using lean six sigma for fast track sg&a reductions

Using LeanSigma for Fast Track SG & A Reductions

“Every system is perfectly designed to achieve “Every system is perfectly designed to achieve the results it gets”the results it gets”

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Donald Berwick, MD

© 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.

SG & A Opportunities are “Huge”

As one of the largest expense pools for any company, SG&A represents a key opportunity to improve bottom- line performance. In fact, a 5% reduction in SG&A for companies in the S&P 500 would result in an average operating profit increase of ~$183M.11

Source: Kaiser Associates analysis based on FY07 results for the S&P 500

SG&A opportunity is typically $70 million per billion in revenueSG&A opportunity is typically $70 million per billion in revenueSource: The Hackett Group and Standard & Poor’s

But…despite the opportunity most American companies

have been ineffective in managing overhead

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A Study by The Monitor Group found that most U.S. Companies have a Poor Record of Managing SG & A…

$2,500

$3,000

$3,500

$4,000Average Revenue and Overhead Spending U.S. Public Companies

Average Sales 7.9%

CAGR

Average Overhead Spending

Average Sales

Despite investments in productivity improvements, average SG & A spending as a

percent of sales continues to increase

$0

$500

$1,000

$1,500

$2,000

$2,500

1992 1997 2002

$MM

Average OH Spending 8.4%

Source: The Monitor Group 4


Average Overhead Ratio (Overhead/ Sales)

23.5% 22.5% 24.6%

Aggregate Change in Overhead Ratio over Time: All Industries $500M+

…it also found a lack of results in SG & A Productivity Improvement

Very few of the 900+ large U.S. public companies in the study had achieved

significant SG&A productivity improvement

15%

100%

15-30%

Change in Overhead Ratio

� Less than a quarter achieved significant SG&A productivity improvement

18%

33%

34%

0%

25%

50%

75%

0–15%

0–15%

15-30%

improvement

� Another third made modest gains

� Nearly half let their overhead to revenue ratio grow

Source: The Monitor Group5


…but…those companies who had a consistent focus on SG & A were rewarded in the market…Firms that managed their overhead ratio consistently over time achieved significantly higher market value growth.

Aggregate Change in Overhead Ratio over Time: All Industries $500M+ (1997 – 2002)

34%

15%

75%

100%

15-30%

0–15%

6.0%

12.6%

0%

5%

10%

15%

Source: The Monitor Group

18%

33%

0%

25%

50%

0–15%

15-30%

-5%

Low Level of Consistency High Level of Consistency

-1.9%

6.0%

-5%

0%

5%

10%

Low Level of Consistency High Level of Consistency

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…however, the challenges is not “what”…

• Still, the biggest challenge of SG&A optimization is not in recognizing its potential…

• But many companies historically:

– Struggle to identify specific SG&A optimization opportunities…

– Are insufficiently “targeted” in their efforts, instead settling on across-the-board spending cuts, automating bad processes, etc.automating bad processes, etc.

– Don’t have a systematic and flexible approach to SG & A optimization…

– Don’t understand the implications/connections between SG & A and strategy execution…


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…rather the challenge is in “how” to optimize SG & A

costs

Improving SG & A requires focusing on both efficiency and effectiveness…simultaneously

� Process quality

� Supplier development/management

� Analytics

� Value Stream Alignment

� Spend Management

� FTE allocation

Examples:

EFFECTIVENESSEFFICIENCY

• Process costs

• Productivity

• Cycle times

• Technology application

• Cost per transaction

• Staffing Levels

Examples:

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Examples:

� % of suppliers comprising top 80% of spend

� Total spend cost reduction as a % of spend

� Percent of spend under procurement management influence

� Percent of procurement activity allocated to decision support

Examples:

� Cost as a % of spend

� FTEs per $1B of spend

� # of POs processed per FTE

� PO processing cycle time

� Staff time allocation by process

� Cost as a % of spend vs suppliers

“Doing things right” “Doing the right things”

Elements of SG & A

Finance

SG & A

Sales & MarketingService Every element of

SG & A is made up of various discrete

Human Resources

Information Technology

Procurement

of various discrete business processes

LeanSigma is a proven methodology for making business

processes both effective AND efficient

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What is LeanSigma?

