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Article # 0052
AN ENGINEERED APPROACH
REDUCING OVERHEAD COSTS
R.L. Langley, P.E.
A proactive, structured approach to identifying, analyzing and evaluating overhead/staff costs utilizing sound engineering principles can provide ongoing savings for most any size business. This is usually a much better approach than the traditional kneejerk, dictatorial edicts that sometimes emanate from headquarters during tough economic times. The guiding principle of this effort should be not getting people to work harder or longer, but to systematically reduce, automate, synergize, standardize, optimize or eliminate certain activities.
Why would something like this needed? Unfortunately, over time any size organization can become bloated, staff heavy and so “work process” oriented that some staff groups sometimes lose their basic service orientation and have a self sustaining allegiance to work products that may have become obsolete, not user friendly or even necessary. At the extreme, the “work process” becomes more important than the results. Even if no company financial crisis exists and “business is booming”, it may still be prudent to implement an ongoing process similar to this to avoid future problems.
Critical Success Factors
A disciplined, fact based approach involves the following critical success factors:
Summary Key Activities
Summary key activities in a structured overhead evaluation analysis are as follows:
· Identify all the work products of the staff group—i.e. can include advice/consultation, specialized services, reports, forms, contracts, etc.
· Determine the true cost of each work product.
· Develop a detailed “brainstorming” based list of ideas to reduce, streamline, or eliminate work products.
· Perform a careful, documented and risk based analysis of all ideas and select those feasible for further detailed analysis with a “stretch goal” of 40% cost reduction.
· Utilize actual data and fact based costs to determine total savings of agreed recommended actions.
· Gain support of “users” of work products and management on implementation of cost savings recommendations and follow through.
Six Steps to Success
The detailed effort consists of the following six steps:
· Step 1: Preparation
-Select the work units to be reviewed
-Upper Management’s provides clear communication and discussion to affected staff groups sets the stage as to the what, who and most importantly why of the upcoming effort and results expected. Provides the “big picture” context.
-Selection of a qualified team of trained, key personnel as objective team leaders and affected staff group participants.
-Preview the process with local Sr. Management and gain commitment
-Develop standard training materials for selected process leaders/team to assure consistency across the organization
-Establish Executive Management Steering/Oversight Committee (see Step 4).
· Step 2: Develop the Database
For each affected staff work group, determine the following:
-The mission of the staff workgroup-why does it exist?
-The staff’s work activities-how the mission is supported
-The work products of those activities-the what
-Costs of each work product
-Staffing-by position, including contractors
-Personnel Costs-Only Salary & benefit costs for total group (exempt, non exempt, hourly and contractors)
-Any outsourced costs
-Non personnel costs-IT, supplies, rentals, equipment, travel & expenses, communications, training, intracompany allocations, etc.
-Annual operating budget by line item (includes all costs, including salaries/benefits, travel, materials, training, supplies, etc.). 40% of this number will become the “stretch target” for reductions. These should be reasonably controllable expenses.
Typically, a work unit (with subdivisions) may have 3-5 missions, 4-6 activities per mission, and 4-6 end products per activity.
By way of example, let’s take the “Operations Support Division”, a subdivision of “Manufacturing Operations” Work Unit.
One of the missions is this Division is “monitor and provide timely, accurate production data.” The following activities are associated with this mission:
-Attend morning Operations meeting & identify production anomalies
-Quality Control Inspector monitors and samples production line per statistical model
-Provide immediate technical/engineering assistance for resolving production issues
-Provide daily production report
Determining the cost of the end products is fairly straightforward, but requires recordkeeping over a defined period. For example, let’s take the work product of “Daily Production Report” that goes to the Operations Supervisor and others. One way to determine the cost of that report is for every staff member that works to produce it to record his/her time spent on the task (usually at 15 minute intervals) over a representative period, usually 4 work weeks or so. Let’s say that Sr. Production Analyst Jan, along with Production Analysts Tom and Bill determine that they spend about 1,095 hours per year, or .526 ( 1,095/2,080) Full Time Employee (FTE) at an average salary+ benefits cost of $65,000/year for 1 FTE. Therefore, personnel costs are .526 X $65,000=$34,190. Adding materials, production and distribution costs, the total documented cost of the Daily Production Report is determined to be $37,000/year.
This is one example of one work product from a staff unit. Similar data should be collected and calculations made for all work products. The sum of the cost of all work products should approximately equal the Annual Operating Budget of the work group.
At this point, the reader may say “…….well, this is pretty simple for a tangible work product like a hardcopy report, but it doesn’t seem like less tangible activities…like advice/consultation… a major function of many staff workgroups….would lend itself to such an analysis”. Not so. The author has yet to see any work product that cannot be assigned a value. It takes work to do it, but it can be done. That’s why records are kept in 15 minute increments….to account for short telephone or e mail type consultation/ advisory type activities.
· Step 3: Generate and evaluate ideas to reduce costs by at least 40%.
Why a “stretch” target of 40% reduction? It forces innovative “out of the box” thinking and innovation.
These ideas can be based upon streamlining/optimizing or a reduction in quality, content, frequency, quantity or at the extreme, elimination.
Optimization may include automation, deautomation, workload balancing, simplification, changing the work process or procedures, changing the work flow, outsource vs. in house (or vice versa), standardization, combine activities, centralize activities (or decentralize), targeting activities, increase (or decrease) required skill level, substitute or combine with activities, purchase “off shelf” vs. internally develop, or defer.
The evaluation part of this step requires identifying risk factors and assigning a potential risk rating (Low, Medium, High) to the impact of implementing the idea in the organization vs. potential cost savings. This must be fully explainable and justified.
