Archive for the ‘Cost Management – Productivity’ Category

The economics of oil … continued.

April 1, 2016

A couple of week’s ago, I posted The economics of oil …  suggesting that countries such as Saudi Arabia were operating below breakeven with oil @ $40 per barrel.

 

image

=====

While technically correct, several loyal readers schooled me on the difference between “economic breakeven” and “fiscal breakeven”.

(more…)

The economics of oil …

March 10, 2016

In light of the oil glut, Exxon has announced that it’s moth-balling some rigs and cutting capital expenditures.

That fits a bigger trend … supply high, demand slow, prices down, production down.

 

image

========

From a supply side, the economics of the business raise some interesting questions …

(more…)

Companies cut fat … but, like all of us, the pounds reappear

March 2, 2009

Excerpted from BusinessWeek, “The Secret to Making Cost Savings Stick”, by the staff of the Corporate Executive Board, February 13, 2009

* * * * *

Of the 90% of organizations that are cutting costs this year only a small fraction will likely retain those savings for three years or longer

As a result, getting managers to focus on the right types of cost savings is more critical than ever. Organizations must ensure that they are driving surgical, sustainable cost reductions rather than indiscriminate cuts that will creep back into the organization (or, even worse, cripple future growth). 

Companies under pressure to cut costs tend to focus on the large variable costs that have an immediate, significant impact (e.g., travel and entertainment, administrative staff). Unfortunately, as soon as external pressure dissipates, these costs often creep back into the cost base.

CEB’s Finance Practice examined 230 major corporate cost-cutting initiatives at S&P 500 companies from 1999–2004. In the first year, only 100 companies, or 43%, achieved cost reductions. After three years, that number fell to 24 companies, or just 11%.

Quite simply, these “Elite Cost Cutters” were successful because they were proficient in controlling the cost of goods sold, rather than just quickly (and sometimes indiscriminately) cutting SG&A or ‘overhead’ costs, such as IT spending and travel. In fact, these firms actually spend proportionally more on overhead than their peers as a way to effectively drive long-term operational efficiency across the business.

Edit by DAF

* * * * *

Full article:
http://www.businessweek.com/managing/content/feb2009/ca20090213_224955.htm?chan=top+news_top+news+index+-+temp_managing 

* * * * *

Want more from the Homa Files?
Click link => 
The Homa Files Blog

* * * * *

Retailers Fashion Ways to Cut Costs

March 2, 2009

Excerpted from WSJ “Fashioning Ways to Hold Down Prices,” February 3, 2009, By Nicholas Casey

* * * * *

After steep discounting on its tops, khakis and jeans ate into its margins last year, American Eagle Outfitters  is trying to reengineer the way it produces clothes.

It hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it’s shipped (less use of air freight) to how it looks (no patterned pockets in many jeans).

Many retailers fear they will be forced into still more rounds of price cuts as the economy continues to sputter. “Eighty percent off is the new normal” …

Other teen chain stores are also growing wary of slipping prices. Abercrombie & Fitch which has tried markdowns since the holidays, says its brand would be harmed if it tarnished its high-end image with more price cutting. And Aéropostale says it’s looking to timed promotions to drive traffic rather than lowering price tags for good …

American Eagle hopes to cut its manufacturing costs significantly. Recently, the company began moving some production out of China, where wages are on the rise, and into cheaper labor markets in Cambodia and Vietnam … But shifting to less costly production carries its own risks … China is still tops in manufacturing talent and “there are definitely quality issues that are coming up” in places like Vietnam and Cambodia …

Even the way stores get their merchandise is evolving. In past years, distribution centers replenished each store’s clothes garment by garment. This year, the company is bundling many of its lines in prepackaged kits that include a small, two mediums, two larges and an extra large — a set that can go directly from the delivery truck to a display table.

American Eagle plans to entice its customers with brighter colors, hipper silhouettes and ruffles on women’s tops for spring. But it’s cutting out a few things it hopes its teen customers won’t miss: the ribbon that lines the waistband of its khakis, for example, and the color pattern on the material used for its jean pockets.

Changing pockets and eliminating ribbon saves only eight to 10 cents a garment, the company says. But eliminating relatively invisible features allows designers to add hip, visible details — like embroidery on the back pockets of denim jeans — that are more likely to lead to sales.

