The automotive sector ranks highest for its cost optimisation performance © Getty Images
The automotive sector ranks highest for its cost optimisation performance © Getty Images

Cost optimisation can ‘unleash innovation’

29 June 2020

Firms across all sectors have opportunities to significantly reduce costs and secure their futures post-Covid 19, according to research. 

The report, by PA Consulting, found cost optimisation is often viewed as a short-term reaction to a threat, but if done well, it can help firms “increase margins, gain new product insight and unleash innovation”.

PA Consulting surveyed 180 global senior leaders across 10 sectors to analyse attitudes towards cost optimisation. 

The report found the automotive sector ranked highest in terms of its overall cost optimisation performance. Life sciences, industrial engineering, energy and utilities, and consumer products were also identified as leaders. 

Among the lowest-performing sectors were IT and telecommunications, defence and aerospace, financial services, transport, and government and public sector.

PA Consulting identified six dimensions to optimising costs: strategy, organisation and governance, processes, tools, competencies and skills, and methodologies. 

It found the weakest areas across the sectors were strategy – a comprehensive vision for managing costs sustainably –  and methodologies for benchmarking cost reduction. 

“This is concerning because both areas were also deemed to be among the most relevant to success. Their relevance and current weakness lead to cost-out efforts underperforming,” the report said. 

In order to improve cost-out results, PA Consulting said firms must look beyond single cost-out levers and focus on all six dimensions, design their organisation for simplicity and embrace emerging technologies and ways of working. 

Shanton Wilcox, partner, manufacturing at PA Consulting, said: “A new ‘always-on’ attitude to cost optimisation will help organisations emerge stronger and ready for the challenges ahead. Done well, cost optimisation doesn’t just protect organisations during uncertain times. 

“It identifies ways to increase margins, gain new product insight and unleash innovation. It presents an opportunity to rejuvenate an organisation – increasing collaboration and empowering people to cut costs in creative ways. It changes the way organisations think about costs.”

Mark Ellis, managing partner at 4C Associates, told SM as the world starts to unfreeze from the global lockdown, CEOs and CFOs are reaching out to their procurement functions for high-calibre support. 

“They are asking procurement to step up and drive cost savings whether that is because banks have cash flow issues due to the mortgage payment breaks or insurers are seeing more claims, as people are at home more. Other organisations are asking procurement to support their suppliers to ensure they can provide services during these troubled times,” he said. 

Nic Walden, senior advisor in The Hackett Group's Procurement Advisory, told SM procurement needed to become a consultant and change agent for its customers in the finance organisation, supply chain and business overall, and price reductions were just the starting point.

“Procurement must be guided by business priorities whether speed, quality, risk, innovation. Leading teams utilise techniques including TCO [total cost of ownership] cost analysis, cost teardowns, clean sheeting, and benchmarking; managing demand, consumption and specifications; ensuring supply continuity and mitigating risk, accessing new developments and innovations,” he said.

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