A few years back, delivery firm UPS designed its routing software to minimise the number of times drivers turn into oncoming traffic, providing drivers with the most efficient route for deliveries and pickups on more than 66,000 routes in the United States, Canada and Europe. The clever thing about it was, at the same time as keeping fuel usage down by 10 million gallons each year, with a reduction in carbon dioxide emissions of about 100,000 metric tons, it also increased the capacity of the business. In the wake of COVID-19 and with the need for many organisations across all sectors to preserve cash, this type of strategic thinking is important. That way you can generate competitive advantage, not just keep the short-term numbers in check.
Long ago, original equipment manufacturers in the automotive industry were able to cut costs by developing platforms that could be leveraged for multiple vehicle models, such as Volkswagen using the same chassis for the VW Atlas, Audi A3 and VW Jetta models. This also brought other benefits. They could speed up time to market and make model refreshes more frequently. Later, Hewlett Packard’s ‘postponement’ strategy meant they built one product and left any differentiation – which could be handbooks, or power cords – to the last possible stage. There are parallels today where high tech businesses like data storage companies provide a ‘standard’ product and switch software features on or off according to what customers want.
In all these cases, the businesses took a step back to see how costs move along the end-to-end journey of their activities. In our report, we explain how valuable that holistic approach to cost cutting is. We’ve seen businesses go wrong because they take a narrow view of cost control. It’s important to have a clear picture of how costs flow through the various functions in your organisation. It will also help you avoid the situation where focusing on one kind of cost increases costs somewhere else. We’ve helped businesses get it right by boosting internal cooperation and aligning KPIs across the organisation, which has resulted in significant cost reductions.
For our report, we researched the extent to which organisations across 10 industries – including consumer, energy and utilities, defence and aerospace, financial services, IT and telecommunications, and manufacturing – use the different cost optimisation techniques at their disposal. We found that automotive and life sciences are leading the way but still have opportunities to progress. And we discovered that those with the biggest opportunity to improve are transport, and government and public sector.
During our research we developed our ‘Cost Out Competitiveness Curve’ to show how the levers organisations use range from industrialised techniques – those are well worn and established – to those that are emerging and yet to be fully established. The ones that few organisations and sectors are yet to exploit represent a chance to steal a march on your competitors. They include requirements management and software cost out.
For example, requirements management is a great opportunity as more and more businesses often offer after-sales service on products ranging from agricultural equipment to consumer electronics. That means there’s a valuable feedback loop – it gives insight into why the customer wanted the product, how they’re using it and how it’s performing. That allows you to eliminate features and functions that aren’t in demand and to better balance the reliability of components. Having that in-depth insight means you can trim costs. But you also become more attractive as you align the products you produce more in line with what customers really want.
As we explain in our report, software costs are anticipated to make up 25 per cent of manufacturing costs by 2025, up from five per cent in 1995. But they’re often seen as a ‘black box’ – suggesting they can’t be analysed and optimised. We’ve worked with clients to show they can. We reviewed the software architecture and development process at a global energy provider. They wanted to understand how they could optimise the cost of development and enhance their competitiveness. We identified cost savings equivalent to 25 per cent of software development costs.
On the other hand, don’t ignore techniques that are well-used, like RFx and procure-to-pay. Everyone knows about them. Everyone does them. This creates the temptation to rest on your laurels, let those activities become institutionalised and run on auto-pilot. But there’s a chance sending the same old RFQs to the same old suppliers means you’re missing out.
This is where it pays to get creative. We’ve seen it work for clients where they take their needs to a supplier and work together to address them. Take logistics for example. Maybe you don’t need to settle for the processes and pricing on offer. How would it be best for goods to flow through your business? Perhaps a central stocking location would be better. Or a ‘milk run’ model, where mixed loads from various suppliers are merged together for efficiency. Exploring new options with a supplier could bring real strategic value.
Gain competitive advantage with cost-out
Sometimes the competitive advantages cost optimisation brings happen by accident rather than design. Thinking strategically, with a holistic view and an understanding of where opportunities lie, allows you to aim for those benefits deliberately. It means you’ll get more from your cost optimisation efforts than a healthier bank balance.