An integrated approach to cost management is better when it comes to battling rising costs and maintaining productivity, said management consulting firm Bain & Company.
For businesses that get it right, the prize is huge: they have the potential to double the typical savings from silo-based initiatives to 10%-20% of total costs, the firm claimed.
Traditionally, companies brace for the impact of rising prices by seeking savings in procurement, manufacturing and transportation and warehousing.
However, leadership teams that implement cost initiatives year after year in each of these silos have to redouble their efforts to generate new productivity gains, making it tougher to hit efficiency targets, the firm pointed out.
“Organizations typically overlook the excess costs that span those silos because no one is responsible for tracking them in an integrated manner,” said Caperton Flood, global head of Bain & Company’s Procurement practice.
Successful leadership teams have learned that bringing costs down as prices rise requires them to search across organizational boundaries for cost savings that are hidden in the seams between functions—the areas where responsibilities intersect, he pointed out.
Seeking savings in the seams is not a natural process
However, seeking savings in the seams between individual units or functions is not a natural process.
“The problem is that functional leaders tend to look only at data relevant to their function,” said Peter Hanbury, head of Bain & Company’s Manufacturing Excellence practice in the Americas. “Developing and analyzing data holistically across silos is key to identifying opportunities.”
The company predicts that inflation will be back soon and will impact—together with shifting trade relations—rather stable supply chains.
In such as situation, Flood said that this integrated approach to cost management can help companies build more resilient organizations while developing a significant competitive edge.
“Under normal conditions, those savings bolster the bottom line, but when costs are rising, they can provide a lifeline,” he added.
According to the company, there are three guidelines that can help businesses deliver savings beyond silos.
Establish clear ownership and accountability
A “cost czar” and cross-functional teams create the missing accountability for cost outcomes throughout the organization.
Bain & Company said the cost czar has the mandate to form cross-functional teams with managers from product design, procurement, supply chain and manufacturing, develop a program, and weigh the trade-offs of cross-functional cost initiatives.
Create incentives to identify savings between silos and functions
Misaligned incentives can make it nearly impossible to take out costs that span different functions, the firm pointed out.
If incentives for manufacturing employees reward quality, for example, the manufacturing leader will be reluctant to find ways to lower costs, even in areas where customers do not value the level of quality provided, it added.
Use data and advanced analytics to make the business case
Developing and analyzing data holistically across silos is key to identifying the opportunities with individual functions and building an integrated cost initiative.