Cost
effectiveness analysis starts by accepting that there may be room to improve
your current practices. Enterprises have four core areas where a review of
processes can yield substantial changes to the organizations overall cost
effectiveness strategies;
1.
Strategic Cost Management
2.
Materials Management Techniques
3.
Labor Infrastructure
4.
Process Automation
Whether
it is implementation of strategic cost management in the supply chain, a change
in materials management techniques, restructuring of the labor force, or an
investment in automation that yields downstream savings, periodic review is the
key to leveraging the most bountiful cost effectiveness strategies.
1. Strategic Cost Management Methods
One
of the keys to being able to judge the success of your cost effectiveness
analysis is to first have an overall strategic cost management program. Without
an enterprise-wide vision for cost controls, implementing the best strategies
is virtually impossible.
Whether
it is the implementation of low-cost country sourcing, or a reduction of lead
times by leveraging domestic sourcing options, supply chain methodology plays a
key role in overall cost effectiveness analysis.
2. Materials Management Savings
Inventory
is one of the top three costs in business. Proper analysis and review of
inventory practices is one of the easiest places to reduce cost. From
improvement of inventory control practices, reducing loss of inventory and
needless purchasing, to carrying correct inventory levels and using Economic
Order Quantities, materials management offers enterprise savings.
Some
of the tools available to implement cost effectiveness analysis include:
leveraging vendor relationships, application of lean manufacturing theory to inventory
processes, subscription to consignment-style inventory, using vendor finance
solutions for inventory, and implementation of ERP software.
3. Labor Infrastructure
While
having more than one person capable of fulfilling a role through cross training
can be one of your cost effectiveness strategies, true redundancy in positions
is counter effective to true cost management.
A
periodic review of positions across different business units is critical to
ensuring that there are fewer areas of redundancy and that as many functions
are effectively centralized or automated.
4. Process Automation
Whether
it is by investment in production machinery, ERP software, full-enterprise
e-procurement, a warehouse management system, or improved labor tracking
software, IT infrastructure in both the hardware and software arenas are
critical to cost effectiveness strategies.
Process
automation can be a labor-multiplier. While it requires training and capital
investments up front, over time process automation generally provides relatively
quick ROI.
Putting It All Together
First
create the vision. Then start measuring the processes. Finally, identify areas
of opportunity. Once those areas are identified, use some of the reliable and
proven decision making tools like cost benefit analysis to ensure you choose
the right areas to address first.
In
a world of limited business resources, addressing the areas with the most
potential return over the shortest time defines cost effectiveness analysis.
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