spend compression surviving the nightfall · roland berger spend compression 1 3 2 4 –– spend...
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Apr
il –
20
20
An ultimate approach to relentlessly cut indirect spending, project costs and CAPEX under exceptional conditions
CompressionSpend
Surviving
nightfallthe
almost every industry is faced with the serious
challenge of surviving the Covid-19 crisis while
keeping the vital core as intact as possible.
Today,
It's about slowing down the metabolism immediately and having enough resources after the pandemic's turning point to return to growth. To ensure that, it's crucial to stop non-essential expenditures quickly and radically and consistently exploit the possible one-off effects.
In this unprecedented situation, companies should establish a cost-cutting task force at the front line. The approach: each business unit decides which expenditures are to be either stopped completely, reduced to a smaller share or delayed, tightly supported
by the procurement department. It's about shifting the focus now, from long-term strategic operations to resisting the acute and life-threatening challenges – while keeping in sight that a vigorous strategic supplier network will be crucial for the way back to normal. Against this background a thoughtful but immediate and relentless reduction of indirect material costs, project costs and CAPEX becomes a lever of enormous value. Roland Berger's Spend Compression approach is the ultimate means of choice to cope with this challenge – quickly, precisely and effectively.
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Roland Berger Spend Compression
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Spend CompressionRoland Berger
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–– Spend Compression targets all expenditure except for production materials. All types of expenditure – literally from a single laptop to major investments in buildings or machinery – are considered. In this way, it is possible to go through all areas of the company, to make even complex structures transparent, and to very quickly reduce expenses with different measures.
–– The approach is either stopping expenditures completely, reducing them to a smaller share or identifying savings potential through demand specification, e.g. reviewing specifications of building projects or checking key elements of outsourced plant
logistics. In any case, a fast realization of results has highest priority. First results are usually visible within six to eight weeks.
–– A cross-functional interaction between procurement and the business functions ensures to gain of one- off reductions and implementation of sustainable budget improvements at the same time.
–– A reduction of the budget by the savings potentials that have been achieved. This prevents the savings from being used for other purposes.
The essentials
Indirect, i.e. non-product-related materials (NPM) have often been shabbily treated in cost reduction projects. And if they do matter, project scopes and measures are typically adjusted to the classic topics, e.g. travel expenses, vehicle fleet or cleaning services. However, it's worth having a look at the full NPM spend and challenge, which means for example CAPEX, especially machinery and building projects, IT, all kinds of maintenance or indirect
Wide range of results
Top speed
SpendCompression
approachplant spend. Furthermore, project cost and other investments have to be taken into account.
This requires a regular check of what is being purchased and what investments are necessary. Ideally, based on those reviews, also better lines of argumentations for price negotiations with suppliers are developed. Here is the Spend Compression approach, with four essential features:
Cross-functional effort
Budget anchorage
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Spend CompressionRoland Berger
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How do you define a good "slash" in numbers? In general, our goal is to achieve more faster – at all indirect costs and across the entire organization. For that purpose, Spend Compression is designed as an ad hoc program that, through a bundle of concentrated and aggressive measures, can reduce spending by up to 30% in the short term. By comparison: traditional approaches usually achieve 5–15% in the medium term. In addition, our approach is not exclusively driven by the procurement organization but includes budget decision makers from all business areas.
So, the business functions are taking control? Exactly. All relevant business functions and procurement being part of the team. Procurement provides the business units with impulses for cost
reductions, must participate, can moderate. After all, it still has the task of ensuring that good investment decisions are made and budgets are optimally spent. But the responsibility for cost-cutting measures lies where the business is generated, in the business units.
Let's take it beyond numbers. Which other effects do you observe in Spend Compression projects? Well, they open new ways of cross-functional collaboration and understanding. This is even more true in hard and dangerous times. Teams which go together through the fire, afterwards work together at a different level. In terms of communication, trust, joint goals and ambitions, performance and commitment.
