Strategic Cost Management (SCM)

Case Examples

Vance Chan Associates

www.vancechan.com

SCM case examples 1

©1998 Vance Chan Associates. Not to be reproduced without permission.
Introduction

There are 3 basic business areas where strategic cost management

(SCM) can be applied
• Is the basic business model still relevant?
Strategy
Strategy • Are parts of the business not meeting
expectations?

SCM focus

Operations
Operations Organization
Organization

• How can we operate more • Is our business structure still

efficiently? relevant?
• What are the highest • Must we own all of the resources?
priorities, and why?

Let’s
Let’slook
lookatatone
onecase
caseinineach
eacharea….
area…. SCM case examples 2
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy
Strategy

SCM focus
Case history: A major steel mill Operations Organization

An effort to “stop the bleeding” must identify basic causes to be

successful
Situation:

n Largest steel producer in its country (not the US)

n Losing share in all segments to Japanese and Korean

producers

n Economic recession

n After 3 straight losing quarters, another projected

quarterly loss of US$150M on sales of $600M

n CEO was sacked; COO became acting CEO

n Board of Directors demanded a 40% reduction of

overhead over next 14 weeks

n Non-unionized; 5000+ employees in main plants; very

people-oriented corporate culture

n “Company town”
SCM case examples 3
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy
Strategy

SCM focus
Case history: A major steel mill Operations Organization

The Board wanted an internal solution developed and implemented by

the employees

Approach:

n Selected 70 people (“our best and our brightest”) from all levels to lead the SCM
effort

n Cross-functional teams reporting directly to the Board, examining 10 areas:

• R&D
• Sales and support
• Procurement
• Production
• Quality
• Engineering and maintenance
• Logistics
• Finance and accounting
• Systems
• HR and admin
n A “super-team” (1 rep from each team) to address high-level issues

n Urgency: Teams were 100% dedicated to the project (all leaves were cancelled)
SCM case examples 4
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy
Strategy

SCM focus
Case history: A major steel mill Operations Organization

Looking at the major symptoms, it was difficult to see where and how to
start making changes

Sales
Salesand
and
R&D
R&D Procurement
Procurement Production
Production Quality
Quality
support
support
• Projects were • Customers • Sourcing • #1 line outdated • Quality was
not progressing were unhappy costs were and unreliable perceived to be
to completion with order rising • Throughput was inferior to Japanese
turnaround sub-optimal and Koreans

Engineering
Engineering&& Finance
Finance&& HR
HRand
and
Logistics
Logistics Systems
Systems
maintenance
maintenance accounting
accounting admin
admin
• Unscheduled • Freight costs • Asset • Outdated and • Headcount was
maintenance were rising utilization was inaccurate for high in every
was high low nearly every dept
• Cost management • Very costly
accounting information benefits program
was not requirement
• Lots of corporate
accurate overhead

SCM case examples 5

©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy
Strategy

SCM focus
Case history: A major steel mill Operations Organization

The teams discovered that the company’s basic strategic vision was
flawed and created too much low-value work throughout the
organization
R&D (too many projects, overlap and duplication of efforts)

Sales and support (more complex order processing and fulfillment cycle)

Procurement (fewer economies of scale)

“All Production (smaller customized batches ==> higher downtime)

“Allthings
things
totoall
all
customers” Quality (skills spread too thin --- inadequate training)
customers”
Engineering and maintenance (more complex)

Logistics (fewer economies of scale)

• Commodity
and Finance and accounting (lower asset utilization, more complex cost accounting)
specialty
steels Systems (more complex tracking systems)
• Custom
steels HR and admin (higher workload ==> higher headcount in every function)

