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Cost reduction

Mark Raddan, Senior Manager, Restructuring


29 June 2006
RESTRUCTURING
ADVISORY
1
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Overview
Introduction
What links cost reduction & cash management?
Cost drivers & opportunities
Our philosophy on cost reduction
How we drive cost reduction
Case study: Project Thunderbird
Critical success factors
Financial case for KPMG involvement
Q&A
2
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Introduction
Senior Manager, KPMG Restructuring
A founding member of Operational Restructuring team
Sector experience:
Automotive
Telecoms
Aerospace
Retail
Service sector
Healthcare
Energy
Region experience: Europe, North America, Asia
3
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Value
drivers
High free cash flow
High profit growth in
relation to capital
invested
Sales
growth
Profit margin
Working
capital
intensity
Fixed capital
intensity
Value
growth
duration
High valuation
Objective
What links cost reduction and cash
management?
4
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Cost drivers & opportunities: People costs
People
Capacity
Availability
Efficiency
Culture
Right amount of people as
output requirements shift
Maximise the amount of time
people spend directly
delivering the output
Make delivering the output
as simple as possible
Make people treat this as
their own business
Invest in a resource
management system
Simplify support
activities
Change a core process
Introduce cost and
output targets
Example
5
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Cost drivers & opportunities: Non-pay
Stuff
Price
Compliance
Consumptio
n
Reduce the cost of a single
unit
Ensure people buy units
within your framework
Reduce the amount of units
bought
E-auctions
Improve purchase order
process
Consumption drive
Example
Specification
Select the appropriate
specification to match the
requirement
Establish catalogue
6
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Our philosophy on cost reduction
Senior management and indirect functions [10%]
Supporting output [30%]
Directly related to
output [60%]
These can usually be
benchmarked internally
and externally against
industry practice
These functions and activities offer
much opportunity and often mount a
robust defence of their contribution
The output is what customers
and stakeholders measure
S
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tio
n
7
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
How we drive cost reduction
High
Generation of new ideas
Pace and robust challenge
Medium
Business cases
Project launch process
Low
Project management
Monitoring
External help required
Ideas Planning Execution
Top line ideas
Bottom line ideas
Top line plans
Bottom line plans
Top line projects
Bottom line projects
Approved scenarios
Implementation approvals
P&L impact
3
2
1
8
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Cost reduction: Ideas generation
What do we propose What can go wrong Backdrop
Kick off and ideas generation
is the primary opportunity to
tackle resistance to any
change
Cynicism can often only be
answered by delivery of an
initial action/success
The full potential of a change
programme is hard to see
without the input of objective
independentsand
specialists with up to date
knowledge of industry best
practice
Projects kept low profile
early on, creating suspicion
and not encompassing a
broad enough view of full
potential.
The process gets mired in
set up, validation and
further analysis
Executives driving new
plans lack credibility of full
potential financial case for
change non-stretch
targets are set
Management feel they have
not been listened to -
disengage
Kick off with co-operative,
bottom-up Size of the
prizeexercise, require full
understanding why change
is required. Advantages
include:
Objective view of full
potential
Industry best practice
Bottom up so it buys
people inas it goes
Scenario based and
selective so sacred
cows can be excluded
Launch a couple of quick
wins
Patiently build larger teams
9
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Cost reduction: Planning & action
What do we propose What can go wrong Backdrop
Plans must be robust,
comprehensive and
financially tested
Ideas must be measured
against a consistent set of
criteria and challenges to
promote objectivity and
minimise error
High level, strategic ideas
make it into implementation
with insufficient scrutiny and
planning 'NO CONTROL
OF THE GATES'
Hard implementation, re-
deployment and investment
decisions are put off and
initiatives holed before they
start
Individuals work to different
criteria and processes,
making review impossible
Providing clear sign-off
and launch criteria for all
top and bottom line
projects
Robust planning process
that links action planning
and cost/benefit cases
Clear accountability for
execution of actions and
meeting financial
challenge
In-flightreviews to reset
projects that are off track
10
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Cost reduction: Implementation
What do we propose What can go wrong Backdrop
Success and what you
measure must look like what
you initially promised,
internally and externally
The devil is in the detail so
know the devil
Ensure all know how to drive
an idea through to a financial
impact
Every objective must have a
financial target, a timeframe
and an owner
Track top line actions as hard
as bottom line
Savings disappear between
completion of action and
the P&L/cash flow
No party given
responsibility for tracking
Words not numbers goals
set as share price, margin
or cash flow
Tracking and financial
systems sit side-by-side
Top line projects not
tracked - 'too qualitative'
Benefit tracking is easily
ignored, hard to retro-fit
Track two areas: process
and financial
Objectives have financial
target and timeframe
Tracking:
Owned by senior
execs who drive initial
quantification
Embed into standard
cycle - use existing
system - finance verify
Link to staff incentives
Top and bottom lines
managed and tracked in
same framework
11
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Project Kestrel: Overview
Aerospace and engineering business with
a turnover of 1 billion
21 sites across UK and US
Impact of inflation and customer price
downs was $65 million per annum
Aerospace restructuring planned to deliver
sustainable savings of 90 million over two
years some 15% of the cost base
Initiatives across four categories:
Procurement
Sourcing
Site consolidation
Process improvements
12
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Project Kestrel: Setting the scene
m
Time
Revenue
Costs
Employment costs
Commodity price
Investment in new programmes
13
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Project Kestrel: Overview of initiatives
Procurement
Direct
Indirect
Value Engineering
Sourcing
Outsourcing manufacturing to:
Domestic suppliers
Low cost suppliers in China, Mexico, Costa
Rica
Outsourcing engineering to:
India, Russia and domestic suppliers
Test equipment outsourcing
China Manufacturing facility established
Consolidation/re-organisation of manufacturing
processes
Consolidation
Consolidation of three sites into one
Closure of two regional offices
California consolidation of four/five sites into two
Process improvements
Shared services
IT
Finance
HR
Headcount and material savings from LEAN
process improvement actions
14
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
7
21
52
14
24
53
20
21
45
125
0
50
100
150
FY04 FY05 FY06

m
Heads Materials Revenue
What was achieved?