It’s important for ideas to be fully developed and detailed before the decision making step. Here’s an example of both:
Undeveloped/Unrefined Idea: “Eliminate free Metro Transit Tickets for employees and eliminate the Administrator’s position in charge of handling the tickets.”
This idea was deemed “No Go” by both the Human Resources Dept. Manager and the Unit Manager’s Supervisor as presenting a risk to hiring and maintaining good employees (see below) as it’s been viewed as a benefit.
(After reviewing the competition in the industry, the Human Resources Dept. found that most other companies offered some type of bus pass benefit, but not free to employees.) “Change the bus ticket benefit to a 50% employee co pay program Reassign administration of the Bus Ticket program to the Services Administrative Assistant and restrict the hours employees can purchase tickets to 3:00-5:00 pm Monday-Thursday.”
The refined ideas and accompanying cost savings ideas are presented to various levels of management* in a concise, documented format for review, discussion and decision.
Affected Staff Group Manager (Unit Manager-UM)
The Unit Manager’s Supervisor (Next Higher Manager-NHM)
The Receiver (User of Work Product)
· Step 4: Make Decisions
The aforementioned individuals have the following decision options:
-Not Agreed (“No Go”)
-Further Study Needed
Managers cannot reject an idea. They should indicate one of the three options.
If one cannot gain consensus “Agreement” a “Controversy” exists requiring further discussion, study or a better understanding of the idea and/or the risks, impacts. The idea may need modified to gain consensus. It’s usually best to gain total consensus before moving ahead. Obviously, if there’s a “No Go” idea that has low savings potential, probably not much time should be spent on that. However, time most certainly should be spent on developing the low risk, low to high savings potential ideas to consensus “Go” agreement. The medium risk with medium to higher savings potential that are in “Controversy” should be pushed to either a “Go” or a “No Go” status. An Executive Steering Committee can help here. This part of the process can take awhile and requires much dialogue and understanding among all affected parties.
In the Daily Production Report example given, plausible findings might be as follows:
- The detailed production report was initially set up as part of warranty measurement for newly installed expensive production machinery (performance tests). It got to be a habit that was never changed, apparently because the receivers never voiced an opinion.
-The Operations Supervisor no longer needs daily reports to second decimal with near as much detail, as now it’s just a production planning tool.
-The level of double checking and verification is no longer needed as absolute accuracy isn’t required any longer.
-The distribution list was cut drastically, because several that received the report no longer needed it.
BOTTOM LINE: The Daily Production Report has been shortened and changed to a much simpler, easier to generate online format (eliminated hardcopies) requiring about 50% less analyst time plus distribution savings. Savings estimated about $18,000/year. Doesn’t sound like a lot, but string a bunch of these together, and it can result in significant savings over time.
NOTE: It’s not unusual to find the the “80/20” rule applies in these efforts. Sometimes a great portion of the overall effort and resources is dedicated to obtaining that last bit of perceived detail, accuracy or “color glossy” formatting perceived as a user requirement—only to find that it’s not necessarily a user desire at all. It’s the staff group’s desire to appear “professional” and polished. Nothing wrong with that to a degree, but it can go too far and it’s something especially technical and sales/marketing staff groups have to be aware of.
· Step 5: Develop Implementation Plan
The objective of this step is to develop detailed, orderly and well communicated plans to all affected groups for converting the potential savings approved by the Steering Committee into actual savings.
For any given idea to be implemented, a management or lead champion should be selected and accountability for reporting back results to Steering Committee. Depending on the circumstance, the requirements of implementing the approved ideas can be written into the appropriate individual’s job performance evaluation parameters.
The Implementation Plan should include key responsible individuals, reporting of results and a projected timeline schedule with milestone type steps.
· Step 6: Implementation and Follow-up Monitoring
Activate implementation and document actual savings with projected. Make any required adjustments. Remember, what gets measured gets done.
Steering Committee is still convened to receive actual results of efforts and to facilitate the resolution of earlier identified “Controversy” or “Further Study” recommendations to a finished “Go” or “No Go” state.
This is but a very brief summary of what can be a lengthy, resource intensive data gathering, documentation, analysis, evaluation and interpersonal work process. For most organizations, this is likely not a “do-it-yourself” effort because behind each step is a volume of critical thinking, experience, templates to be used (for consistency) and expertise required for application of the steps briefly presented here. The main function of this paper is to let the reader know there are proven work processes and tools available to accomplish this.
The reality of the matter is that implementing this process can result in significant changes on what work is performed, how it is performed, and staffing (jobs may be eliminated or personnel may need redeployed). Therefore, it’s critical that Human Resources Departments be involved every step of the way.
Applying engineering principles of identifying end work products, accurate data gathering, objective evaluation/analyzing data, calculating fact based costs, generating ideas, objective election of the best options, defining requirements, establishing post implementation metrics and validation of results has a place in the organization’s efforts to decrease overhead costs. These activities, when practiced in a structured framework that’s commensurate with the resources and vision for that organization, can lead to ongoing benefits.
R.L. Langley, P.E.
Overhead Value Analysis Advisory Task Force Orientation for Gulf Oil Corporation (McKinsey and Company-1983)
Robert (Bob) Langley, P.E. holds a B.S. Degree in Chemical Engineering from the University of Oklahoma. For over 30 years he worked for Fortune 500 midstream (natural gas processing) companies as Process Engineer, Plant Engineer, Plant Supervisor, Plant Manager, Supply and Distribution Manager, Supply Chain Manager and Environmental, Safety & Health Manager. In 1983, he served as a technical Advisory Task Force Leader for Gulf Oil Corporation’s Overhead Value Analysis Project at South and East Offshore Production Division in New Orleans.
Article # 0052 TEST QUESTIONS: Coming Soon
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