WHAT DOES LEAN MEAN?

LeanSigma is the combination of two powerful business process improvement methods that came out of the manufacturing sector in the 1980’s.

In recent years it has been developed and successfully deployed in the service sector to include banking, retail, healthcare, staffing and financial services.

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Lean is the elimination of all forms of non value added work from the customers perspective (waste) in business transactions and processes

WHAT DOES SIX SIGMA MEAN?

Six Sigma is a statistical based methodology used to eliminate defects (errors or variations) in business transactions and processes


Why LeanSigma?

LeanSigma incorporates the principle of Lean’s simplified flow and speed to increase business process velocity…

…and incorporates Six Sigma’s approach to Sigma’s approach to eliminating errors, variation and instability…

…the combined tools, principles and methods of LeanSigma attacks the “hidden factory” of complexity in your business

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Time is the Underlying Measurement of LeanSigma…

The key is to reduce end-to-end system and effort to “core value”

• Customer’s definition of “core value” provides a common lens to identify, prioritize and achieve both tactical cost reduction and strategic advantage – simultaneously

• Common element of time consumption allows for engagement and participation at every level in the organization

• Drives a rapid shift in paradigms by sifting “what we do” through a simple, common-sense filter

• Accelerates bottom-line and operational results which can be leveraged for growth

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Core Value

Value-Adding Activities

Transform products or information into products and services the customer wants

Value is always defined from the customer’s perspective

Non-Value-Adding Activities

Consume resources, but don't directly contribute to process or service


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Business Process Waste

SG&A costs, or overhead, often are related to non-value added activities that can be eliminated or can be eliminated or streamlined using

LeanSigma principles.

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… focus for SG & A Improvement with LeanSigma…

Identify and eliminate waste

• Defects and loop-backs

• Hand-offs

End-to-End Time Reduction

Procure to Pay (P2P)

• Reduced invoice processing time from 44 days to minutes

• Increased FPY rate from 2% to 87%

• Hand-offs

• Over-producing

• Unnecessary processing

• Decisions in process

• Excess transportation

• Waiting

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87%

• Decreased error rate from 80% to 0.7%

• Increased cash discount $300K

• Reduced expenses of faxing, bank fees, postage and forms $200K

Bottom Line = $1.6MM savings

Improving the SG & A

Your most powerful

competitive advantages are where the work

“The secret is in the dirt.”

-Ben Hogan

where the work gets done

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SG & A “Hunting Ground”

Marketing/Sales Planning

•Pricing/incentives process, standardization, and optimization

•Market Incentives vs. end-to-end impact of unevenness

•Effectiveness measures

Field Sales Management

•Service delivery model

•Business/geographic alignment

•Offices-Real Estate consolidation

Finance

•Budgeting

•Management reporting/analysis

•Revenue cycle: Billing, Collections, Cash Application

•Accounting /External Reporting

•Invoice/AP processing, T&E

•Treasury management

Sales

•Selling administrative processes

•Effectiveness measures

Information Technology

•Infrastructure –support/maintenance process

Purchasing



Human Resources

•Compensation approach standardization

•Incentive/Bonus standardization and award process

•Pension/Benefit plan rationalization

•Recruiting and hiring process

•Reporting and compliance

Engineering


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Customer Contact Center

•Order cycle process

•Complaint/return processing

•Capacity management

•Effectiveness measures support/maintenance process

•Development process

•Project prioritization and management


•Sourcing processes (vendor selection, POs, …)

•Metrics

Supply Chain and Inventory Management

•SKU rationalization

•SKU velocity

•Minimums/pull systems

•Distribution Center strategy

•Logistics

Corporate Services

•Real Estate and Facilities management

•Legal

•Communications

Engineering



•Design process

•Testing process

•Project management process

•Efficiency and effectiveness measures

LeanSigma SG & A Optimization Roadmap

• Focus on Time and Customer Value

– Improve cost by improving customer value… Improve cost and service and quality, same time… Identification and prioritization of performance gaps

• Leverage Speed of Lean and Precision of Six Sigma Statistical tools

– Rapid and collaborative approach… Analyze current SG&A… – Rapid and collaborative approach… Analyze current SG&A… Identify opportunities… fact-based and data driven

• Focus on both functional opportunities and cross-functional opportunities

– Some of the “fastest” improvements can be made vertically (functionally)

– The biggest impact improvements are found horizontally (cross-functionally or end-to-end)


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Enterprise-wide SG & A Transformation

Awareness & Assessment

Tactical “Quick Hit” Improvements

• Functional opportunities with limited impact on the customer value stream

• Finance & Acctg.

