The Cost Reduction Challenge - April 09

April 23, 2009

The Cost Reduction ChallengeDublin Chamber of Commerce

April 23, 2009

PricewaterhouseCoopers

April 23, 2009

Market Challenge

The Market

• Credit crunch• Recession• Declining revenues• Tighter margins• Fixed cost base• Negative returns for shareholders• Cash flow

The Challenge

• Increase revenue/margin• Reduce cost• Generate cash


April 23, 2009

PwC CEO Pulse Survey 2009

• Cost is the top challenge for CEO’s, followed by growing market share andfinancing the business

• The turmoil has impacted investment plans and access to finance the most

• Survey reveals that businesses will have taken decisive action by the end of2009 (this combines action taken in 2008 and planned action in 2009):


April 23, 2009

Market Challenge – Cost Reduction

PwC Points of View:

The current global environment creates a new imperative for companies inall sectors to embed sustainable cost reduction programmes

• Cost management is now the priority issue for the foreseeable future - fundamental re-thinking regarding business strategies, operating models and cost structures will all benecessary

• The baseline for cost analysis must be aligned to current forecast revenues

• An understanding of the true profitability of each business is essential

• The cost focus must be enterprise wide

• Many organizations confuse “cost postponement” with total cost management

• A well organized end-to-end program is needed

• Consistent investment in cost control is required

• The tone at the top is key

• An executive dashboard is required to monitor results

April 23, 2009

Profit & Loss

RevenueCost of Sales

MarginProcurement

Op ExTax

Balance Sheet

FundingReceivables

PayablesInventory

VAT

Sourcingstructures

End-to-end processes

IT Systems

Strategy

KPIs’ / Metrics

Cost Control Culture

Role of Finance

Cost ReductionAgenda


April 23, 2009

Key Challenges

• Revenue / Margin

• People Costs

• Supply Chain

• Procurement Spend

• Finance

• Cash Management

• IT

• Structures

• Metrics

• Project Management


April 23, 2009

Key Challenges

REVENUE / MARGIN:

Limited cross selling across organisations;

Rebate issues – not consistent in chasing recoverability;

No visibility of margins end to end;

Ownership and accountability of management, sales & buyers.

What Others are Doing:

Developing activity based models to better understand margin by product;service; customer; channel; etc

Revisiting bonus / commission schemes

Mapping order-to-cash value chain for effective business management


April 23, 2009

Key Challenges

PEOPLE COSTS:

Incentives not aligned to strategic objectives;

Skill-sets not appropriate to role requirements;

Tackling non base-pay costs;

Overcapacity and inefficient work practices.


April 23, 2009

Review staff related cost areas:

• Overtime• can the amount of overtime be reduced• can the uplift % be reduced• can overtime be compensated by time-in-lieu

• Leverage a flexible cost base –• outsource or centralise non core services• adopt a mix of permanent & temporary staff

• Salary freeze

• Review incentives / bonuses• align to benefit delivered• align to key strategic objectives

• Review pension benefits / structures

• Reassess fringe benefits

• Review utilisation within shifts

• New hires approval – need business case

• Minimise external cover for absenteeism

• Performance management – look atunderperformance and address issues

Assess headcount levels:

• Review roles to ensure they are value add roles –essential activity

• Carry out a process review – map end-to-endprocesses with swim lanes for responsibilities andidentify duplication, looking to release capacity

• Review part time working, unpaid leave, leave ofabsence, job share, sick leave

Pay Cuts / Redundancy:

• Consider pay cuts first

• Where redundancy is required, better to have atargeted redundancy approach, clearly definingscope with HR department

• Leverage cost efficient redundancy packages –options to structure packages to yield most toemployee at least cost to employer

Tackling Non Base-Pay Costs


April 23, 2009

Inefficient Work Practices

1. Order to Cash Review

1Customer

Set-up

2Establish

CreditLimit

3Process

Order

4Pick &Pack

Shipment

5Stock

Management

6DeliverGoods

7IssueInvoice

8CollectCash

9Credit

Monitoring

10Manage

Promotions

11Manage

CustomerService

2. Procure to Pay

1. SupplierSet-up

2. Raiserequisition

3. ReceiveGoods

4. ReceiveInvoice

5. PayInvoice

6. ManageSupplier

7. PayExpenses

3. Record to Report1. FinancialData Mgt

2. Record &Validate Data

3. Journalisetransactions

4. Run periodend procedures

5. PrepareFinancial &MI reports

6. Bankreconciliation

7. Budgeting 8. Forecasting 9. FixedAsset Mgt


April 23, 2009

Process FlowLean project example

ASD gathersInformationAnd requests

aPID be opened

Via email

PID requestMeets PIDinitiation

Requirements?

PI sendsback to ASD

requesting tocomplete required

information

No

Yes

Pi Creates PIDIn Milestone

Pi sends emailTo PAP board

To add new PIDTo PAP meeting

agenda

PID is reviewedAt WeeklyTuesday

PAP meeting

ASD CapacityAnalystassigned

And reviewsASD request

WeeklyPAP meeting

Review of ASDCapacity Review

ASD CapacityReview

Complete?

