Being a world-class manufacturer means being the fastest and lowest cost producer of quality goods in a competitive market. Those that have excess inventory, a cluttered workspace, and employees who aren’t following rigorous standardization practices will never get ahead of the competition.

You need a system that instills continuous improvement in your products and your manufacturing, distribution and sales processes. And that requires efficiency. In other words: Lean Practices, the philosophy of continually reducing waste in all work areas.

So, where do you start? Many managers have improved their systems by learning from the “5S Program,” the theory started by Japanese manufacturing expert Hiroyuki Hirano’s 5 Pillars of the Visual Workplace.
The program is based on Japanese words that start with the letter S:

• Sort or Seiri
• Set in Order or Seiton
• Shine or Seison
• Standardize or Seiketsu
• Sustain or Shitsuke

(The literal translations of the words in Japanese are: housekeeping, workplace organization, cleanup, keep cleanliness and discipline.)

Here’s a breakdown to help make your business more lean and efficient:

Sort. Separate items you need from those you don’t, keeping only what’s immediately necessary to complete a job. Put a red tag on anything that isn’t required and evaluate each item. After employees review the tagged items, they are returned, stored, sold, or thrown out. This frees up valuable space and eliminates the clutter of broken tools, obsolete items and other junk that creates inefficiencies. This step eliminates the tendency to keep things around “just in case.”

Set in order. Organize the workspace by arranging items so they are easy to find and use. Label them so anyone can find them and put them away. In a manufacturing environment, setting in order includes painting floors, outlining work areas and installing shelving and cabinets for items such as trash cans, brooms, mops and buckets. The ideal is economy of time and motion with a reduction in wasted energy and excess inventory. How could you apply this to your work environment?

Shine. Sweep and clean everything around the working area. This helps employees take ownership of their work spaces and lets them more easily spot leaks, breakage, misalignments and other problems that lead to equipment breakdowns and production losses.

Standardize. Set up best-practice standards and involve employees in developing the standards. Follow the basic examples of some fast-food chains, major department stores or the military, then adapt them to your requirements.

Sustain. This is the most difficult step because it involves everyone in the organization understanding the rules and practising them. People have a natural tendency to resist change and return to the comfort of doing things the old way. Overcome that by getting staff members to help define different ways of doing jobs and coming up with procedures to keep the new status quo. For example, require certain tasks to be completed at certain times so that the whole system becomes the norm.

The thrust of the 5S system is to empower employees to control their jobs and their environment. When they actively maintain the workplace, they take more pride in what they do, gain greater job satisfaction and improve productivity. Ultimately, this leads to better quality and faster lead times, making your company more competitive and profitable.

Our telecommunications experts recently produced a white paper that shares some of this knowledge (as well as research from The Aberdeen Group, the Canadian Wireless Telecommunications Association, and more than 3,200 mobile-user years of data from their own customers).

This article is the first in our serialization of this white paper on wireless telecommunications…

The Challenge of Increased Usage

Wireless revenues are today the largest single component (41%) of telecommunications service providers’ revenues. The demand for wireless services continues to increase; in the business arena, wireless costs are a significant and growing portion of organizations’ overall telecommunications expenditures.

Usage is increasing steadily on all fronts, including airtime minutes, data downloads, text messages and mobile Internet browsing.

Why has the use of mobile devices increased?

In business, a variety of factors is leading to increased use of mobile services and devices and, of course, greater associated costs:

• More employees have mobile devices – cellular phones, Blackberry devices, iPhones and tablets are becoming standard business tools

• Use of airtime minutes per user has quadrupled when compared to 2006 data. We expect this trend to level off or even reverse itself somewhat in the near future with the increased use of non-voice mobile services such as text messaging

• Data usage (for services such as Internet browsing) has skyrocketed from barely measurable in 2006 to sometimes hundreds of Megabytes per month and even Gigabytes per user. We do not expect this trend to level off in the foreseeable future because:
  • Wireless devices are increasingly “data friendly” as the result of larger screen sizes and increased processing power
  • Service providers are upgrading networks because data usage is highly profitable
  • A small proportion of users account for a large proportion of data transfers. More users will mean more data transfers