While it seeks savings, American Eagle has to be careful not to cut too much. Swamped by low-end competitors like Old Navy, the specialty retailer realizes “we can’t be the cheapest in the mall … If they wash it twice and it falls apart, they’ll say it’s not a good shirt,” he says. “There’s a fine line between price and value” … 

Edit by SAC

* * * * *

Full Article:
http://online.wsj.com/article/SB123362245399041753.html?mg=com-wsj

* * * * *

Want more from the Homa Files?
Click link =>
The Homa Files Blog

Managing the customer experience … from "delight" to "good enough"

January 26, 2009

Excerpted from the McKinsey Quarterly, “Maintaining the Customer Experience”, by Adam Braff and John C. DeVine, December 2008

* * * * *

Stinting on customer service is a common and sometimes costly response to tough economic times. By managing the customer experience more rigorously, companies can maintain quality while still saving money.

How can consumer businesses make necessary investments in service while facing the pressure on revenues and costs? One key is to minimize wasteful spending while learning to invest in the drivers of satisfaction. Specifically, companies should challenge their beliefs about service and test those beliefs analytically. Many will discover that long-held but seldom-reviewed assertions about what customers really want are wrong.

* * * * *

Consider service levels, specifically average time-to-answer, which is one of the most common metrics used in call centers. Companies that closely manage the customer experience have taken a rigorous approach to resetting service levels and, in some cases, are saving money without degrading them or customer satisfaction. In short, these companies have carefully measured the “breakpoints” to find their customers’ true sensitivity to service level changes.

One company, a wireless telecommunications services provider, found that its customers had two breakpoints at X and Y seconds on a call; answering the phone immediately (less than X seconds) produced delight, while leaving customers on hold for longer (more than Y seconds) produced strong dissatisfaction (exhibit). Although customers were fairly indifferent to service levels between X and Y, the company’s average time to answer was only loosely managed between these two points.

 

image

 

The company considered raising service levels to the “delight breakpoint” or reducing them to just above the “patience threshold.” Customer-lifetime-value economics pointed to the second option: relaxing service levels but guarding against crossing the patience threshold. The drop in customer satisfaction was negligible, but the savings in staffing were significant, and the company ended up saving more than $7 million annually.

* * * * *

Other good places to look for potential overinvestment include marketing campaigns (for example, offering to move a customer to a cheaper rate plan regardless of whether the customer says cost is a problem) and excessive use of bill credits and adjustments. The business case for these “customer delight treatments” can include unrealistic assumptions about how they will increase customer referrals and retention. And often, there is no business case.

Finding these savings requires rigor in customer experience analytics: the collection of customer-level data, matching survey responses to actual behavior, and statistical analysis that differentiates to the extent possible between correlation and causation. It also requires a willingness to question long-held internal beliefs reinforced through repetition by upper management.

Edit by DAF

* * * * *

Full article:
http://www.mckinseyquarterly.com/article_print.aspx?L2=16&L3=14&ar=2259

* * * * *

Want more from the Homa Files?

Simpler shades show big savings for Unilever

January 21, 2009

Excerpted from AdAge “Unilever Sees Green With Pared-Down Color Palette” By Jack Neff, December 01, 2008

* * * * *

Somewhere over the rainbow lies $5 billion in savings for the package-goods industry.

Using a color-harmonization program Unilever is reducing the more than 100 hues it uses on its spreads and dressings packaging in Europe to six. Unilever’s hope is to save tens or eventually even hundreds of millions of dollars a yearthe initial savings for Unilever in Europe amount to $13 million to $26 million…

Advancements in printing, which have added as many as four additional colors to the old four-color process, have helped make such moves possible, reducing the need for specialized or “spot” colors to get the right look — or close to it.

There’s even a potential environmental benefit…Cost savings and waste reduction come from buying inks on a greater scale, creating far less ink and packaging waste in the process of doing changeovers, and from producing final packaging because reduced complexity can improve quality and consistency…

“Basically, eight out of 10 marketers couldn’t tell the difference between their old packaging and the new packaging once we converted it…The team was, quite frankly, blown away with the results…”

But the approach isn’t for everyone. Savings are much bigger for the largest, most diverse package-goods companies with the most complexity in their packaging lineups.

Edit by SAC

* * * * *

Unilever’s efforts to reduce color hues will likely go unnoticed by consumers, but will certainly be noticed by brand managers looking to cut costs.  The effort is a great example of a small, yet significant change that is friendly to both the environment and the corporate wallet.  

