Parameters of Operational Excellence – Cost Management

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After addressing various aspects of Operational Excellence, including potential misconceptions and the correlation with ISO and other quality standards, it's essential to delve into the parameters that form the core of any operational excellence initiative. These parameters may be implemented selectively based on strategic objectives and timelines, taking different forms across divisions, locations, departments, or functions within a corporation. Each parameter undergoes decomposition into sub-parameters, and then further into smaller initiatives, projects, and tasks.

The first parameter to discuss is a crucial parameter in this Operational Excellence pursuit which is “Cost Management”. This parameter plays a pivotal role in ensuring that companies not only remain competitive but also thrive in an ever-evolving market.

Cost Management: A Cornerstone of Operational Excellence

Cost Management involves optimizing expenses while maintaining or enhancing the quality of products and services. It's about striking the right balance between cost reduction and overall operational efficiency.

Under Cost Management, we delve into various sub-parameters, each crucial in cutting operational costs:

  1.         Waiting & delays
  2.         motion
  3.         over-processing
  4.         defectives & rejects
  5.         Excess inventory of processed & unprocessed materials,
  6.         Poor engagement & unused skills
  7.         Over-production
  8.         Transportation & Shipping
  9.         unplanned outages
  10.       energy & resources
  11.       Health, Safety & environmental compliances
  12.       Contractual obligations & loss of potential business
  13.       Unclear, lack or erroneous information

These wastages can be categorized or studied based on:

  1.     Source (Internal, External, etc.)
  2.     Severity
  3.       Priority
  4.       Difficulty to eradicate

In order to study such wastages from Cost Management prospective it is mandatory to study it in conjunction with other Operational Excellence parameters like:   

  •  Operational Efficiency: This parameter primarily focuses on the efficiencies of People, Business Processes, Production Processes, Utilized Technologies, and Process Safety.
  • Supply Chain Rationalization: Streamlining the supply chain and reducing the number of suppliers can lead to better negotiation of prices and cost reduction.
  • Technology Integration: Advanced technologies play a crucial role in improving efficiency and reducing costs. For instance, predictive analytics can be implemented to reduce unplanned downtime and enhance maintenance efficiency.
  • Culture of Continuous Improvement: Fostering a culture of continuous improvement enables companies to identify and implement ongoing cost-saving measures, yielding numerous tangible and intangible benefits.

The Operational Excellence parameters mentioned above will be discussed separately in further articles. However, reader can start building relationships immediately by answering simple questions like, have you ever considered how reducing waiting times can significantly impact operational costs? How storage of raw material or finished products impact the cash flow? How a safety incident may impact your ability to deliver products on-time and no defects.

Finding the trade off is the main objective of this parameter as Eliminating wastage may necessitate investments in new technologies or production processes, which may entail initial capital expenditure but lead to long-term reductions in production and operational costs. Each opportunity requires special attention, necessitating technical, economic, and possibly environmental and social studies to measure the impact of any planned investment.

These studies are critical in understanding the holistic impact of any investment. They encompass evaluating tangible and non-tangible benefits across five crucial aspects:

  • Increase profitability
  • Improve competitiveness
  • Enhance customer satisfaction
  • Sustainable benefits
  • Growth Potential

While focused for now on discussing the parameters of operational excellence, we will also discuss in future different mechanisms of exploring, identifying, screening and prioritizing cost saving opportunities which is a step that many organizations prefer to hire external consulting house to perform such assessments and studies.

Conclusion

Cost Management stands as a critical parameter in achieving operational excellence in any industry not only the process industry hence there are countless examples of successes like GE, Amazon, Shell, etc. Companies that excel in this area not only navigate the challenges of a competitive market but also position themselves for long-term success. By embracing process optimization, rationalizing the supply chain, integrating advanced technologies, and fostering a culture of continuous improvement, these companies set the standard for operational excellence in the industry.

 

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