Cost Reduction
Which costs should be the first priority for cost reduction?
The largest cost
What is the cost of failed cost reduction scheme?
additional costs
What kind of information shall we have for productivity improvement?
workflow and work study
What kind of information shall we have for process improvement?
Benchmarking and KPI
What are the critical information for cost reduction?
costs in terms of amount
Why is idle cost important for carrier?
Carriers have to buy a new ship a few year ahead.
Carriers may not have an accurate budget due to cyclical nature.
What are idle costs, warehouse, transportation, fixed asset, manpower?
All have idle cost elements
What are the problems of idle costs?
100% not absorbable, thin margin and high affordable price, cashflow problem
What are the most effective control on idle costs, budget, alert, fast quote, risk management?
All should be done.
What are Root costs of idle costs?
seasonal factor
cyclical factor
inaccurate forecast
too much commitment
What are critical costs for manufacturing?
Research and development
Volume discount or single source discount
Compensation
Lost goodwill and reputation
Stock out costs
Marketing and selling expenses
Staff turnover cost
Potential exchange loss
Costs that cannot pass to customers such as loss making quote
Unnecessary commitment, long term lease, redundancy
Idle costs due to seasonal demand
What is the lowest cost business model?
Outsourcing labor and trucking (no investment in truck and human capital)
Share of central overhead/talent (idle capacity)
Using telephone routing/web base system so that telephone enquiry, tracking, billing and finance can be done in the lowest cost region (reduce operating cost by relocation)
Necessary staff are locating in agent office (avoid rental deposit and early termination costs)
How to cut cost?
Improve cost transparence
Set up KPI for each unit
Set up number information system to show understandable performance
Set up reward and punishment scheme methods
Encourage internal competition and then external competition
What is critical cost of freight forwarder?
Volume discount or single source discount
Compensation
Lost goodwill and reputation
Network setup costs
Depreciation, building and truck
Staff turnover cost
Potential exchange loss
Costs that cannot pass to customers such as loss making quote
Unnecessary commitment
Idle costs due to seasonal demand
What are tools for cost reduction?
KPI, Benchmarking & Ratio analysis for efficiency
Alerts for pivot rate, idle & consolidation inefficiency
Internal control review checklist for fraud and procurement
TOC, LLC and ABC for pricing
Quotation controls for unabsorbed costs
Training for contract negotiation and contract backing
Training for Budgeting & forecasting to explore cost saving opportunity and to avoid cost of risk
Source of change to identify cost saving opportunity
Business analysis of historical information and current options
What are cost of risk?
Financial risk, cashflow, exchange rate, tax penalty, bad debt
Operation risk, compensation and loss of reputation
Contract risk, subcontractor, agent, co-loader, consequence loss, negligence, penalty
fluctuating demand, chartered volume and idle space
Customer and routing concentration risk
Excessive Cost and Unnecessary cost
Unabsorbed cost
Stable price and rising costs, oil and salary
How growth strategy can save cost?
Share of overhead
Volume discount in purchasing
Fixed costs do not increase with increase in volume
Make use of idle resources
More chance of consolidation efficiency
What are critical cost for trucking?
Driver, pick up and transport planner
Oil
Repair & Maintenance
Compensation, Contract, License and Insurance, Operation & Security & Claim & recruitment
KPI
Procurement & finance cost vs depreciation and total ownership of costs on transportation equipment
Recruitment vs efficiency and compensation costs
11% VAT in China, China profit source or not and Road tax in China
Empty load and mishandling
Administration from order, contract, billing to cash
Consolidation efficiency, Idle space and low loading factor for LCL price
why is there necessity for cost audit?
Cost Audit in China has never been formally carried out. Even some actual cost reduction schemes or devices have already implemented and has been working well for some stations. Some managers have very limited knowledge in cost control or do not take initiative in application to their managed field. There is no KPI imposed on cost saving.
Cost Audit is different from the budget cost control which is based on the last year information and do not go into every details of operation from booking, sourcing, vendor selection, contract drafting & negotiation, pricing and payment.
It is different from Procurement because procurement concentrate on achieving lowest purchasing cost with acceptable service quality while cost audit put emphasis on whether the cost is necessary such as considering inefficiency and idle costs, how the costs can be shared, how the costs can be avoided or reduced such as mishandling or over-specification and finally how the conflict of interest can be identified and avoided.
Also, at the current moment, procurement concentrates mainly on indirect cost items per procurement policy while cost audit can concentrate on direct cost and consolidated items of costs such as project costs including, Implementation, CAPEX and running costs in Logistics, total ownership cost of owning fixed assets.