Finally, what are the essentials of fast-track actions? Postpone expenditures and limit them to the bare essentials – relentlessly. This creates additional short-term impact and is the key to a fast recovery. "Nice to have" is not the option in times like this, nor is hesitancy. Protecting the company's core is about discipline and focus even if you have to make painful decisions. You must stay alive to return to the growth track.
Source: Roland Berger 2020
* BE examples: functions, divisions, factory locations
Expert talkW I T H M A R C U S S C H Ü L L E R , S E N I O R
PA R T N E R , O P E R AT I O N S
Spend Compression programProject example global supplier
Overall forum for indirect spend optimization covering both savings and spend avoidance plus demand control
"Spend Compression" will be activated per business entity (BE)*
> Governance in weekly Spend Compression meetings
> Executive tandems – e.g. CPO/CFO – coordinated by Spend Compression office
What is "Spend Compression"? Set-up of "Spend Compression"
Supplier
4
Content/responsible
Story 1: "Spend break" for occurring demands (>50K EUR)/procurement and BE
Story 2: Savings in NPM projects/procurement and BE
Story 3: Savings with top NPM suppliers/procurement
Story 4: Tooling savings/procurement and BE
Story 5: Quick win savings/BE
Spend CompressionRoland BergerSpend
Compression –
Overview
Compression m
echanism (fast and im
mediate)
Budget mechanism
Dem
and challenge – Radically challenge large
spend (release gateway)
Comm
ercial pressure for, e.g., top/large suppliers (renegotiation, kick-backs, etc.), target of >5%
Supplier contribution from, e.g., rem
aining/sm
aller suppliers (general, undifferentiated extra
savings of 2 –5%)
Business
Dem
and
Reject non-mission-critical spend (13%
–20%)
Yes
No
Indir. proc. Business
Spend reduction applicable for
budget reduction?
Dynam
ic budget adjustm
ent &
"publication" of deviations to drive
budget compliance!
BudgetBudget
cutN
ewbudget
Muda's "last dance" – Broad &
radical identification of excessive expenditures (e.g., sponsoring, events, trade fairs, …
), leveraging input from
employees, and steam
roll decision-making and im
plementation
Outlook/alternative: Radical application of
accelerated zero-based budgeting
x
Sourcing
Negotiation factory
Blunt "post-procurement"
discount demand
360° specification challenge
Radical review of approved
spend regarding specs, com
fort level, etc.Ordering
Budget cut – Imm
ediate cut of current
budget, reflection for future budgets
Target coverage: 80 –100%
of supply base
Spend Compression leads to 15 –30%
imm
ediate P&L eff
ects through the consistent leveraging of dem
and, specs, quantity and price
5
Source: Roland Berger 2020
Spend CompressionRoland Berger
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times of high pressure. Particularly relevant are decisions that
are critical on a larger scale for the company's ability to act, e.g.
delaying investments in machinery and maintenance work.
Even in a remote operation status, manufacturing must
be able to ramp up again quickly, quality levels and delivery
dates have to be guaranteed.
Make sure that the bulkheadsfor spending are tight, i.e.
that the budgets are adapted to the cuts. Not just in a
quarterly plan, but as soon as a measure is decided.
Time for action
Don't limit the project to one-off measures.
Intermeshing all measures with the budget planning of
the business is essential.
Note the importance of clear guidelines from top
management, especially with short, unambiguous timelines
for decisions. Obtain an explicit commitment from all
employees involved – without making exceptions.
Don't waste your time with micro budget decisions in
What approaches can your organization take to achieve rapid results with Spend Compression?
We recommend focusing on four crucial aspects as a first step:
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USA
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This publication has been prepared for general guidance only. The reader should not act according to any information provided in this
publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use
of the information contained in the publication. © 2020 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.
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os: R
olan
d Be
rger
Gm
bHRoland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 35 countries, we have successful operations in all major international markets. Our 52 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 250 Partners.
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