No

Pi submitsPID to local CIT

Board forreview

Yes

PID is reviewedAt WeeklyCIT Boardmeeting

PID approved?

No

Yes PID statusChanged toApproved inMilestone

ASD CapacityUpdates

Demand plan

Direction givenBy

PAP Board

CancelPID

Pi deletesPID in

Milestoneand notifies

client

Review PID

Returned toPI for

Requestedupdates

PIDto be

updated Orcancelled?

Update PID Cancel PID

60 minutes 1 minute

10 minutes4 days

10 minutes

7 days

5 minutes

5 minutes

10 minutes

5 minutes5 minutes2 days

5 minutes

15 minutes

PI reviewsPID request

15 minutes

PAP BoardApproval?

Yes

No

Meet FridayDeadline? Yes

No

Wait

7 days

Process Time13 days 2 hours

Work Time12 hours 26 minutes


April 23, 2009

New Process Flow

ASD gathersInformationAnd requests

aPID be opened

Via email

Pi Creates PIDIn Milestone


Board forreview

PID approved?

No


ASD CapacityUpdates

Demand plan

Pi deletesPID in


client

Returned toPI for

Requestedupdates

PIDto be

updated Orcancelled?

Update PID Cancel PID

60 minutes

PID requestMeets PIDinitiation

Requirements?

PI sendsback to ASD

requesting tocomplete required

information

No

Yes 1 minute

10 minutes

PID is reviewedAt WeeklyTuesday

PAP meeting

Direction givenBy

PAP Board

CancelPID Review PID

10 minutes

ASD CapacityAnalystassigned

And reviewsASD request

7 days

5 minutes

5 minutes5 minutes

5 minutes

15 minutes

PI reviewsPID request

15 minutes

No

Yes

WeeklyPAP meeting

Review of ASDCapacity Review

ASD CapacityReview

Complete?

10 minutes

PAP BoardApproval?

PID is reviewedAt WeeklyCIT Boardmeeting

2 days

Yes

No

Wait

7 days

Pi sends emailTo PAP board

To add new PIDTo PAP meeting

agenda

4 days

Meet FridayDeadline? Yes

No

Time Removed

- 15 min- 16 min

- 4 Days- 11 Days

- 26 min

- 18 Days

- 36 min

- 20 Days


April 23, 2009

New Process Flow

Pi openPID

PID approved?

Pi deletesPID in


client

5 minutes

ASD CapacityUpdates

Demand plan

5 minutes


Board forreview

No

PIDto be

updated Orcancelled?Update PID

Cancel PID

Returned toPI for

Requestedupdates

15 minutes


5 minutes

Time Saved

Up to 20 days and 36 minutesTime Saved

Up to 20 days and 36 minutes


April 23, 2009

Key Challenges

SUPPLY CHAIN:

No clear visibility of the value chain – sales to cost of sales to inventory to margin;

Inventory forecasting deficiencies;

Not rationalising product ranges and promoting slow moving stock;

Logistics – optimising minimum order quantities; route management; etc.


Mapping the value chain for efficiency & effectiveness

Re-configuring logistics approach

Applying operational disciplines


April 23, 2009

Key Challenges

PROCUREMENT / SPEND:

Rationalising the supplier base and leveraging consolidated demand to improvesupplier prices and terms;

Regular review, negotiation and appropriateness of supplier contracts;

Tackling spend categories - usage & price.


Establishing ‘Procurement Projects’ to leverage best value in

- price;

- terms;

- usage.

Optimising the Procure-to-Pay process


April 23, 2009

Strategy

• Strategy/vision is notaligned with overallbusiness

• Limited strategicpartnerships withsuppliers

• No leverage of grouppurchasing power

• Procurement has lowprofile, viewed astactical

• No alignment ofProcurementaccountabilities

• Central procurementinitiatives are notsupported locally

• Limited capabilities forprocurement bestpractice

A lot of effort isbeing drained …

Management effort and resources

ProcurementEfficiency

People Process Systems

What valuecan

procurementadd?

I must develop myown local practices toovercome limitations

of centralprocurement

Procurementactivities arenot aligned

Conflictingpriorities in the

business

Procurementdoes not

follow bestpractice

How do wemanage

procurementmore

efficiently?

• No formal supplierassessment

• Lack of consistentprocesses across thebusiness

• No formal receipting ofgoods or services tosupport invoice matching

• Large supplier base (forsafety) including ‘one-timevendors’

• Procurement processesare supported bymanual, paper basedsystems

• Procurement notintegrated with otherbusiness systems

• Procurement systemdoes not provide accessto key data

No externalbenchmarkingof practices or

costs

Optimising Procure-to-Pay Process


April 23, 2009

Key Challenges

FINANCE:

Inefficient month end close process;

Lack of cost transparency – visibility of profitability; value for spend; hidden cost?;

Opportunities to leverage shared services and/or outsourcing;

Poorly integrated internal systems;

Manual processes – excel hell; paying suppliers by cheque.


