A holistic approach to cost control

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The need for effective cost control has never been stronger in the US automotive industry. While many companies are aggressively pursuing the ‘low hanging fruit,’ few are actually taking a holistic view necessary to truly maximize the potential savings. Leading companies develop a ‘DNA-like’ approach to complete transparency and involvement of the entire organization that will challenge all elements of the existing cost structures to identify actionable responses and sustainable savings.

That’s why Ernst & Young has combined several of our current capabilities into a highly relevant service, Enterprise Cost Reduction, to help companies create programs that drive cost efficiency across the entire organization. Steve Patton, Business Advisory Services Group Principle and Automotive Advisory Services Leader, explains.

Aren’t companies already doing a good job cutting costs?

Many are clearly targeting the traditional places to reduce costs: staffing, production efficiency and material costs. But there are typically several areas that offer savings that are completely ignored due to lack of understanding or the necessary skills to achieve the savings. In addition, there are sometimes unintended consequences of lowering costs in one area that may actually raise costs elsewhere. And many times multiple efforts are attacking the same cost base, and ‘double-counting’ of the cost impact can dilute the financial impact of the efforts. Without a common command and control structure, it’s virtually impossible to get a true picture of the cost-saving potential and the results achieved.

We have always helped clients with performance improvement and cost reduction across various aspects of their business. What we are doing with Enterprise Cost Reduction is applying all of our capabilities into a holistic view that considers the possibilities and interactions, and then helps our clients orchestrate and sequence it in the most effective way.

What factors should guide the cost reduction effort?

The need to cut costs is sometimes apparent in a company’s financial statements. But how one goes about targeting an excessive cost structure may not always be clear. Typical areas of focus include functional costs (those that are typically applied as overhead), product costs (those that are directly attributable to a specific product or service) and working capital efficiency. It’s not just about reducing the head count, but rather to look at all the processes and effort that goes into an operation, and focusing the attention on the areas that do not directly translate into customer value. Our approach is to minimize the impact on our clients’ customers by determining what provides value and helping companies focus their resources in those areas.

How should a company get started?

Formulating an attainable objective for the cost reduction program is the best place to begin. This can be measured in various ways, but it should be the specific target of what is trying to be accomplished. This will guide the effort regarding how broad, how deep and how soon. It is also very important to define the scope based on the reduction target, something we call ‘addressable spend.’ If the objective is extremely large, then the scope will necessarily have to be similarly large in order to achieve the target. If the need for cost reduction is smaller, it will allow the company to selectively target areas to achieve the savings and minimize any impact to other areas. Scope can be defined in several ways, but typically involves elements of functions, geography, business units or products/services.

What results can a company expect?

It is very difficult to put a generic savings potential target out there and think it is applicable to any organization. Depending on the current efficiency of operations and previous efforts to address costs, the results can vary widely. In over 20 years of helping companies improve performance, I have rarely seen a situation where savings potential does not exist. Companies are currently too resource constrained to dedicate the people and time to achieve the goal.

How quickly could they see results?

We have set up programs that start generating result in as little as 60 days. If the issue is over spending, results can be achieved in a very short duration. When the benefit will require changing a process, it will usually take longer. Our objective is to get near-term benefits that then enable the pursuit of longer-term reductions.

But speed to benefit is not the only consideration. We look to help our clients create a sustainable cost structure as well, and while initial benefits may sometimes be achieved in relative short order, it may take long-term actions to implement processes to sustain the lower cost structure.

What is your advice?

Think big and start now. Tough times call for tough action. What worked in the past to cut costs incrementally may not be enough. Maybe it’s time to look at things you haven’t considered before. The sooner you get started on a holistic view of costs, the sooner you’ll see sustainable benefits.

To learn more about Ernst & Young’s Enterprise Cost Reduction capabilities, please contact Steve Patton at +1 312 879 4119 or Kristen Michalik at +1 313 628 8326.

To learn more about the services we provide, please visit our website.

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