The importance of cost optimization
Taking out cost is easy. However, companies that seek to balance material, sustainable cost reductions with broader strategic goals have a far more complex challenge on their hands. Addressing short-term cost-out imperatives, while ensuring your company maintains the core capabilities it needs to support strategic goals and compete in the marketplace, is a delicate act.
Often the most obvious places to look for savings directly conflict with strategic considerations, and there may be limits to how much savings you can extract. In addition, it is often difficult to challenge your organization to consider potential opportunities because the fact base for key cost levers is not documented. Or your senior team may believe there is no room for improvement, while remaining oblivious to best practices in the industry or analogous sectors.
Furthermore, achieving the most effective and sustainable cost transformations, generally requires complex solutions, such as material organizational or process redesigns, not to mention capital investment and senior leadership time. As a result, the payback period, or simply the reluctance to change, becomes a stumbling block.
How we work with clients to optimize costs
L.E.K. helps clients create optimal cost positions by first undertaking a comprehensive review of all possible levers, leveraging a broad toolset and deep functional experience. Taking a fresh look at your cost base doesn’t require a lengthy and overly detailed, desktop-based diagnostic, but rather a rapidly developed, fit-for-purpose fact base that can support well-coordinated initiatives.
Fact base development. We use our deep, sector-relevant functional experience to help clients create a single source of truth within a matter of weeks. This normally involves:
- Cost segmentation by function
- Decomposition of costs by segment
- Identification of cost reduction levers
Opportunity hunt. We use a broad productivity toolset to identify opportunities for each client situation. We then develop an overall savings target that can be cascaded down to various initiatives. This toolset includes:
Spans and layers: Ensures that the breadth of reporting lines to the front line is appropriate
Value stream mapping/LEAN: Minimizes duplication and ensures only value-generating activities are undertaken
External benchmarking: Creates a clear view of what “good” looks like
Process redesign: Eliminates redundancies and streamlines processes
Cost/value driver trees: Decomposes costs into their underlying drivers and addresses the drivers
Contractor assessments: Determines degree of reliance on contractors and the efficiency of doing so
Operating model: Redefines allocation of responsibilities and where work is done
We combine our deep industry knowledge with the output of these tools to provide clients with the evidence-based analysis they need to make informed decisions.
Mobilizing the program. A change program guided by leaders within the company has a far greater chance of succeeding than one driven by external advisors. That’s why we view our role as supporting business-led initiatives. We are able to draw on our deep experience in Organizational Strategy and Value Activation to help our clients configure their businesses to unlock the value of their most complex cost opportunities.
We typically can deliver profit improvements of 10-30% for our clients.
Delivering cost optimization to clients
We work with clients across a broad range of industries to implement cost optimization solutions:
- Product portfolio rationalization and opportunity sizing for a global commercial explosives manufacturer, yielding a short-term 1-2% gross margin improvement. Read more
- Comprehensive performance diagnostic, identifying greater than 10% profit uplift for a leading independent film studio. Read more
- Cost-reduction diagnostic and execution plan development for a South American agricultural storage system manufacturer. Read more
- Comprehensive strategic review for a private equity-backed global currency services provider, including a value activation program that was ultimately successful in delivering 100% growth in EBITDA within two years. Read more
- Development and implementation of an end-to-end efficiency program for a roughly $2 billion electricity and gas transmission and distribution company. Read more
- Development of a transformative operating model and comprehensive cost-out program delivering 10% savings, for a large freight railway operator. Read more
- Cost reduction opportunity identification and implementation planning for a roughly $5 billion state-owned electric power distribution company that delivered a 20% improvement. Read more
- Organizational restructuring and potential cost-savings identification for a very dispersed resource base. Read more
- Turnaround effort for a U.S.-based manufacturer of mission-critical aerospace components that streamlined production, re-engineered RFP response capabilities and prioritized company initiatives. Read more
- Improved profitability for a U.S. manufacturer of plastic horticultural containers by optimizing the product portfolio and improving manufacturing operations. Read more
- Identification of critical overhead and operational cost-reduction opportunities for a leading global high-technology engineering business. Read more
- Supply chain turnaround strategy for a global paint-systems supplier, including capability mapping and footprint rationalization, resulting in best-in-class inventory turns of greater than 25% and a 70% improvement in operating profits. Read more