both individual and team measures) and use these to evaluate performance of company personnel. Another recommendation at this time is to provide incentives for exemplary performance.

Overhead costs — There is an urgent need to reduce energy costs beginning with a review of your air-conditioning system. These include re-evaluating operating hours of air-con equipment and reducing demand charge (through staggered start-ups of major machinery/equipment in operations), improving power factor and avoiding penalty charges. Other measures include improving utilization of plant and office facilities and reviewing your insurance coverage.

Besides these basic strategies, there may also be a need to prioritize on the larger cost components of your operations. If you are engaged in manufacturing activities, some quick-wins can be achieved by prioritizing and focusing on materials cost management. However, don’t forget to find simple yet effective ways of likewise managing your labor and overhead costs that will involve the whole organization from bottom to top.

If you have not done it yet, launch a cost management initiative and adopt a company-wide energy conservation program. Many companies already have such programs but they may need to revisit or realign them to the current needs of the times. Some of the best ideas will come from your rank and file. It would be best to equip them with the tools needed to help analyze and reduce your operating costs.

Management should also consider the creation of a core team to take charge of coordinating cost management activities. In some companies, they have been designated as the “green champions.” This team will take charge of plans to convert your cost management activities into a long-term and sustainable program of the company. They will measure and monitor these effects in quantifiable terms.

The objective is to attempt to implement short-term quick-win cost measures that can generate incremental savings of 5%-15% of total operating costs, and continue the pursuit of long-term measures that can generate cost savings of over 50% of total operating costs. Attaining these figures can spell a favorable difference in your 2010 financial statements.

More importantly, reward cost management measures taken by your company personnel. This will make it more participative rather than being seen as an obligation. Rewards can be in the form of financial and/or non-financial rewards. In fact, the cost savings generated by the program should be able to fund these rewards.

Last but not least, you need to ensure that all cost management action steps are aligned with the long-term strategies of the company. It is important to always keep the big-picture in mind.

Managing costs during these uncertain times is one unique opportunity for everyone to be of extra value to his or her organization.

The author is a Principal in the Advisory Services Group of SGV & Co.

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.