Source: Project Kestrel analysis
P&L impact from initiatives
15
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
(0.3)
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m
e
n
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Kestrel FTSE 100
What was achieved
Source: Yahoo finance
Share price movement
Board
approval
Planning Execution
Process
embedding
16
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Critical success factors
The role and extent of the authority of those involved in running the
cost reduction effort should be clarified and agreed with business
and functional heads
Strategic intent must be translated into clear financial targets in
defined timescales:
Cash
Profit
Any significant cost reduction project will require:
Energy & leadership
Prioritisation
Dedicated resources
Executive
commitment
A clear financial
objective
Authority
17
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Critical success factors
The launch can be structured to use meetings, communications,
board briefings and small pilot projects to build momentum and
engagement.
Coming up with scale changing cost reduction ideas will require you
to challenge the norms and look at the cost base from different
perspectives.
The best cost reduction ideas emerge when people work together
to generate ideas:
Cross-function, seniority levels and geographies
Involvement
Challenge
Momentum
18
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
The financial case for KPMG involvement
Quicker
do this day in, day out
have techniques that surface the issues
track progress religiously
Better
conversion
know the devil is in the detail
base our approach on understanding numbers
track savings actions right through to the bottom line
Broader
access to niche professionals
an objective view
experience of a large range of projects
As a matter of course, we will write the business case for you as part of the proposal process
Because we have
Because we
Because we
If you have got
50m of
savings, well
get 75m
8 months
instead of 12
months
Better
conversion of
savings to profit
19
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Q&A
Cash flow forecasting
Eoin Connaughton, Director, KPMG
29 June 2006
ADVISORY
1
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Introduction
National Director KPMG Cash Management, UK
Over 50 cash assignments in last five years
Large and small companies variety of industries
Distressed and non-distressed
2
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Defining cash management
What it is not:
Treasury management
What it is:
Understanding how cash flows around a business
Forecasting cash requirements
Improving cash controls
Generating cash
Preserving cash
Applies equally in distressed and non-distressed
situations
3
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring
Implementing
Forecasting
Credit
Control
Accounts
payable
Inventory Tax
Capex
Purchasing
Sales
Finance
Prioritise cash improvement initiatives
Prepare action plans
Set key milestones and accountability
Implementation
Covenant compliance
Monitoring of cash balances
Variance analysis
Prepare cash flow forecasts
Determine available headroom
Implement/strengthen cash controls
Our cash management programme
Embed initiatives in reforecast
Communicate progress to
Board/stakeholders
4
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Why forecast?
Preparation will focus management on:
Key cash drivers
Cash improvements
Risks/sensitivities
Opportunities
A management tool to proactively manage cash
Provides visibility of funding requirements
Near-term
Short-term
Long-term
5
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Benefits of cash forecasting
Short term
Control cash in the
business
Drive improvements
Identify any immediate
issues
A tool to drive cash
generation initiatives
Highlight funding
requirements
Medium term
Measures impact of
strategy
Identifies any
problems
Used for stakeholder
communication
Suitable plan for
determining medium
term financing
structure
Long term
Measures impact of
strategy
Used for stakeholder
communication
Assists in determining
long term funding
requirement
Operational Planning Strategic
Putting finance at heart of business, benefits are:
6
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Commonly encountered short-term forecasts:
Closing balance forecast
EBITDA forecast
Funds flow
Run rate forecast
None provide sufficient detail of key inflows in near-term and short-term
Types of cash flow forecast
Therefore we use a rolling 13 week receipts and payments forecast for the
short-term
For the medium/longer term we use funds flow given the need for an integrated
P&L, balance sheet and cash flow.