• The use of text messaging is increasing exponentially over time
• Socialization of business services: social networks, Twitter and video can be used legitimately to accomplish business tasks
• Fixed location wireless connectivity is slowly becoming more popular. Using “turbo hub,” locations can instantly be provided with phone and data services at relatively low cost
• Certain users require more horsepower to display and process data than is currently provided by handheld mobile devices. As people demand mobility, we are seeing wireless modems often provided to users in addition to a handheld device
• As the capabilities of mobile devices become more and more impressive, so the use of non-business services is increasing steadily

What challenges does this present to business?

Given the explosion in mobile usage within business, and as more employees use company-issued mobile devices, telecommunications managers and finance departments are struggling with new challenges:

• Operational management: the time and complexity of managing many devices and the services delivered to them is increasing rapidly

• Cost management: with a greater number of wireless services now being used by employees, it is becoming harder to understand complicated service provider contracts, to match those contracts to a business’s needs, and to isolate business-use wireless charges

• An abundance of opinions: it’s difficult to make the changes and set the standards that are best for the business because users become emotionally attached to their mobile devices and IT/Procurement teams tend to become attached to existing service providers

You can overcome these challenges. The remainder of this series of articles focusing on mobile telecommunications looks more closely at challenges you might face and practical solutions to them.

So, where should you look for ‘easy wins’ when planning your cost reduction initiative? And how should you go about achieving your goals?

ERA Canada achieves substantial savings for its clients across all cost areas. Here are just a few specific examples of average category savings:

• Copiers and printers: 42%
• Document storage and disposal: 26%
• Office consumables and paper: 20% each
• Off-site printing: 20%
• Cleaning and janitorial services: 19%
• Insurance: 28%
• Telecommunications: 21%
• Couriers and freight: 19% each
• Uniforms: 34%
• Waste management: 24%

Typically, people believe that there is not much room for negotiation on prices and few differences between suppliers’ services in these common cost areas. Not true. Consider a few methods for revealing savings opportunities:

• Say “No” to price increases. When a supplier tells you its price list has changed, don’t take it lying down.
• Track down the prevailing market prices before you start price negotiations (don’t rely on suppliers for this information).
• You may believe your costs are under control based on historical trends, but what are your competitors paying? Benchmarking data is a useful tool to highlight areas that have the most potential for improvement and will help you to set priorities. Gather the data from outside agencies, consultants, or benchmarking services. Be careful to ensure that you understand the data as they apply to your situation and use them to negotiate with your suppliers from a position of strength.
• Determine your product and service requirements. Is there a better way to procure the goods and services you need? Look at total costs, including item price, the cost of holding inventory and administration costs. Don’t accept premium services unless you really need them: for example, 9 a.m. next day courier delivery service if 5 p.m. is acceptable.
• Find out if there are any new technologies or suppliers that can immediately reduce your costs and administrative time. Work with your suppliers and external experts to identify new cost-cutting strategies.

But intelligent cost reduction is about generating profits by eliminating waste. Cutting jobs is always a last resort, regardless of the prevailing business climate.

So, how do you reduce costs without reducing morale? How do you prevent negative water cooler gossip and make your staff see the benefits of your strategy?

You communicate.

Carefully considered, ongoing, open communication about the nature and scope of cost reduction initiatives engenders a culture of tolerance – if not enthusiasm – for efficiency within organizations. When you identify the benefits clearly and show a direct positive impact on working life, you preempt criticism and give people the opportunity to support you.

