Cutting the Hidden Fat May Boost Morale and the Bottom Line
By Dr. Dave Kwinn
Cost cutting efforts typically focus on the obvious targets: travel, sales meetings, advertising, overtime, etc. But there may still be “hidden fat” that can be cut without causing as much pain as these more obvious targets.
There are two ways to cut hidden fat: hard saves and soft saves. Hard saves focus directly on the bottom line. Subletting unused space is a typical hard save. A soft save is indirect and may not be so easy to connect to the bottom line. A good example is establishing standard work procedures for a key process. This may eliminate systemic errors and ultimately reduce total operating costs. At times, it may be hard to see the economic benefit of soft saves, especially if other areas of waste in the business counteract the savings attained.
Let’s review some key areas for potential saving and their applicability to your business:
- Space. Is every square foot of space really required? Is some premium space being taken up by items that could be stored in lower-cost space somewhere else? Typically, a good lean effort can reduce space used by operations by about 30%, due to better layout and a ‘5S’ program. The space saved could be used for a new product or service opportunity.
- Utilities. Are there special rates that could benefit your business? Are lights being kept on when they don’t have to be? Are lights being used in areas that have plenty of natural light? Recently, a large superstore in the rural United States decided to turn off their overhead lighting during the day and rely on skylights. Could your business benefit from a change like this? Could temperatures be modified by a couple of degrees? Is there a way to recycle corrugated cartons or other materials for extra cash?
- Unplanned maintenance costs. A preventive maintenance program should eliminate breakdowns and emergencies that require premium cost services, like overtime and weekend rates, to fix. If you have premium cost services, take a look at your preventive maintenance program. Are there gaps to close?
- Premium inbound and outbound freight. Are you tracking premium freight costs? Is there a corrective action program in place to reduce or prevent premium freight costs by means of better planning?
- Efficiency. Do you have a way to measure efficiency trends reliably? If you are using standard labor hours to measure efficiency, are the labor hours correct? If trends are not improving, do you have a program to get them moving in the right direction?
- OEE (Overall Equipment Effectiveness). This measure tells you whether your equipment is available when you need it, performing up to speed, and delivering the quality level expected. OEE is expressed as a percentage, and typically rates are about 60-65%. A world-class rate would be 85%. If you don’t know your OEE, it might be worth base lining it to see if there is an opportunity for improvement.
Soft saves or cost avoidance activities may not show up directly on the bottom line. For example, if you find a way to process orders twice as fast but your staffing level doesn’t change to reflect this, there won’t be an impact on your bottom line. The real issue with soft saves is whether a saving you make in one area is counteracted by a new inefficiency in another area.
One suggestion regarding soft saves is to track them separately, so as to encourage people to do the right thing. If the soft save log shows very positive results that can’t be reconciled with the financials, then margin leaks must be occurring, and it is time to look for their source.
Here are some potential soft savings opportunities:
- Environmental, Health, and Safety (EHS) improvements. You may be able to get a reduction in insurance rates as a result of EHS improvements. Perhaps your insurance company can help with a program.
- Reduction in the loss of key employees. A seasoned employee may have knowledge that is be extremely difficult to replace, and time and money spent on recruiting can be substantial. Retention of key employees can save money.
- Productivity of new employees. How long does it take to get a new employee fully up to speed? How much time is wasted “learning the ropes” that could be saved with standardized work for offices and warehouses? If your business has high turnover or many temps, this can be a surprisingly big opportunity to save.
- Administrative rework. How much time is wasted in administrative processes due to corrections and delays? Many of these inefficiencies are fairly easy to eliminate.
- Photocopier waste. I have never seen a photocopier that didn’t have a trash container next to it. Why are so many copies thrown out? Why doesn’t anybody care? This is waste of paper, toner, electricity, and machine time. Perhaps an imaginative employee could be asked to do a simple analysis of reasons for the scrap, like wrong layout, wrong paper, or poor print quality. It wouldn’t be surprising if the amount of scrap decreases once the staff notices that somebody is looking at it.
- Unused reports. For some reason, computer reports take on a life of their own, and people are reluctant to stop printing them. Perhaps all reports should only be printed on demand. It might be fun to publicize the total number of pages printed and to offer the staff a simple recognition, like free cookies, when the number of pages drops by 30%.
- 60-minute meetings. Perhaps because of convention, people think meetings should last either 30 or 60 minutes, and so schedule them as such. Is there any reason for this? Couldn't people agree to have 50-minute meetings? Does anybody really believe that the same work wouldn’t get done in 50 instead of 60 minutes?
Cutting out the hidden fat may sound painful, but how many of the items discussed above would really cause suffering? Getting new employees up to speed faster? Eliminating safety hazards? Getting rid of the need for premium cost maintenance?
If the elimination of waste is viewed as a means to a more energetic way of doing business, cutting out the hidden fat can boost staff morale as well as the bottom line.