While purchasing concentrate on purchase indirect cost items externally while cost audit will take into account internal expenses such as cash advance to staff, excessive cash pool and internal control on staff related expenses and entertainment expenses
Taxation in China is a huge cost in supply chain including its vendors and customers. It certainly need finance people to have proper taxation planning in minimize the tax costs
Carry out compliance test to ensure that procurement policy have been strictly follow
What are the objectives of cost audit?
The objectives of cost audit are to identify unnecessary, controllable costs, hidden costs and cost of risk and cost saving opportunity and their key influences and to minimize such costs in specification, sourcing, vendor selection and contracting and negotiation, operation and payment.
What are the benefits of cost audit?
increase in sales due to decrease in cost and decrease in selling price
saving in capital costs and the corresponding finance costs
saving in staff cost
saving in processing or administration cost
Avoid unnecessary costs
Avoid or reduce the level of mishandling cost and other hidden costs
Can reduce cost continuously at the earliest possible time
Achieve smooth operation as a result of common goal of the least cost at the earliest possible time
Higher return on capital employed
What are difficulties in applying cost reduction for logistics industry?
Logistics manager or Project manager do not involve Finance at the earliest possible and do not invite Finance manager to be a key project member. As a result, total costs have been considered and incorporated into billing
Project Manager do not follow the company policy in contracting, procurement and financing on the ground of urgency
Cost plus pricing method results in wastage and unnecessary costs. Plenty costs are expensed with the approval of customers who relies on 3PL in exercising cost control
Contract review cannot identify all potential cost or wastage by legal manager and legal terms and condition cannot be fully understood by others
Using transactional pricing without committed volume
No full contract backing and back checking on investment
How to carry out cost audit?
Interview managers of various function to understand the actual application of cost reduction concept
Contract and quotation. Examine contract on contracts to identify all favorable terms or conditions that are missing and all unfavorable terms and contract that exist
Operation. Examine operation to identify all favorable procedures that should exist but not exist, ordering, billing, pricing, payment, and purchasing procedures in souring, vendor selection, specification and contract & negotiation and assess and its effectiveness in Cost Reduction
Why cost reduction in logistics industry may not have been applied to its full effectiveness in China?
Lack of full cost information at the right time such as market price, formal analysis on insourcing vs outsourcing, local sourcing vs foreign sourcing, local source vs regional source.
lack of knowledge of costing structures such as fixed, variable and sunk costing structures of airlines and co-loader, vendors, customers and its impact on cost saving opportunities
lack of knowledge of key cost components of logistics service provider and its vendor such as taxation in China
lack of understand the nature of costs such as costs of risk (mishandling costs) , hidden costs, controllable costs/uncontrolled , necessary/ unnecessary costs and prevention/mitigation costs and its relationship to cost saving opportunity
lack of understanding of costing concept such as lifetime costs, total ownership of costs and activity base costing and its relationship to life time cost reduction
difficulties in applying total ownership of cost and activity base costing in practice especially in supply function
inability to convert intangible costs to quantified costs due to lack of cost information and legal knowledge and
Finally lack of accountants’ effort in setting up formal cost reduction scheme cost approach in a more systematic, simple, practical and comprehensive way.
Why is it difficult control logistics industry?
Accounting information system do not provide full logistics information and it is costly to keep separate management accounting system
How can you improve consolidation efficiency?
Internal growth
Acquisition
Co-loading
Scheduling
Pooling
How to achieve growth?
Discrimination Pricing to new customers
Contract renewal, service or price
Lost customer analysis
Cost reduction proposal to existing customers
What is financial strategy for growth?
Credit, appropriate payment terms to customers, cash discount or long payment term
Credit control to ensure reliable cashflow for payment
On time payment to vendor to maintain the service quality
On time payment to avoid stop run
Payment on discretionary expense should be approved with proper analysis such as benchmarking, compare cost with the benefit
What is pricing strategy for growth?
Penetrating price
Cost plus pricing
Breakeven pricing
Marginal pricing
When to apply cost reduction?
At the earliest time
Each time
Budgeting
Shipment analysis
Variance explained and investigation
Budgeting & Forecasting
Contract negotiation
Accepting order
Business analysis
Investment appraisal back check
Contract renewal
How to start cost reduction?
Using life cycle cost concept or total ownership of cost to identify total cost checklist, e.g., Total Ownership Cost to measure total cost of ownership of fixed costs and particular type of service provided
Using detailed financial analysis for business decisions.
