Thursday 8 January 2015

4 Critical Areas for Business Cost Effectiveness Analysis

Authored by Usama Shahid

Cost effectiveness analysis starts by accepting that there may be room to improve your current practices. Enterprises have four core areas where a review of processes can yield substantial changes to the organizations overall cost effectiveness strategies;

1.    Strategic Cost Management
2.    Materials Management Techniques
3.    Labor Infrastructure
4.    Process Automation

Whether it is implementation of strategic cost management in the supply chain, a change in materials management techniques, restructuring of the labor force, or an investment in automation that yields downstream savings, periodic review is the key to leveraging the most bountiful cost effectiveness strategies.

   1. Strategic Cost Management Methods

One of the keys to being able to judge the success of your cost effectiveness analysis is to first have an overall strategic cost management program. Without an enterprise-wide vision for cost controls, implementing the best strategies is virtually impossible.

Whether it is the implementation of low-cost country sourcing, or a reduction of lead times by leveraging domestic sourcing options, supply chain methodology plays a key role in overall cost effectiveness analysis.

    2. Materials Management Savings

Inventory is one of the top three costs in business. Proper analysis and review of inventory practices is one of the easiest places to reduce cost. From improvement of inventory control practices, reducing loss of inventory and needless purchasing, to carrying correct inventory levels and using Economic Order Quantities, materials management offers enterprise savings.

Some of the tools available to implement cost effectiveness analysis include: leveraging vendor relationships, application of lean manufacturing theory to inventory processes, subscription to consignment-style inventory, using vendor finance solutions for inventory, and implementation of ERP software.

    3. Labor Infrastructure

While having more than one person capable of fulfilling a role through cross training can be one of your cost effectiveness strategies, true redundancy in positions is counter effective to true cost management.

A periodic review of positions across different business units is critical to ensuring that there are fewer areas of redundancy and that as many functions are effectively centralized or automated.

    4. Process Automation

Whether it is by investment in production machinery, ERP software, full-enterprise e-procurement, a warehouse management system, or improved labor tracking software, IT infrastructure in both the hardware and software arenas are critical to cost effectiveness strategies.

Process automation can be a labor-multiplier. While it requires training and capital investments up front, over time process automation generally provides relatively quick ROI.

Putting It All Together

First create the vision. Then start measuring the processes. Finally, identify areas of opportunity. Once those areas are identified, use some of the reliable and proven decision making tools like cost benefit analysis to ensure you choose the right areas to address first.

In a world of limited business resources, addressing the areas with the most potential return over the shortest time defines cost effectiveness analysis.