Re-configuring Finance Function to meet needs of business

Investing in people and systems to improve processes


April 23, 2009

Objectives: Demands Focussed on Three Areas

Finance objectives have to be balanced between therequirements for Insight & Action, Compliance &Control and Efficiency.

Compliance and Control: The accountability of CFOsmeans compliance and improving control have beentop of the agenda in recent years. The future financefunction needs to optimise compliance and control toestablish a sustainable cost effective controlenvironment which meets today’s requirements as wellas being flexible for future changes in regulations.

Efficiency in finance means performing tasks in atimely and cost effective manner to achieve the definedquality by making use of Leading Practice approaches,Tools and Sourcing. Also the finance function must bemore robust and scaleable to support future businessgrowth.

Insight is at the heart of the vision of the future financefunction. It can take the form of corporate performancemanagement (CPM), business analytics, corporateinformation logistics and straightforward managementinformation.

Insight

Compliance& Control

Efficiency

Current view

Aspirational


April 23, 2009

eg Shift from reconciliation to insightful analysis

eg Monitor Service Level Agreements

Score Keeper

Commentator Business Partner

eg Automate &Seek process efficiency

Reactive Proactive

Accounting SkillsMandatory activities

Business SkillsValue adding activities

Current Profile

Target Profile

eg Earn place at the decision making table

Caretaker

To bring a greater focus on delivering insight to the business the roles that are undertaken by a highperforming Finance function are changing from that of Scorekeeper to Caretaker and from Commentator toBusiness Partner

Developing Role of Finance Function


April 23, 2009

Key Challenges

CASH MANAGEMENT:

Order to cash inefficiencies, especially invoicing, credit notes & rebates;

Cash management – visibility; forecasting; and centrally controlled;

Management of Working Capital – lack of ownership.


Moving from monthly to weekly cash forecasting

Identifying and eliminating sources of inefficiency in receivables & inventory mgt

Establishing and driving targets for DSO; DSI; DPO

Aligning working capital management targets to personal performance metrics


April 23, 2009

Key Challenges

IT:

Inadequate IT skills match to business requirements;

Lack of systems integration;

Poor management information systems.


Re-investing in systems to improve efficiency and effectiveness

Restructuring IT to meet needs of business

Automating manual activities


April 23, 2009

Key Challenges

STRUCTURES:

Shared services or outsourcing opportunities not being leveraged;

Terms of outsourcing contracts not being challenged.


April 23, 2009

SSC Value Chain

• Create Center ofExcellence

• Eliminate Duplicate JobActivities

• Leverage Scale

• Allow Business toFocus on MoreStrategic Needs

•Deploy IT Systems

•Retain Capability toMeet Business Needs

•Enhance ControlEnvironment

•Provide Consistent &Accurate Information

•Strengthen BusinessContinuity Plan

• Increase Automation

• Utilize Benchmarking

• Deploy deskTechnology/ Tools

• Implement MajorProcess Improvements

• Leverage MultipleLocations

• Value addedReporting

• Enhance Customer Focus

• Share Support forMergers & Acquisitions

• Provide Risk Mitigation

• Flawless ControlEnvironment

CentralizeCentralize StandardizeStandardize

ImplementImplementBest PracticesBest Practices

Realize theRealize theBenefitsBenefits

PeoplePeople

ColleagueEngagement& Satisfaction


April 23, 2009

Why choose Outsourcing?

Reduce Operating Costs

Share Risks

Resources NotAvailable Internally

TransparentService Standards

Exploit ExternalManagement Expertise

Increased transparencyof costs

Increased controlDuring turbulent economic

conditions

Function May BeDifficult

To Manage

Improve CompanyFocus

Access To World-ClassCapabilitiesImprove Services

Agility

Cost

Resour

ceService

Bus

in

ess Focus


April 23, 2009

Key Challenges

METRICS:

Lack of relevant KPIs to support corporate performance management;

Metrics not aligned or inappropriate relative to strategy

Lack of performance reports / desktop reports;


Defining a small number of key metrics, which link business activities andpromote ownership, responsibility and accountability

Investing in the development of integrated KPI dashboards


April 23, 2009

Dynamic?- indicators to guide the reader- focussed rather than full detail

- simple graphics

How Companies are Communicating Performance


April 23, 2009

Key Challenges

PROJECT MANAGEMENT:

Multiple projects, minimal resources

Projects not being delivered within timeline and/or budget

Benefits not being realised


Establishing Project Offices within their business to:

- Train staff in the disciplines of project management

- Prioritise projects and assign resources

- Plan & design each project – ownership; delivery milestones; benefits

- Monitor progress of each project and support as appropriate

- Ensure benefits proposed are delivered


April 23, 2009

• Lead from the top

• Policies & Procedures

• Zero based budgeting

• Short interval control

• Involve everyone

• No ‘sacred cows’

• Spend every dollar as if it were your last – get value from money spent

Cost Control Culture


April 23, 2009

Questions?

Thank You!

Garrett Cronin

01 792 8807

[email protected]

The Cost Reduction Challenge - April 09

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