For many companies, reducing cost is a routine and painful exercise that can lead to low employee morale. However, cost containment does not have to be temporary or painful—as long as it is addressed as part of an overall company strategy, led by cross-functional teams and driven by multi-year goals that feed into operating budgets.
Accenture’s comprehensive approach to sustainable cost management fulfils these objectives. Furthermore, it is directly applicable to the chemical industry given the increased pressure for performance due to a range of market factors. These factors include acquisitions and vertical integration, low energy and oil prices, exchange rate volatility and demand for smart environmental practices that require deeper investment.1
The effective implementation and execution of a sustainable cost management strategy enables chemical companies to reset their cost position, respond to dynamic market conditions and maintain cost savings over time. And, the majority of chemical executives realize the value that cost management can bring. According to Accenture research2 conducted in 2015:
69 percent of chemical companies rate cost containment very highly for competing with strong differentiated competitors.
79 percent of businesses include cost containment strategies in their business case for new market entry, new product development and adoption of new enabling technologies.
69 percent of businesses believe that increased technology would enable their operating model to operate at half its base cost.
Accenture’s sustainable cost management approach helps simplify cost reduction by creating visibility and accountability, attacking it comprehensively and putting a structure in place that sustains it. As shown in Figure 1, the approach includes four pillars—rapid cost takeout, zero-based budgeting, organization alignment and operational effectiveness. These pillars are based on a foundation of digital technology enablers such as predictive analytics, the Industrial Internet of Things (IIoT) and cloud-based platforms that allow cost reduction to be delivered faster and more effectively.
Rapid cost takeout allows companies to quickly identify significant opportunities to bring costs under control across multiple functional areas including finance; procurement; talent; service management; logistics; manufacturing; and sales and marketing. For example, selling, general and administrative (SG&A) expenses can be reduced by implementing smart consumption policies (i.e., travel) and decreasing contractor spend through insourcing. IT spend can be addressed by prioritizing project spend, reviewing software license usage for duplication and telecommunications expenses, and renegotiating third-party service level agreements. Rapid cost takeout also targets working capital by improving receivable terms from credit and collections, improving the credit collections process and reducing bad debt, and pushing vendors toward just-in-time delivery.
Zero-based budgeting (ZBB) helps organizations to identify, eliminate and prevent unproductive costs on an ongoing basis by balancing policy, consumption and price. This highly effective method is one component of the broader sustainable cost management approach in which divisions and functions no longer receive funding based on a prior year’s budget, but rather have to justify every expected expense. The ZBB process creates visibility through detailed analysis around how and where all costs are incurred. After the analysis, ZBB identifies opportunities to target a reduction in consumption and price, and assigned executives create budgets from the ground up to expose and eliminate unproductive expenses. The last step is to execute against the new budget through sourcing events, right-sizing headcount, outsourcing non-core processes, and executing against new and simplified processes.
Organization alignment supports a company in effectively executing its cost management strategy using a tested methodology for designing and delivering best-in-class operating models. Sustainable cost management addresses this in a two-phased approach. The first phase, which typically lasts one to three months, sets a clear vision and establishes a roadmap. Outputs include “to-be” operating models, organizational design criteria, organization targets and top-down organization sizing. The second phase executes the plan developed in phase one, refines organization designs and establishes detailed design guidelines. Reductions in cost can result from:
Banding, variable pay policies and benefits review, which can be done without headcount reduction.
Organization restructuring, which requires a different approach than other cost categories.
Savings in overhead costs averaging five to 10 percent per full-time-equivalent reduction.
Operational effectiveness helps reduce components of cost of goods sold (COGS) in order to change a company’s cost structure. Results can be generated by identifying and addressing performance gaps in four areas:
Material input costs, focusing on raw materials and packaging, are addressed through an aggressive sourcing program. Using sourcing professionals who bring market, industry and commodity insights can help companies achieve best-in-class commodity costs. Strategies include hedging, “should-be” cost models and best unit cost to reduce supply chain costs.
Variable manufacturing costs associated with direct labor productivity, production (depreciation and losses) and utilities are targeted through the “Perfect Plant” program. The objective is to improve productivity by deploying Lean strategies to find and eliminate waste, enable standard work, and reduce variation in manufacturing processes.
Variable logistics costs related to inbound and outbound transportation and warehousing are impacted through a transportation optimization initiative that identifies the parts to insource versus outsource to a third-party logistics provider. This helps improve fleet utilization and reduces cost per lane.
Fixed input costs (specifically associated with reliability, maintenance, plant, warehouse and network) are reduced through a network optimization initiative. This approach uses actionable intelligence to achieve cost reductions, increased service levels and strategic agility with a focus on optimizing logistics footprints, product flows configurations, alternative distribution solutions for customers and other methods.
Digital enablement initiatives are technology catalysts for sustainable cost management, allowing companies to execute on the four key pillars more quickly, effectively and consistently. For example, implementing spend and predictive analytics provides quicker identification of potential savings opportunities, while migrating to a procurement cloud lays the foundation for organizations to adopt mobility-based solutions. Most importantly, digital technology enablement helps companies move toward flexible and reliable operations, faster decision making and optimized performance.
In closing, by implementing at least some of the pillars of sustainable cost management and leveraging digital technologies, chemical companies will be better suited to adapt to a dynamic market and reset their cost position.
Managing Director – Chemicals, Accenture
Managing Director – Chemicals, Accenture
2“Increasing agility to fuel growth and competitiveness,” Accenture 2015, https://www.accenture.com/us-en/insight-increasing-agility-fuel-growth-competitiveness.