Here are some ideas that might help you communicate effectively with your organization:

• Don’t limit the scope of your cost reduction initiative to the extent that it might appear you are singling-out particular individuals, job functions or departments that have not controlled their costs.
• Be honest about why you are cutting costs, if possible.
• Send a note to everyone in the organization. Tell them your strategy is to maximize profits by being efficient in all areas. Be clear that cost reduction needn’t affect day-today operations.
• Use your bulletin board, if you have one, to solicit ideas and feedback. While you must remain firm – you are not asking for permission to reduce costs – it’s hard for your critics to justify negativity if they have not taken the opportunity to have their say in an open forum.
• Consider incentives – financial or otherwise – to reward contributions to cost reduction schemes, or to share savings for a limited period.

Finally, if you are using a third party to help you reduce costs, ask for help with your communications. A good cost reduction firm will have seen and dealt with plenty of internal politics and will know how to handle your specific challenges.

If a company with $50 million annual revenue works on a gross margin of 25%, then it needs to increase sales by $4 million, or 8%, to add $1 million to its bottom line. Increasing sales by 8% is no mean feat for any company.

In contrast, reducing costs by the equivalent of 2% of revenue produces the same $1 million of profit. A comprehensive cost reduction program, covering a broad range of indirect costs and overhead expenses, typically yields savings of between 1% and 2% of annual revenue. And it can take as little as three months to implement.

These figures do not suggest that it is better to cut costs than to increase sales; naturally, most organizations want to do both. However, they do make it clear that cost reduction is a worthy pursuit and should be high on a list of corporate priorities.

What about price increases? Wouldn’t it be simpler for a company to raise prices by 2%?

For many, this isn’t feasible at the moment. For example, those that are sensitive to increases in the oil price have already passed on increases in production and distribution costs. Further price increases – with the aim of increasing profits – would likely be more than the market is willing to bear.

We might conclude that there is a strong case to be made in any company for improved efficiency and cost reduction. But if there is widespread pressure to become more efficient, we cannot expect our suppliers to be immune to it. So, how are we to reduce costs?

Even when suppliers are reluctant to cut prices, companies that have not recently undertaken a comprehensive, professional cost reduction program can find significant savings. A cost reduction team, including category experts, can reduce your costs by developing smarter solutions, identifying process improvements, improving productivity and reducing waste in addition to negotiating with suppliers for better prices. In fact, it can address all the methods you can use to become more efficient.

The extra dollars this adds to your profit are particularly useful in tough times and might be far more difficult to generate elsewhere.

Bruce is one of ERA Canada’s most successful and longstanding experts. The editor of Less Waste More Value (“Ed“) interviewed him to learn more about the Office Equipment category and find out what it takes to reduce office equipment costs…

Ed: Bruce, you’re an expert in the Office Equipment category. What exactly does that mean; what specific equipment are we talking about?

Bruce: We are experts in hardware and software technology for enterprise print solutions. This includes laser printers, inkjet printers, fax devices, multifunctional devices, digital presses, copiers, large format printers and software such as Print Audit, Pharos, Equitrac and equipment vendors’ secure print release software.

Ed: How would a business lose control of the costs of managing this equipment? Tell me about some of the challenges a company faces in managing its office equipment.

Bruce: Most companies don’t have an enterprise print strategy; and if they do, they typically don’t manage them well. Numerous different departments within an organization manage equipment. In most cases these departments do not communicate, so there is no unified strategy.

Due to advancements in equipment technology many products have overlapping functionality, which results in excess hardware and software; and with this excess come numerous vendors, all of which require support from Accounts Payable.

The final way that businesses lose control of their office equipment costs is in managing the various expenses associated with print products, such as capital, service, toner, maintenance kits, etc. Many companies simply do not know what their expenses are for these products, which makes it impossible to manage, maintain and reduce costs.

Ed: Can companies look out for anything in particular that might suggest there is waste in their Office Equipment spend?

Bruce: Yes, I touched on it in my previous answer: look at the data and reports you have on all of the print products in your enterprise; if they do not clearly show you the total cost of ownership, including capital expenditure, ongoing usage and maintenance, you’re probably spending too much.

Ed: How do you find savings for ERA clients in this area?

