How Leading Companies are Dealing with the Need for Cost Management and Value Enhancement

In light of the worldwide economic downturn companies are faced with the challenge to improve or maintain their bottomline margins. Topline growth today is difficult, so the focus is on operational cost management and cost efficiency. At last week's CFO Conference, several CFO's from leading companies presented their approach to cost management, cost efficiency and value enhancement.

This blog post features a quick overview of three very different approaches to cost efficiency and value enhancement. The first is Akzo Nobel, a company that is well managed and well prepared and has adjusted their approach at a tactical level, focusing on innovation and emerging markets. The second is Refresco, a company that has cost efficiency embedded in it's DNA, but still sees opportunities for further cost reduction by actively engaging middle management and shop floor employees. The third is Oskomera, a company that adopted lean manufacturing principles to achieve impressive improvements in their business processes.

Innovation at Akzo Nobel

Akzo Nobel is a good example of a company that made detailed preparations for the economic recession. Early in 2008 the Board of Directors developed detailed scenarios and roadmaps for each scenario. Rigourous margin management programs were implemented throughout the company with a strong focus on cost management. A tactical change was made from investment and growth to cost management and cash management. The main risks were perceived to be in the top line (volume). Since the company's balance sheet is strong, the decision was made to contain or if possible reduce operating cost, make critical assessments of underperforming businesses, monitor the quality and level of working capital and be prudent in capital deployment.

Besides managing costs and working capital, the company also wants to come out of the recession stronger and serve their customers better. Therefore the company focuses on continuous innovation and development of emerging markets. Akzo Nobel benefits from the ever increasing interest in durability and greener products. The emerging markets are skipping generations of products to adopt the latest. The company is developing a range of products that suit the needs of business and consumers in emerging markets. Technology and innovation are key differentiators. The crisis forces Akzo to adjust, but not to fundamentally change.

Cost Efficiency and Value Enhancement at Refresco

Refresco is in the business of private label soft drinks and faces continuous pressure from the major food retailers. Although the company is already operating at very cost-efficient levels, it launched a program to maintain its cost leadership and further reduce costs. The goal was to achieve a sustainable cost reduction of 1% of the company's revenue in six months. The objectives of the cost reduction program were set by the board of Refresco and communicated to the business units. Communication was very close and intensive, to make sure managers understood the importance and background of the program and bought in to it.

Specific ideas for cost reduction were proposed by the business units and presented to their peers. Communication remained intensive to facilitate learning and an open and constructive atmosphere. All ideas were prioritized rigorously by applying a pre-defined set of criteria (impact vs. effect matrix). The best ideas were being rewarded with immediate implementation, thereby allowing the people involved to reap the benefits of their proposal. The results of the cost management program were being monitored closely, to ensure actual implementation and benefit realization.

Lean Business Processes at Oskomera

Oskomera is specialized in facade technology and steel structures. By applying lean principles the company succeeded in a reduction of work in progress of 85%, a reduction in cycle time of 65%, an improvement of quality levels by 41% and an increase of productivity by 67%.

The lean principles that Oskomera applied are:

• No product or service is delivered until a client downstream needs it
• Quality is integrated in the business process - no inspection or checks
• People are an integral part of the business, not just an extension of the machinery
• Stocks and buffers must be eliminated
• Customer value must be added in business flows
• Everybody needs to be committed in eliminating waste and striving for perfection

By describing and auditing every single business process, adn making detailed analyses, the company succeeded in a dramatic improvement and runs at a very cost efficient level.

Summing Things Up

Companies today are using very different approaches to survive the economic downturn and come out even better. The general focus is on more cost efficient operations and enhancing customer value. At a strategic level, a well-managed company like Akzo Nobel applies tactical shifts and focuses even more on innovation and emerging markets. Cost-driven companies like Refresco employ a company-wide cost management program, involving close communication and co-operation with business unit managers. Companies like Oskomera that in the past few years did not feel the need for a strong focus on cost, are redesigning their business processes using lean production principles.

Written by :

Rutger van den Berg