7
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
The cash flow forecasting process
Determine inputs
and pro-forma
Accountability/
responsibility
Timetable
Opening
balance sheet
Obtain inputs
Document
assumptions
Populate
forecast
Management
review and
challenge
Identify risks and
sensitivities
Management
sign-off
Forecast and
commentary
Variance analysis
Risks and
mitigating actions
Set up
Forecast
preparation
Challenge
& review
Reporting
8
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Receipts and payments forecast
It captures all flows with a clear anchor point:
Rent, rates,leases,
wages etc
New capital
expenditure
Accruals
New purchases Trade creditors Outflows
Rental income, etc. Disposals/
VAT etc
Other assets
New sales Trade debtors Inflows
Bank/net debt
position
Balance sheet
accounts
Opening cash -
Forecast activity
-
Regular receipts/
payments
9
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Forecasting by line item
Opening cash position
Debtor and new sale receipts
Other receipts
Supplier and new purchase payments
Accruals unwind (plus VAT)
Direct debits and standing orders
Payroll and pension
PAYE/VAT
New capital expenditure
Bank interest and fees
Other payments
10
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Who should be responsible?
Finance
Inventory manager
Tax manager
Payroll manager
Accounts payables manager
Purchasing manager
Treasury manager
Sales manager
Depending on the size of and level of resource within a
business:
Property manager
Credit controller
CAPEX manager
11
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring
Implementing
Forecasting
Credit
Control
Accounts
payable
Inventory Tax
Capex
Purchasing
Sales
Finance
Prioritise cash improvement initiatives
Prepare action plans
Set key milestones and accountability
Implementation
Covenant compliance
Monitoring of cash balances
Variance analysis
Prepare cash flow forecasts
Determine available headroom
Implement/strengthen cash controls
Monitoring improves accuracy
Embed initiatives in reforecast
Communicate progress to
Board/stakeholders
12
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring
Monitoring comprises:
Actual vs. forecast
Forecast vs. re-forecast
Cash KPIs
Benefits
Identifies errors in cash forecasting methodology/completeness of flows,
if applicable
Identifies any major changes in assumptions
Impact of variances reflected in preparation of new cash forecast
Changes to cash forecasts can be explained to board/stakeholders in
advance of their questions demonstrating finance management control
13
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring: actual vs. forecast
Purpose:
To compare actual result to forecast result
Basis of preparation
Prepared daily/weekly
Actual vs. forecast for each line item
Proper explanation of variances:
Timing
Permanent
Benefits
Identifies errors in forecasting methodology/completeness of flows, if applicable;
and
Impact of variances reflected in preparation of new forecast
14
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring: forecast vs. reforecast
Purpose:
To compare current forecast to previous forecast which is understood by all
parties
Basis of preparation
Initially compare weekly flows between the two forecasts and identify reasons
for variances
Benefits
Identifies any major changes in assumptions
Determines whether any corrective action is required in advance of finalising
forecast
Major changes to forecasts can be explained to stakeholders in advance of their
questions demonstrating management control over forecasts
15
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Monitoring
Implementing
Forecasting
Credit
Control
Accounts
payable
Inventory Tax
Capex
Purchasing
Sales
Finance
Prioritise cash improvement initiatives
Prepare action plans
Set key milestones and accountability
Implementation
Covenant compliance
Monitoring of cash balances
Variance analysis
Prepare cash flow forecasts
Determine available headroom
Implement/strengthen cash controls
Cross-functional involvement enhances
control and improvements
Embed initiatives in reforecast
Communicate progress to
Board/stakeholders
16
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Short-term receipts and payments forecast
It captures all flows with a clear anchor point:
New capital
expenditure
Rent/rates/leases
Wages
Accruals
New purchases Trade creditors Outflows
Disposals/
VAT
Rental income
Other assets
New sales Trade debtors Inflows
Bank/net debt position
Balance sheet
accounts
Opening cash -
Forecast activity
Understanding cash flows enables improvements to be driven
throughout the business
Better matching of
flows
Improved and
accelerated inflows
Reduced
spend/purchasing and
outflows
Improvements
17
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
There are numerous opportunities that we
look for
Shorter term
Timescale
Longer term
Revise terms of trade
Quick
wins
Best
practice
Stakeholder
management and
communication
including cash
performance
Staff incenti ves
aligned with cash
KPIs
Cash
forecasting
Control
purchases
Introduce cash
KPIs to monitor
inventory cycles
Structural
Higher
commercial
risk
Lower
commercial
risk
Redesign supply chain
Revise
customer terms
Negotiate
creditor
terms
Demand planning
Business model
transformation
Outsourcing and
shared services
Margins
improvement
Revise credit
controls
Payment
controls
Overdue
debtors
collection
Direct and
Indirect Tax
Property
portfolio and
redundant
assets
Identify non-core
assets for sale
Invoicing
Strategic
Treasury
Capital
expenditure
18
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Helping embed a cash culture
Internal
expertise
Incentive
structures
Management
sponsorship
Reflects
priorities
Reason for the
change
Leadership by
example
The skills to
make the change
The appropriate
structures
19
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Wrap-up
Monitoring
Actual vs forecast
Forecast vs forecast
Cash flow
improvement
Match/improve flows
Working capital
Other assets and liabilities
Forecasting
Short-term: receipts and payments
Longer-term: integrated P&L, B/S and CF
20
2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Questions