SCM case examples 6

©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy
Strategy

SCM focus
Case history: A major steel mill Operations Organization

After narrowing the strategic focus, the workload shifted and the
organization and operating cost improvements were relatively easy to
see and make
nn R&D
R&Dfocused
focusedon
onfewer,
fewer,but
buthigher-impact
higher-impact
projects (45% savings)
projects (45% savings)
nn Sales
Salesforce
forcereduced
reducedby
by30%,
30%,order
orderprocessing
processing
Shut down #1 line cycle cut by 35%
cycle cut by 35%
Specialty steels nn Procurement
Proceed with mini- Procurementcosts
costscut
cutby
by30%
30%
only
mill and other joint
nn Production
Productiondowntime
downtimecut
cutby
by50%
50%
ventures
Prioritize and nn Quality
Qualitycosts
costsreduced
reducedby
by20%
20%but
butquality
quality
reduce # of acceptance rate improved by 35%
acceptance rate improved by 35%
customizations
“Key market / key nn Pending
PendingITITupgrade
upgradecost
costonly
only$7M
$7Minstead
insteadof
of
account’ strategy $20M
$20M
nn Overall
Overallheadcount
headcountreduction
reductionof
of35%
35%over
over18
18
months (mainly through early retirement plan
months (mainly through early retirement plan
and
andattrition)
attrition)
Keys to shifting
New focus nn Still
workload and cost Stillnon-union
non-union
structure
SCM case examples 7
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case history: Consumer Electronics Operations

Operations Organization

When looking for operational gains, the key is prioritizing the efforts and
identifying where to start

Situation:
n International manufacturer of branded
consumer electronics

n Losing share in Asia to Japanese

competitors -- can’t compete on price

n Huge matrixed organization in Asia

• Product divisions (head office)

• Country sales and distribution

• Regional management

n Management suspected the cost

structure (“selling cost”) was too high
but didn’t know where to start

SCM case examples 8

©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case history: Consumer Electronics Operations

Operations Organization

The company decided to do some field benchmarking to understand

exactly where the key cost gaps were

Approach:
n “Field intelligence” to
benchmark competitors
in key country markets Suppliers

• 3 key product lines -- Industry

sample of 3 markets Your Other Sources
company
Competitor Competitors (Trade press,
• Interviews with trade
suppliers, distributors, Distributors associations,
customers, trade press, etc)
competitors
Customers
• “Encircle” the
competition to
understand their cost
structure Using external information to benchmark competitors

n Next step: detailed

analysis of trouble spots
SCM case examples 9
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case history: Consumer Electronics Operations

Operations Organization

The initial benchmark results were eye-opening --- the company was
competitive in only two segments of two markets

Selling Expense as a Percentage of Sales

Thailand India Australia

Company Best in Class Company Best in Class Company Best in Class

Product Line 18% 13% 12% 9% 21% 12%

#1 (Sony) (BPL) (Sony)

Product Line 23% 13% 24% 16% 33% 13%

#2 (Sharp) (Bajaj) (Sunbeam)

Product Line 12% 14% 12% 11% 29% 12%

#3 (GE) (Surya) (GE)

This
Thismatrix
matrixbecame
becamethe
theroadmap
roadmapfor
forthe
the
more detailed SCM effort
more detailed SCM effort
SCM case examples 10
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case history: Consumer Electronics Operations

Operations Organization

By “drilling down” into the cost structure, the teams then discovered
specific opportunities for improvement

Selling expense Results:

Results:
nn Over
Over$34M
$34Min in
potential
potentialcost
cost
Sales, marketing and Logistics and Finance, HR, IT savings
savings
customer support distribution and admin identified
identifiedin
inthree
three
countries
countriesfor
for
Thailand: India: Australia:
detailed
detailed
• Return on adspend • Extra layer of logistics • Average F&A
was inadequate. (staging warehouse cost per head implementation
implementation
New media plan with 282 people) added was 250%
was needed 2-3 days to order greater than for nn Estimated
Estimated
fulfillment competitors
• Sales force potential
potentialsavings
savings
productivity (I.e. • F&A staff was too for all of Asia:
sales / employee) senior for the for all of Asia:
in Bangkok was work involved $110M
$110M
low, probably due
to logistical
difficulties
SCM case examples 11
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case History: Computer Peripherals Operations

Operations Organization
Organization

Organization structure could be the issue: Smaller companies who

struggle to maintain critical mass must find creative ways to reduce cost

Situation:

n R&D and Manufacturing done at head office

n Fighting for survival in Asia. Projected sales

in Asia were down 25% from previous year

n Technically superior product but competing

for share with the US and Japanese “big
boys” ==> not enough sales and marketing
muscle

n Only 20 people in the entire Asia-Pacific

organization (offices in Singapore, Australia,
China) ==> no apparent way to reduce
headcount or facilities cost

n Can’t increase marketing spend, can’t reduce

headcount ==> what to do????
SCM case examples 12
©1998 Vance Chan Associates. Not to be reproduced without permission.
 Strategy