Bruce: We use a six-step process:

• Assessment: determine where the client is today, number of devices, costs for all devices including service, capital, toner, maintenance kits, etc. Develop an enterprise print policy.
• Interview: conduct end user interviews to determine department specific requirements.
• Design: develop the future mode of operation for each department.
• RFP: support the development and evaluation of an RFP to provide the service, software and product required for the enterprise print strategy.
• Support the implementation of the enterprise print strategy.
• Manage the ongoing managed print services to manage the fleet, reduce print, migrate print and reduce costs as well as assist with increased productivity and reduction of environmental footprint.

Ed: Are these one-off savings?

Bruce: 70 percent of the savings are captured with the implementation of a solution that sets the future mode of operation. 30 percent are captured in the ongoing management of the solution. If the solution is not managed, not only will enterprises lose the 30 percent savings, they will also see creep into the original 70 percent savings.

Ed: What sort of savings are we talking about? What percentage of annual costs?

Bruce: Savings typically range from 30 to 50 percent of an enterprise’s annual office equipment costs.

Ed: If a company doesn’t have a resource to manage Office Equipment costs for the long-term after you’ve helped get things under control, what can it do to prevent cost creep?

Bruce: We offer ongoing management of the enterprise print strategy. It’s one of ERA’s Category Management services, whereby clients can outsource the task to us, save their own resources and simply monitor the regular reports we send them to ensure that they’re achieving predicted savings.

Is this equation correct? And can we agree that profit is the ultimate goal of business? Then where are all the Chief Profit Officers?

If Revenue – Costs = Profit, then it would seem sensible to set the goal of generating as much revenue as possible while constantly working to reduce costs, thereby maximizing profit. It would also make sense to structure our businesses to achieve this goal and ensure that our employees understand the goal and their part in achieving it.

For the most part, of course, it works well. Most businesses share a similar structure, which supports the goal. Hierarchies are defined with roles and responsibilities. Everyone has a function within this hierarchy and titles are created to describe the functions so everyone understands his colleagues’ roles. For the most part that is…

There’s a paradox, you see. Typically, as we look through a company hierarchy, we see familiar titles that provide good descriptions of employee functions: Programmers program computers, for example; Project Managers manage projects; a Chief Financial Officer is the person responsible for the company’s finances; the Chief Technical Officer is the top dog when it comes to technology; and so on. But when we get to the top — to the most important functions — things change.

What function does Chief Executive Officer describe? Is the CEO responsible for his company’s executives? In a way he is, but no more than, say, a VP of Sales is responsible for salespeople. The VP of Sales is primarily responsible for bringing in revenue in the form of sales; he just happens to use salespeople to achieve that goal.

No, as the company’s top executive, a CEO’s function is generating maximum profit. And by the same token, a Managing Director is employed to fulfil a similar function; directing the company is a task within that function.

Surely, if profit is the ultimate goal, the correct title for a CEO or MD should be something like Chief Profit Officer. So why is it that organizational hierarchies don’t include CPOs, or Profit Directors, or Profit Managers. I’ve never even worked at an organization that had a Chief Revenue Officer or a VP of Costs!
This is a light-hearted “Thought of the Day,” and it might seem fastidious or unimportant. But it’s true that the titles of our top executives obscure our view of their task — and every commercial enterprise’s ultimate aim — profit. And therefore it blurs the focus on the two keys to profit: revenue generation and cost reduction.

So, allow us to introduce (at least the idea of) the Chief Profit Officer, her Revenue Manager, and her Cost Manager.

In fact, almost every invention or innovation has come to light after someone ‘killed a cow’, and it can help your business, too…

Everybody has his or her sacred cows: rules to live by, opinions forged over time, certain ways of doing things. Life wouldn’t be the same without them, right? They provide the consistency, stability and comfort that we all need.

The thing is, it’s only by sidestepping the comfort zone occasionally – by killing a sacred cow – that we can put fresh meat on the table and perhaps reawaken our appetite.