Future State Realization

• Focus on the customer

• Lean, customer-centric processes

• Relentless focus on waste

• Leveraged for competitive advantage

Assessment– Leadership Engagement and

Buy-in

– Pilot End-to-End &

Functional Assessments

• Value Stream Maps

• Metrics/KPIs

• Volume Data

• Supplier Performance

• Business Case

• Prioritized Improvement

Opportunities

• Scorecard

– Organiztional Awareness

• Finance & Acctg.

• HR

• Legal

• Aligned to end-to-end as well to manage cross-impacts

• Leverage collaborative problem solving to develop solutions and rapidly implement

• Begin end-to-end/systemic improvement

• Start with the customer and work backward to the vendor

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Typical SG & A Timeline

6 – 8 Weeks 4 + Months3 – 4 Months

Alignment, Awareness &

Assessment

• Executive Leadership Alignment

• Identify gaps in assessment data from SCI, PBM and Specialty – complete assessment

• Communication plan

Tactical Improvements

• Shared Services

• Tactical cost savings

• Energy savings

• Process reengineering – waste reduction

• Staffing models

• Begin focus on value

End-to-End Focus

• Best Sourcing

• Value Stream transformation

• Organizational transformation

• Push ownership of improvement to lower levels of leadership

• Communication plan and leadership awareness

• Launch Sponsorship & Steering Committee

• Begin actions for previously identified savings

• Begin focus on value stream

• End-to-end flow of goods and services

• Cross-functional opportunities

• Processes aligned to/support the value stream

• Focus on leadership development for sustainment

• Adopt “Process Mental Model”

• Knowledge transfer to internal resources

Fin

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l F

ina

ncia

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Be

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fit

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Lessons Learned

• Active leadership and ownership from Senior Leadership– Top organizational talent should be assigned to the effort to drive the on-going change– Aligned metrics and incentives– Everyone has to play– Create a “burning platform” if one does not exist– Walk the talk

• Build “tension” – stretch goals• Connections – integrate with other initiatives and teams, customer councils, governance

• Invite self and promote contributions• Service Level Agreements – two way relationship

• Communicate, communicate, communicate– WIIFM– Solicit participation at every level– Complaints are a gift

• Passion around Process– LeanSigma– Metric-centric: (scorecards, business reviews, operating reviews, performance boards)

• Quality, Cost, Delivery

– End-to-End Focus

• Savings and improvements need to be integrated into the on-going budgeting process• Do not mistake effort for results • Expect results – not “let’s see if it works”


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A global water and fueling systems manufacturer

had experienced 87% growth over three years while

managing multiple acquisitions and product-line

expansions to solidify its market share and long-

term earnings potential. During that same period,

SG&A as a percent of sales, had grown from 17.7%

to 19.8%.

Water and Fueling Systems Manufacturer

WTS Tech Support

• Average call abandon rate is 49%

• Average weekly overtime is 29 hours

• 800 number on packaging is directed to Tech Support - Many calls regard non-techissues (pricing, shipping, availability)

• Without addressing operational gaps (possibly scheduling, process, and volume) additional 10-60% FTE required to eliminate overtime and handle calls

Opportunity

Approach

• Assess flow, volume, complexity

• LeanSigma Workforce Management to best match capacity to volume by hour, day, and week.

