Cost Management
Business Challenge
One of the most important challenges facing a leading American dairy product company was how to improve bottom line profitability; halting their persistent quarterly losses, which were averaging 5% of revenue.
The Solution
We conducted a competitive relative cost analysis on their 600 products and developed a model to calculate the cost-to-serve for each of their 3,000 customers-from home delivery to retail food chains. We recommended major changes in their business model that turned the operation into a profitable business:
- Elimination of 15% of SKUs
- Price increases of greater than 50% on 10% of the items
- Elimination of discounts ranging from 10% on 27% on customers groups
- Price reductions averaging 5% on products constituting 40% of volume
- Shifted development efforts to segments in which client had sustainable competitive advantage
We installed a permanent system integrating the findings of the analysis into their control and pricing systems.
Business Challenge
The American division of a leading German producer of gas springs for automotive and industrial applications was experiencing sharp pressures on improving its bottom line even though top line growth exceeded the industry average.
The Solution
We conducted an industry review and competitive analysis to determine segments of the business with the best profit potential. Using activity-based costing (ABC) principles, we developed a quotation tool which provided accurate quotes for custom jobs, which constituted the majority of orders. These quotes reflected the true cost of complexity, as determined through our analysis of each operating department. This lead to the implementation of a new pricing structure that increased prices an average of 75% on approximately 25% of jobs – typically specialized, low-volume orders – resulting in the loss of only one customer.
Business Challenge
A Scandinavian world leader in manufacturing of marine controllable pitch propellers and tunnel thrusters was under pressure from overseas competitors and changing markets to produce at a lower cost structure. Management felt that they lacked a true understanding of the costs associated with all aspects of project sales, design, and management activities and that they were losing potentially profitable orders to their competition while struggling to profitably engineer, manufacture, and deliver the orders they were winning.
The Solution
We developed a quotation and pricing tool, integrating the cost of complexity components into the technical cost calculation, which covered manufacturing costs only. This enabled accurate estimation of all project complexity costs prior to quoting. Additionally, we modified the client’s standard cost systems to incorporate complexity cost tracking in manufacturing operations. We then analyzed the expected profitability of existing booked orders and implemented recommendations for immediate corrections to existing policies and processes:
- Price increases averaging 10% in the second largest segment of the market
- Optimization of their commission structure
- Development of local resources in the Far-East to handle customers more efficiently
- Redesign of the purchasing process
Business Challenge
One of the most difficult challenges facing a leading French pet food manufacturer was to understand the hidden costs associated with its promotion policies, which were developed in response to the entry of economy brands on the market and the growth of the discount distribution sector.
The Solution
Using activity-based costing (ABC) principles, we analyzed the cost of complexity in all functions of the client, purchasing, conversion, sales force and marketing, R&D, fixed assets, identifying all key cost drivers. We also developed transaction cost menus for all significant transactions. A special focus was placed on hidden cost of complexity associated with promotion practices.
We interviewed 50 key customers to determine key success factors and to understand how the client was vulnerable to attack and provided recommendations for policy and process changes:
- Merging of three sales forces, with a new call plan producing a 20% reduction in sales force cost without loss of competitive relative call frequency advantage versus competitors
- Elimination of 15% of the SKUs for which the best competitor substitute index was less than 60%, permitting a reduction in first-piece costs of 9% on a two-year horizon
- Revised product manager reward system to reflect true prospective complexity costs
- Produced revised promotion criteria to reduce hidden-cost/consumer benefit ratio
- Introduced significantly more competitive economy segment pricing reflecting lower manufacturing cost-of-complexity and customer cost-to-serve, reversing the erosion of market share in that segment.
Business Challenge
A division of a major US Financial institution, wanted to develop and implement a solid cost management foundation with the objective to significantly reduce its operating cost structure; 70% of which was indirectly controlled, being allocated from other divisions and shared service units.
The Solution
Working together with internal client resources, we instituted a benchmarking and target setting policy and developed a process for an ongoing engagement of shared service providers, which lead to the proactive involvement in budgeting of shared service resource consumption. Using integrated reporting, we developed a greater cost transparency and a more sophisticated use of cost information in horizontal decision making, delivering over $40MM of documented cost savings through the elimination of lower value-added activities, aggressive management of resources, and charge-out methodology changes.
Business Challenge
One of the nation’s largest health insurance companies had grown through acquisition and was operating with two major claim processing systems. Management was considering migrating one of its business segments (3 million members) from one administrative processing platform over to the other. Based on the differential between the average cost per claim, the internal analysis had concluded that this migration would generate $26M in annual savings and would create a pay back in less than 2 years. We were retained to review their internal cost/benefit analysis to determine if the stated costs and benefits were accurate.
The Solution
We performed an activity-based costing analysis to better understand the cost structure of the organization, using the results to determine the cost-to-serve of their different products and services. We determined that the higher cost of serving the members on the one platform was not due to the platform itself, but was rather due to the more complicated mix of products and services it served. In performing their own analysis, the client incorrectly attributed this higher cost-to-serve as a platform cost, whereas it turned out that this cost had nothing to do with the platform and everything to do with the complexity of the products themselves. The client came to realize that in migrating to the other platform, the cost-to-serve would not significantly decrease because the more expensive mix of products would simply be transferred from the one platform to other. The client ended up avoiding a $52M mistake.