When seeking to optimize COGS, teams often target areas related to manufacturing productivity, direct labor, or maintenance-related spend.

Working capital improvement requires a focus on the various sources and uses of cash flow, including debt and lease obligations. Companies might also choose to address issues ranging from excessive on-hand inventory to non-standard order-to-cash and procure-to-pay processes.

Improving cost-to-serve often focuses on optimizing service levels and rationalizing the activities corporate functions provide to their internal customers. This typically includes assessing lower-cost delivery models like shared services centers and outsourcing relationships for commoditized or transactional services. Similarly, leaders can drive organizational efficiency by eliminating activities (across logistics or pricing strategies, for instance) that do not add value or are redundant.

Building the right plan to target meaningful cost reduction

Regardless of where companies start their cost optimization programs, leaders and their advisory partners should create a program plan based on a clear definition of their current-state baseline, realistic market scenarios or challenges they intend to address, and pragmatic cost reduction opportunity targets. A sound approach will typically follow this framework:

• Articulating scenarios and baselining costs. Informed by likely business conditions, cost structure considerations, and relevant benchmarking, aligning on a set of market scenarios helps leaders provide a current-state baseline, identify opportunities to right-size costs, and create an initial hypothesis. A company might articulate scenarios based on certain market growth and contraction metrics to inform the scale of necessary cost reductions and investments in differentiated capabilities.
• Identifying, prioritizing, and aligning on cost reduction opportunities. Using the baseline and insights from the scenario planning, companies should conduct cross-functional, bottom-up reviews to identify underlying root causes of cost gaps and inefficiencies. As discussed above, this requires input from stakeholders across the business to evaluate trade-offs and implications and for teams to align strategic targets and initiatives.
• Developing and mobilizing an action plan. With a focused set of strategic priorities in place, teams can sequence and plan the actions required to achieve the targeted savings. It is critical to quantify and prioritize quick wins for near-term impact while building defined, actionable plans to support accountability for longer-term initiatives.

Any cost optimization approach should emphasize long-term value and sustainability. It will balance the need for maintaining differentiated capabilities while identifying opportunities to improve how the business operates and optimize the cost structure. The exercise should also be rapid, with the initial analysis to support the program charter taking no more than  4-6 weeks, and result in a clear, actionable plan with milestones. Once planned and executed correctly, most cost optimization programs are self-funding and result in significant functional and organizational upskilling for teams that participate in the program.

A forthcoming article in Riveron’s Strength Amid Uncertainty series will examine additional detailed working capital considerations.