4-Patterns of Cost Reduction

I was fortunate to work for some years with McKinsey and Company. As an alumnus of that organization, I receive regularly the McKinsey Quarterly. Every once in a while, the McKinsey Quarterly emails a feature called Chart Focus.

A couple of weeks ago, I received one of these Chart Focus emails where McKinsey was talking about making field teams more productive. The firm has apparently done a good deal of work with large field service teams, such as technicians who install telephone lines or cable T.V. boxes, for example. The chart described the differences in productivity before and after the work that improved the performance of these field service workers.

The chart lists a set of measures that a client company used to calculate their field teams’ productivity. Against each of these measures, McKinsey noted cost saving approaches that the company had used to improve productivity. Then the chart showed the improvement in productivity that the cost reduction efforts produced. Here are a few of those measures and the cost saving efforts that improved them.

Measure: Cost Improvement Effort:
1. Daily target for service bookings 1. Load more points than will be completed
2. Some technicians assigned to tasks other than calls 2. Technician schedule measured more carefully, reducing or eliminating time spent on other tasks
3. Full load not booked to allow for some rescheduling 3. Load appropriate levels of technicians and points
4. Unfilled quota caused by no rebalancing among work zones 4. Rebalance schedule to limit amount of unfilled quota

This is just a partial list of those measures and efforts shown in the chart.

Over the last several years we have looked at several thousand cost reduction efforts like these in order to categorize patterns in cost reduction. At the highest level we found four patterns in cost reduction:

1) reduce the rate of the cost input;

2) reduce inputs not producing output;

3) reduce unique cost driving activities in processes;

4) spread unique cost driving activities over new product output.

All four of the examples in the McKinsey Chart Focus fall into the second of our categories, reducing inputs not producing output. My guess is that the study teams actually use some of the other three cost reduction approaches as well.

Posted 3/18/08

Update:

You can use our many cost reduction concepts and examples to brainstorm improvements for your own company.  Here are a few cost reduction concepts supporting the second of the four patterns mentioned in the original blog. Each of these concepts has many examples and sub concepts for your use.

Reduce units of Input (I) available but not producing 

A term used in the analysis of productivity and economies of scale. An intermediate cost driver is an activity, such as an entry of an order, that adds value and contributes to the acquisition or retention of the customer and the unit volume he represents (abbreviation: ICD). (See also Economies of Scale, Effectiveness, Efficiency, Productivity)

“>Intermediate Cost Drivers (ICDs) or Output. This action makes Input levels more directly variable with the quantity of the ICD by reducing the amount of the available Input that is wasted or idle. Here are some of the concepts companies use to implement this approach:

  1. Assist Input in increasing ICDs
  2. Shift demand to use unproductive resources or reduce the unproductive resources.
  3. Improve the accuracy of the demand forecast.
  4. Use short-term sources of Input to meet peak demand.
  5. Use other underemployed Inputs.
  6. Speed the process.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.