Holistic Approach to Cost OptimizationFri, 09/01/2017 - 10:22
In manufacturing and corporate activities, all processes can benefit from optimization strategies, although there are different ways to achieve it. Guillermo Bilbao, Director General in Mexico of PA Consulting, explains that companies work from a strategic to an operational level and each has different cost-reduction approaches. “Process optimization is absolutely necessary and does not require large investments. But when companies need to transform their organizational culture, they must bet on a cost-out strategy.” Cost-out maturity is the basis of PA Consulting’s offering, transforming its clients’ business radically. The company has already worked with leading supplier Magna Steyr in product-development processes and it also participated in a project with FCA that resulted in savings of over €1 billion (US$1.2 billion) per year.
When faced with a cost-optimization problem, companies have two ways of looking at it. They might choose a transversal approach, seeking the best way to improve interaction between departments within the company, or they can follow a functional strategy minimizing costs and cutting corners vertically, Bilbao says. Once executives implement these strategies, they often discover the project lacks a holistic approach that can combine both aspects. Certain positions that seemed irrelevant at first might be eliminated at a functional level but transversally they might be crucial to run operations seamlessly, says Bilbao. As a result, cost-reduction projections are limited because overheads might increase in order to maintain a healthy interdepartmental communication.
“For cost-out maturity to be achieved, all different levels of an organization must be aligned under a single strategy and communicate with one another,” says Bilbao. “A cost-out transformation strategy considers the company’s strategy, organization, processes, tools, skills and approaches to a certain problem. The analysis goes beyond handling only manufacturing processes and we might end up transforming even people’s habits.” Performing this level of analysis is not easy and Bilbao explains that the only way to deliver it properly is following system dynamics guidelines. This concept was created at the MIT Sloan School of Management to help executives understand and manage change. Rather than focusing on isolated processes, every operation must consider all the variables that might affect its outcome.
Having worked with PEMEX and the Mexican government, PA Consulting is experienced in the local market. Its expertise has been applied to logistics companies such as DHL Express and DSV Road, creating an IT replacement system capable of supporting the division’s ambitions for growth. In line with technology development in manufacturing, Bilboa hopes to penetrate automotive companies globally as they can reach much higher maturity levels following a cost-out model. He sees the biggest area of opportunity is in developing competencies and skills, particularly regarding information integration. Industry 4.0 might prove an ally in process development. The idea behind its concept is for companies to manage large amounts of data and apply it to decisionmaking processes. Although it is a common concept in manufacturing, all corporate processes can be improved by effective data collection and analysis strategies, Bilbao says.
Industry 4.0 is just one example of how the industry is moving forward and now that innovation is becoming standard industry practice, cost optimization is taking centerstage. “Cost-out maturity allows companies to move past innovation and into an implementation phase,” says Bilbao. He says sustainability is the perfect example of innovation. Although it might be seen as an obstacle for efficiency and investments might be larger at first, operations transform positively in the long term and provide companies with the product offering needed to survive recessions and industry turnarounds. Bilbao explains how in the 2000s the global automotive industry was peaking and was faced with an imminent cliff edge. European companies, in particular, were struggling to compete with American and Japanese players on costs and the only way to regain their competitiveness was developing a disruptive product that kick-started new product lifecycles. That is when companies turned to electric and hybrid technology. “When the industry started investing in electric vehicle technology, it was not because they were interested in the environment. They did so because it opened up a whole new business dimension,” he says.