SCM focus

Case History: Computer Peripherals Operations

Operations Organization
Organization

This company changed its cost structure and created a “virtual” sales
and marketing model by shifting most sales and marketing
responsibilities to its key distributors

Asia organization Distributors

Results
Results
Before • Sales planning and management • Sales to channels
• Marketing (advertising, nn Fixed
Fixedsales
salesand
and
merchandising, product promotion) marketing
marketing costwas
cost was
• Customer applications training reduced
reduced by 60%----
by 60%
• Technical support
mostly
mostlyabsorbed
absorbedby by
distributors
distributors
• Order processing, inventory and
logistics nn The
Thebest
bestdistributors
distributors
received increased
received increased
• Sales and marketing • Sales to channels margins
marginsandand
After
strategy exclusivity,
exclusivity,asaswell
wellas
as
• Local marketing intensive product
• Technical support intensive product
• Order processing, training
• New function: Customer inventory and logistics training
Management nn Sales
Salesheld
heldsteady
steadyand
and
• Customer applications
training
increased the
increased the
following
followingyear
year
SCM case examples 13
©1998 Vance Chan Associates. Not to be reproduced without permission.
About the author

VANCE
VANCECHAN CHANworksworkswith
withmultinational,
multinational,regional
regional AApartial
partiallist
listofofthe
theclients
clientsVance
Vancehas
hasserved
servedinin
and local companies to develop and implement
and local companies to develop and implement Asia
Asiaincludes:
includes:
change
changetotobusiness,
business,product
productand
andtechnology
technology • •Philips • Texas Instruments
Philips
strategies.
strategies. He has more than twentyyears
He has more than twenty yearsofof • •Nokia • TetraPak
Nokia
executive-level
executive-levelconsulting
consultingexperience
experienceandandhas
hasaa • •General
broad GeneralMotors
Motors • Dun and Bradstreet
broad base
baseofofexperience
experienceininAsia
Asiathat
thatincludes
includes • •Ford
Ford • Seagram’s
industries as diverse as telecommunications,
industries as diverse as telecommunications, • •Cathay
CathayPacific
Pacific • Qantas
electronics,
electronics,consumer
consumergoods,
goods,computer
computerproducts,
products, • •Bristol
BristolMyers-Squibb
Myers-Squibb • Pharmacia & Upjohn
airlines
airlines and transportation, energy, healthcare
and transportation, energy, health careand
and
pharmaceuticals, food and beverage, automotive, • •Clorox
Clorox • Tandberg Data
pharmaceuticals, food and beverage, automotive,
and • •Ericsson • National University of
andchemicals.
chemicals. Ericsson
Singapore
Vance
Vanceholds
holdsMBAMBAand
andundergraduate
undergraduatedegrees
degreesfrom
from
Stanford University. He was formerly Director
Stanford University. He was formerly Director of of
Arthur
ArthurD.
D.Little’s
Little’sTechnology
TechnologyandandInnovation
InnovationCentre
Centre
ininSingapore, and a Director of the Pacific Rim
Singapore, and a Director of the Pacific Rim
Consulting
ConsultingGroup
GroupininHong
HongKong
Kongand
andSingapore.
Singapore.
HeHe began his career as a program manageron
began his career as a program manager onthe
the
corporate marketing communications staff
corporate marketing communications staff of of
Hewlett-Packard vance@vancechan.com
Hewlett-PackardininthetheUS.
US. vance@vancechan.com
Tel:
Tel:+65-9816-9325
+65-9816-9325
Vance
Vanceand
andhis
hisfamily
familyhave
havelived
livedininAsia
Asiasince
since1992
1992
and are currently based in Singapore. Fax:
Fax:+65-251-8076
+65-251-8076
and are currently based in Singapore.
SCM case examples 14
©1998 Vance Chan Associates. Not to be reproduced without permission.