Using cost database to quantify costs which can be quantified directly
Using professional judgment or activity base costing or mitigation and prevention costs to measure unqualified cost of risk
Using total ownership of costs and activity base costing to make logistics decisions in sourcing, vendor selection and specification so as to achieve the lowest cost the first time
Using cost tables to gather, summarize, compare and to choose the logistics option with lowest cost
Using different costing strategies
Turning fixed cost into variable cost by outsourcing
Avoid unnecessary and reduce controllable costs in specification the first time
Avoid unnecessary and reduce controllable costs by performance measurement in specification and vendor selection the first time
Avoid unnecessary and reduce controllable costs every time by adding necessary terms and conditions in logistics contract
Explore the saving opportunity under changing environment on supply market and demand market and make use of them during contract and negotiation
CAPEX and cost control before payment
What are unabsorbed costs in logistics?
loss making quote
refuse to pay bunker
late quote
mishandling
unquoted
empty load
Waive income
refuse to pay VAT
Idle reserved space
Pay excessive weight
overcharge
What are symptom of inefficiency?
a lot of new comers
a lot of system bugs
Creating traps
do not give full co-operation
do not help and teach other
doing before obtaining full information
excessive overhead
high staff turnover
idle time
language barrier
late order
limited rotation of duty
long outstanding issue
manual work
no backup
no handover list
no pre-approval for overtime
no SOP
no time table
receive after critical path
unfair environment
waiting time
zero overtime
no holiday plan
what are unnecessary costs?
mishandling
idle freight space costs
excessive freight costs
commission
tax
unnecessary
inefficiency
excessive overhead costs
What are critical costs of feeder company?
Port Rental
vessel charter rental
drayage
Freight and Transportation
Fuel and diesel
Driver Salary
labor charge
Local Transport
Container handling rental & Lifting/Shifting
Container Rental
Repair and Maintenance
declaration
Barge Rental
weight bridge costs & Gate costs
Agency & declaration
Depreciation motor vehicle
port operation
insurance & license
Container Repair & cleaning
How to cut staff cost?
freeze headcount cut recruitment cost and time
voluntary termination
cut loss making division staff
cut overtime
cut staff training
cut headcount
cut staff benefit
cut travel and entertainment
cut rate with additional bonus scheme
cut rate only
dismissal without compensation
dismissal with compensation
What are unnecessary staff costs?
Sick leave
Waiting time
Communication time
Travel time
Mistake, duplicate work
Handle complaint
Excessive overhead
Idle time
Inefficient work
Non value added Overtime
Unfair un-allocation of duty
Cannot handle/lack of knowledge
Mobility problem or no multi-task ability
Permanent staff benefit
Excessive benefit cost
Non-performance bonus
High Staff turnover, recruitment
Useless training
Manual work
Lack of temporary staff, outsourcing and inter
Dismissal
Unabsorbed by customers
What are cost drivers for rental cost?
Contract Buffer
Contract backing
Market information
Pricing
Optimal warehouse utilization
Minimize idle capacity
Free Rental Period
Termination
Delay
What are cost drivers for staff costs?
Reward scheme
Mobility
control on waiting time
objective measurement
inefficiency
mishandling
Economic of scale
Learning curve
Statutory requirement
What are cost drivers for compensation?
exclusion
Limitation
Indemnity
calculation
penalty
insurance
inventory loss
Risk transfer
Security control
What are cost drivers for electricity?
location
Special incentive policy
What are cost drivers for trucking department?
Fraud
Fuel price
inefficiency
security
Statutory requirement
What are the most common methods of cost reduction for logistics industry?
Tax planning, compliance, tax risk management
Growth strategy, consolidation, cost sharing, volume discount
Fraud management
Procurement/Sourcing management
Contract negotiation and Contract baking management
Risk management
Performance measurement for Idle and waste management to improve efficiency and remove unnecessary cost
Avoid unabsorbed cost by customers
Business options/Conditions analysis to minimize costs
What are cost reduction methods during economic boom?
Growth strategy
Recruit talent with multi-function
Exit clause for rental agreement
Add variable cost only
Shift duty
Performance bonus to improve efficiency
Discretionary allowance to improve efficiency
Outsourcing
Contract staff
Recruit staff with new skill
Reduce fixed costs
Win-win reimbursement
What should be consider for a new project cost control?
Start-up costs
Sub-contracting liability
Volume discount, share of overhead, removing idle opportunity
How contract management can avoid cost of risk?
Contract negotiation taking into idle, fixed cost structure, growth opportunity, share of overhead
Contract backing to avoid unnecessary costs
Transfer the cost of risk to the vendor
Stick to variable cost structure