Copernicus did it when he wondered, “What if the earth is not flat after all?” Even a catholic priest did it: after struggling to identify where one word ended and another began in Latin texts, he began putting spaces between words to make reading easier, thus breaking with conventional wisdom and killing a sacred cow of grammar.

In fact, almost every invention or innovation has come to light after someone ‘killed a cow’.

Have you ever thought about the rules and ideas embedded in your organization? Some of them are new and some were born with your company; some are strict and some loose. Though they may be written or unwritten; they may be acted upon consciously or subconsciously, they probably govern the behaviour of your staff. Could there be some sacred cows among them?

All rules should be open to question. They are based on ideas that were good but are not necessarily good still. When we become attached to them, we reduce our companies’ flexibility – the ability to change. And change is healthy.

Of course, at ERA Canada we look at this from the perspective of cost reduction. We ask our clients to question why their purchasing habits are as they are. Do they still need all the items they buy, in the quantities they order, from the traditional supplier? Perhaps they could order fewer, substitute an item for an equally good new product that costs less, change suppliers for better service and significant cost savings? I especially like to use an example from Roger van Oech’s classic book on creative thinking, “A Whack On the Side of the Head:” a computer hardware manufacturer has a supply problem – it cannot get a sufficient quantity of a chip that it buys from a single source. After hours of deliberation, management finally asks the engineer who originally purchased the chip why it is so important that it can only be bought from one supplier. “Oh, it was the only company that could supply the chip in blue,” said the engineer, “and I thought it looked nice on the circuit board.”

This can be the power of ingrained processes and rules left unquestioned. Think it could never be happening in your organization? Consider killing a sacred cow.

Here’s a seven-point plan you can use to make your cost management strategy easier to implement:

1. Develop an overall cost management strategy

One-off cost reduction initiatives seldom succeed for many reasons. On the other hand, when you undertake several initiatives under the umbrella of a corporate cost management strategy that covers a number of spend categories, you are likely to gain more support from within the organization and to make more of an impact.

2. Set expectations for each participant in the cost management process

The bottom line is that you expect everyone in your organization to support important strategies such as cost management. But be sure to set specific, measurable goals for managers, key stakeholders and purchasers.

The first and most important expectation is of your executives. They must commit to cost reduction fully and make their commitment known to the rest of the organization. This invariably precipitates greater buy-in from staff and greater focus on the tasks within the cost management strategy.

Make expectations clear so that all participants understand they will be answerable for their performances.

3. Develop specific cost reduction goals for each spend category

From Telecommunications to Travel & Accommodation, each spend category has unique characteristics; so, with the key stakeholders and any experts you might use, you’ll need to define specific goals for every category project. Make sure everyone involved in the categories understands these goals and the processes you put in place to achieve them.

4. Set a timeline for results

Human nature generally dictates that a project, regardless of its object, will expand to fill the time allotted for it. So set challenging but achievable deadlines and ensure that you reduce costs according to an agreed plan.

5. Regularly monitor supplier performance against agreed targets and the market

Cost reduction projects can yield great savings. If you want to reduce costs and maintain savings long term, you must monitor suppliers and the agreements you’ve made with them. Otherwise, it’s inevitable: your costs will creep up. If you’ve insufficient resources to assign someone to this task, get help. Hiring a firm to provide category management services will pay dividends.

6. Regularly monitor staff purchasing habits

To reduce costs, it’s sometimes necessary to introduce new processes to your operation. And if these processes are not thoroughly embedded into the daily routine, employees sometimes revert to old methods. Regular monitoring is therefore important to cost reduction success.

7. Audit savings at regular intervals for the foreseeable future

Quantify the savings you find to add to your cost reduction intelligence and identify where additional efficiencies might be found. ERA’s experts tend to produce monthly reports for clients, but whatever intervals you choose, analyze the reports carefully to ensure optimal performance.

ERA undertakes each of the above cost management tasks in providing cost reduction and category management services. They are valuable tools for any organization that plans to operate at the optimum level of efficiency.