by Matt Haddon
Re-examining cost cutting and efficiency assumptions
Many businesses have driven operational improvement programs for years, often using Six Sigma and lean approaches to achieve efficiencies. Yet, substantial savings often remain untapped. As the economic downturn leaves no sector untouched, identifying these savings opportunities has never been more important. Redundancies and multi-million dollar cost-cutting missions are making the headlines on a daily basis.
“Job fears as Vodafone launches £1bn cost-cutting drive” 1
“Qantas to make further cost cuts” 2
“Diageo May Cut Jobs, Hoard Cash to Make Acquisitions” 3
Relying solely on restructuring and redundancies to achieve cost cuts bears its own set of risks; organizations potentially compromise the talent and experience they need for the journey ahead. Rather than focusing on headcount alone, organizations must re-examine their assumptions around cost reductions and efficiencies. Close analysis of a company’s resource consumption usually reveals a number of hidden opportunities. For instance ERM recently helped a brewing company undertake water efficiency assessments and implement processes to reuse 15% of treated wastewater for secondary purposes such as steam production and cooling purposes. Scaled across its global business this would save up to US$50M a year.
Latent opportunities: resource efficiency
Organizations need to scrutinize their core business processes and ancillary services for latent opportunities to improve the management of water, energy, carbon and raw materials. In turn, this will reduce waste, create cost savings, and improve a company’s environmental footprint.
By conducting a comprehensive usage assessment it is easy to identify immediate, mid-term and long-term improvements. For example, reusing outputs for secondary purposes such as wastewater to cool equipment or recycling waste to reduce raw material requirements. But, the most rewarding of these savings opportunities is usually energy efficiency.
The greatest returns: energy efficiency
For some sectors energy costs account for up to 40% of costs. Reducing the amount of energy consumed, and carbon emitted, is one of the fastest and most effective ways to save money.
- Examples of such improvements recently achieved by ERM teams include:
US$33M savings over three years for a major refining group, with performance sustained by enhancing the underlying management system
- US$2M annual savings at an olefins plant through improved heat integration across the facility’s different processes
- US$600k annual savings at a large manufacturing facility by identifying and removing an unnecessary thermal oxidizer
Energy efficiency improvements typically provide far greater returns than the investment costs. However, when cash flows are tight making a business case for any form of capital expenditure can be difficult. In this situation, how can business still achieve resource efficiency improvements?
QUEST – a tailored resource efficiency approach
ERM has responded to this challenge by developing QUEST (Quick Environmental Savings Technique) in order to help clients achieve resource efficiencies with minimal cost and over a short period of time.
The QUEST approach combines leadership engagement, with facility inspection and workshops to identify the cost saving actions which are easily achievable and which do not require investment. Generally, these involve operational adjustments to equipment and behavioral changes in the workforce. In the latter case, senior leadership needs to lead by example and be seen to prioritize resource efficiency in their daily activities. In ERM’s experience, QUEST regularly identifies significant cost savings; in many cases the actions identified have the potential for replication across the company’s network of facilities thus multiplying the savings.
Companies who use the QUEST approach now will improve their resource efficiency, reduce their resource bills and be at a competitive advantage when the economic upturn occurs.
- The Guardian, 11 November 2008, http://www.guardian.co.uk/business/2008/nov/11/vodafone-jobs
- The Financial Times, 23 March 2009, http://www.ft.com/cms/s/831e66ca-174a-11de-9a72-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F831e66ca-174a-11de-9a72-0000779fd2ac.html&_i_referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Dcost%2Bcuts%26aje%3Dtrue%26dse%3D%26dsz%3D%26x%3D16%26y%3D7
- Bloomberg, 12 February 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=axFkh8b70atg&refer=home