* * * * *

Full Article:
http://adage.com/article?article_id=132885

* * * * *

Want more from the Homa Files?
Click link =>
The Homa Files Blog

If you want to be Costco, you gotta cut costs …

December 9, 2008

Excerpted from BusinessWeek, “Costco’s Artful Discounts”, by Jena McGregor, October 20, 2008

* * * * *

In Costco Wholesale’s New Jersey distribution center, some 2 million rolls of paper towels recently sat stacked in a mountain of green and orange plastic. Nearby, row upon row of jumbo tissue rolls formed a wall of cushiony toilet paper.

A year ago, the space was virtually empty.

Costco’s customers have not, of course, suddenly stopped buying paper products. The 258 truckloads of Bounty and Charmin are the result of a “buy-in,” just one strategy Costco ( has been using to hold prices down amid rising costs. After Procter & Gamble announced a 6% price increase in August, Costco bought as much as it could stuff into its depots at the old rate.  “We’ll have a six-week supply when everyone else is going up in price.”

* * * * *

At Costco, where more than 29 million households pay $50 to $100 a year to shop, low prices aren’t just a nice-to-have. They’re a way of life.

Not only does Costco’s famously frugal CEO James D. Sinegal cap margins at a sacrosanct 14% on branded goods, he’s constantly pushing his buyers to find creative ways to lower prices and add value while getting his managers to crank up their efficiency efforts. Besides the buy-in strategy, Costco has been redesigning product packaging to squeeze more bulky goods onto trucks and revamping processes for moving goods through its depots. 

 For one, holding prices low is the best way to protect profits: About 75% of Costco’s operating earnings come directly from membership fees, and if prices rose too quickly, some members could flee.  Costco’s reputation for bargain prices and surprise designer goods could inspire a new crop of warehouse chic devotees. 

* * * * *

What Sinegal isn’t doing is wavering from the basic model that helped him  build Costco into a retail phenomenon. The company’s warehouse model relies on selling core items at rock-bottom prices while scooping up excess inventory from high-end brands. The average store does $137 million in annual sales, a volume so high that Costco turns its inventory 11.9 times a year, meaning it often sells goods before it technically has to pay its suppliers. Combine that with high-income customers—the average Costco household makes upwards of $75,000—and “what they’re doing is really high velocity retailing.”

As consumers cut back, Costco is finding more available inventory and fielding more calls from companies hungry to boost slumping sales. Lately, the loot in that treasure chest is getting even more high end. Over the last year, Versace dinnerware, Waterford crystal, and pastel girls’ Lilly Pulitzer dresses have all made their way into Costco’s stores. “Their ability to sell stuff is staggering.”

* * * * *

With about 4000 SKUs, compared to 5300 at Sam’s Club and 40,000 at an average grocery store, Costco’s pared-down approach can make vendors more willing to cut them a deal.

The limited SKU count also helps to drive impulse shopping and remind customers that Costco doesn’t stock everything. “In a tough economy, the ability to change your assortment towards products that are selling more is a huge advantage  …If the item isn’t a value anymore, or isn’t generating the sales hurdles, it’ll be deleted.”  This holiday season, for example, almost all of Costco’s Christmas lights will be light-emitting diode because of the demand for energy-efficient bulbs. Regional food buyers also have significant sway to reflect local tastes.

* * * * *

Costco has even gotten vendors to redesign product packages to fit more items on a pallet, the wooden platforms it uses to ship and display its goods. Putting cashews into square containers instead of round ones will decrease the number of pallets shipped by 24,000 this year, cutting the number of trucks by 600. By reshaping everything from laundry detergent buckets to milk jugs, Costco has needed 200,000 fewer pallets a year overall.

Sinegal acknowledges that he can’t hold back the cost increases forever. “The biggest concern to me is that we lose our way and start thinking it doesn’t matter if you charge another dime or another dollar or another hundred dollars,” he says. “Without those disciplines, we don’t have anything.”

Edit by DAF

* * * * *

Full article:
http://www.businessweek.com/magazine/content/08_42/b4104058856320.htm

* * * * *

Want more from the Homa Files?
Click link => 
The Homa Files Blog

* * * * *

General Mills Milks its Margins to Stay Lean

November 26, 2008

Excerpted from Fortune “Cereal Cost Cutters” by Mina Kimes, November 3, 2008

* * * * *

At General Mills, the maker of Cheerios, cost-cutting is a way of life:

Company execs meet weekly to discuss ways to streamline products. The company’s Holistic Margin Management system has helped them sustain higher margins than their peers…

“Was it cute that the pretzels in our Hot ‘n Spicy Chex Mix spelled H-O-T?” 