• Continue to address demand root causes

• Cost avoidance of adding resources to current operation ($25-90K)

• Improved customer experience (reduced abandoned calls, reduced

transferred calls)

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5

10

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Re

sou

rce

Ho

urs

Cal

l Vo

lum

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CallsTaken AbdCallsScheduledHrs OvertimeHrs

RequiredHoursCT RequiredHoursPD

Abandon call

reporting not

available until

5/13

ImpactSupplies

• Consolidate spend to one vendor

(Staples and Bell Office)

• Nearly 50% of the YTD spend is WTS

outside printing …. Consider in scope

with Marketing Spend project

Opportunity

Approach

• Re-negotiate with Staples or other vendor on overall Supply ~$900K

• Leverage pull system if not in place

Impact

• $90K+ savings

• Consider $350K WTS buy as part of the marketing spend project ($35K)

Object: 714220

Facilities Lease

• At Corporate/AWS the average cubicle

space per person is 102 ft2

• Typical cubicles are 6x8, 8x8, or 8x10

maximum similar to Fueling

• Sales offices may also not be fully leveraged or utilized

• Fort Wayne – 1 sales rep ($7K)

• Dublin – 2 offices in one city ($19K)

• Siloam Springs – 1 office ($3K)

1. Restack main building from 84 to

154 cubicles at 6x8 and 8x8. Move

45 employees from Annex. Still have

space for 25 cubes

2. Eliminate Annex office Lease $210K3. Re-evaluate sales rep space

requirements and option to work

from home.

Opportunity Approach

Management Reporting – Rebate Accrual

Demonstrates waste of

Waiting, Over-Processing;

Rework, Potential Defects

Span of Control by Business/Level

Manager Salary/Bonus

• $4.0M … Span 1-2

• $3.0M … Span 3-4

• $4.6M … Span 5+

54321

14

12

10

8

6

4

2

0

Management Level in the Organization

Span of Control

3.54

3

4

7

“There are a lot of working managers in this organization

… get called to meetings and spend more time managing

than contributing.” - Franklin Employee with Span of 1

Summary of Impact

Low High Low High Low High Low High Low High Low High

$1,088 $1,108 $13 $90 $240 $370 $1,341 $1,568

Legal, IS, Finance, FFS & WTS

Tech Support, FFS Engr

$320 $700 $210 $285 $0 $35 $440 $1,090 $970 $2,110

Telecom, ,Supplies, T&E,

Facilities

$100 $150 $523 $689 $172 $265 $153 $238 $948 $1,342

Management and Financial

Reporting, Concessions,

FE TotalCorporate AWS WTS FFS Cross-FE

Functional Improvement

Spend Reduction

Cross-Functional ImprovementApproach

The Need

• $8.5M reduction in costs, a reduction in SG&A of

6%

• Conducted executive and SME interviews to gain

holistic perspective on pain points and

opportunities

• Performed detailed analysis within high-impact

SG&A functions, focusing on organizational design,

performance management, process efficiency and

effectiveness, and spend management.

• Developed execution roadmap for quantified

opportunities

• Executed a series of Kaizen events to redesign

processes


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Corporate Corporate Fueling

Reporting, Concessions,

Marketing Spend

$200 $300 $194 $338 $394 $638

Customer Service, Marketing

Services

$888 $1,468 $654 $838 $1,542 $2,306

Marketing/PM, Engineering

$200 $470 $165 $270 $365 $740

$1,637 $2,013 $128 $738 $636 $1,024 $528 $836 $2,929 $4,611

$3,345 $4,441 $2,114 $3,750 $1,669 $2,590 $921 $1,444 $440 $1,090 $8,489 $13,315

Span of Control

TOTAL

Shared Services

Service Delivery Model

Performance / Incentives

Approach

Results

Functional Examples

• Support Call Center– Focus: Sales concessions and customer support– Approach: 2 kaizen events– Result:

• Productivity improvement by 20% on Call Center operation• Improve customer experience =>decrease call volume• $1.2 million in savings

• Marketing• Marketing– Focus: Poorly executed shared services model for managing

marketing collateral, advertizing spend, etc.– Approach: 3 kaizen events– Result:

• Exhibit & Trade Show costs reduced by $-220K• Collateral costs reduced by $310K• Promotional costs reduced by $150K• Overall reduction in Marketing costs of 18%

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Thank you

Guidon Performance Solutions, LLC

Email – [email protected]

Website – www.GuidonPS.com

Phone – (866) 986-4414Phone – (866) 986-4414


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using lean six sigma for fast track sg&a reductions

Business

guidon performance solutions

licensee of leansigma

average sg

line performance

average overhead ratio

sg acosts7

elements of sg

hackett group