 “Sure, it was cute, but we had 14 different pretzel shapes. By getting rid of some of them, we save $1 million a year.” A million bucks may not seem like much for the $13.7-billion-a-year company, but General Mills…makes hundreds of such cost-cutting decisions each year. And those cuts add up:

Last year General Mills  posted a 13% gain in profits…and analysts say that it has fatter margins than Kraft and ConAgra…

CEO Ken Powell attributes the gains to a General Mills-designed fat-trimming system called holistic margin management.

General Mills had worked on improving efficiency for decades, but the rise in inflation a few years ago spurred it to seek a more effective companywide productivity solution…  

Powell’s team first applied the system to struggling Hamburger Helper. At the time the company sold 50 versions of the product, with 25 pastas ranging from wagon wheels to spirals. Executives researched the costs of producing the different options as well as how much consumers liked them, then eliminated half of them. They excised unimportant spice and cheese pouches. They shrank the size of the box while keeping the serving size the same. The upshot: Hamburger Helper now costs 10% less to make.

Margin management soon grew into a structured process at General Mills…Ditching multicolored Yoplait lids…saved $2 million a year.

Factory-floor workers will point out when box sizes are inefficient for putting in trucks. And consumer researchers identify flavors that aren’t selling…

One group recently looked at the oils, flour, and sugar that its baking division uses. The team found a way to consolidate purchases of such items, giving General Mills more buying power. The changes resulted in $12 million in annual savings.

Of course, frugality is just one of many ingredients needed to be successful in consumer foods. Innovation and marketing drive sales, and General Mills’ revenues rose 14% last quarter after it heavily promoted new products such as Fiber One yogurt. But the money for such aggressive initiatives, says Powell, comes from margin management.

First you have to protect your margins,” he says. It figures that the company that makes Wheaties would understand that sometimes the best offense is a strong defense 

Edit by SAC 
* * * * *
Full article:
http://money.cnn.com/2008/10/29/magazines/fortune/kimes_generalmills.fortune/index.htm?postversion=2008110311

Want more from the Homa Files?
Click link =>
The Homa Files Blog

Pepsi Overhaul: Cutting Jobs & Changing Logos

November 19, 2008

Excerpted from AdAge “PepsiCo Launches Massive Overhaul” by Natalie Zmuda, October 14, 2008

* * * * *

PepsiCo said it will pour some $1.2 billion over three years into a push that will include sweeping changes to its brands, including …  a revamp of “every aspect of the brand proposition for our key [carbonated soft drink] brands. How they look, how they’re packaged, how they will be merchandised on the shelves, and how they connect with consumers.”

Included is the redesign of many of the brands’ packaging graphics, as well as a redesign of the Pepsi globe logo. The white band in the middle of the logo will now loosely form a series of smiles. A “smile” will characterize brand Pepsi, while a “grin” is used for Diet Pepsi and a “laugh” is used for Pepsi Max. Also, Mountain Dew will be rebranded as Mtn Dew…

Time for strong action
It is our belief that, especially, in this economic downturn, we should be investing in the category to get consumers to stay with and some to return to the packaged liquid refreshment beverage category and to our brands, in particular.”

PepsiCo said the $1.2 billion will come from its “Productivity for Growth” program, which involves the elimination of 3,300 positions, as well as the closing of six plants… “The majority of the savings will be invested in our businesses. A primary focus will be restoring growth to our North American beverage business. At the same time, we will increase our investment in developing markets, make selective investments to continue growing our global snacks business and accelerate our global R&D initiatives to help secure our future innovation pipeline.”

During the third quarter, PepsiCo Americas Beverages reported a 2.5% volume decline, with a 4% decline in North America, specifically. North American carbonated soft-drink volume dropped 3%, while non-carbonated beverages declined 5%. Unflavored water and Propel saw double-digit declines during the quarter…

Gatorade in for a facelift
.”We’re initiating similar upgrades for the entire Gatorade line, which will have an entirely new contemporary identity, and there will be exciting innovations for both G2 and Tiger and a renewed Propel platform.” 

Beverages are more affected than snacks in this economy, because there is a free substitute: tap water. The last 12 to 18 months mark the first time the category is seeing a decline. “We’re saying goal one is to stem that decline . … It’s a critical source of profitability,”

 “Once we have a breakthrough on a natural low-calorie sweetener that can be used in colas, we have a reason to talk about this category growing again.” 

Edit by SAC
* * * * *
Full article:
http://adage.com/article?article_id=131733

Want more from the Homa Files?
Click link =>
The Homa Files Blog