1. Cost Reduction and Recovery
•SIPOC
•Comments
•Flow Diagram
•Measure
T and T LLC.
2. Preface
• This Cost Reduction Process expressed here is a
common type of auditing practice used by
corporations every day. Examples of this can be
found all over the web and have their roots in
auditing methods utilized and recorded by the
Greeks and Romans.
• Unique here is expressing the practice in a SIPOC
format with suggested measuring formats and
information. The hope is to enable small to
medium sized companies in their Cost Reduction
and Recovery efforts.
3. Comments
• The Cost Reduction and Recovery effort is one of the best Return On Investment (ROI) areas a company
can foster. The returns varying from $3 to $250 for every dollar spent on Cost Reduction Efforts.
• Conducting the exercise after Purchase Order issuance makes the effort a great deal more difficult. Your
Cost Reduction Expert (CRE) should know what actions are needed to make this easier. A
multidisciplinary action will sometimes need to be coordinated by your (CRE) to insure recovery is
possible. Setting new Purchasing Policies in place may sometimes be necessary.
• Cost Reduction efforts sometimes fail to yield monetary results. I have seen this when companies have
either allowed their vendors to control the rules of engagement and/or when company personnel fail to
support the Cost Reduction effort for political reasons. I see this as a good argument for occasionally
outsourcing the Cost Reduction efforts.
• Keep in mind, recovered funds can be used to balance budgets or fund those mid year projects that pop up
so often unannounced and unfunded.
• An extremely successful example of this of this was a prolonged engagement t where I was involved for
four years and averaged 25M yearly in hard dollar recovery.
• While reviewing costs it is also a good time to review products for quality, material reduction, going green
opportunities……etc. This is typically outside the ability of most auditors but what I expect of any Cost
Reduction Expert.
4. Measure
Data Raw Volume
Resolution Time
50
40
30 Recovered $ <1 Week
<2 Week
In Review
20 < 3week
Spending Other
10
0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Return On Investment
60000000
50000000
40000000
Investment
30000000
Return
20000000
10000000
0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
5. SIPOC - Cost Reduction
SUPPLIER INPUT PROCESS OUTPUT CUSTOMER
MONTHLY COMMUNICATE WITH
PURCHASE ALL SPENDING COMPREHENSIVE LIST OF ALL COST REDUCTION
PURCHASING ORDER SPENDS ORGANIZATIONS SPENDING FOR THE COMPANY EXPERT
PARETO
EXPENDITURES FOR
COST REDUCTION OJT ANALYSIS TOP LIKELY HIT LIST OF CANDIDATES FOR COST REDUCTION
EXPERT METHODOLOGY OVERSPENDS ANALYSIS EXPERT
COMPARE
EXPENDITURES TO
"RULES OF THUMB"
COST REDUCTION OJT ANALYSIS COSTS AND PAST REQUEST COST BREAKDOWN COST REDUCTION
EXPERT METHODOLOGY EXPENDITURES. FROM SUPPLIER EXPERT
COST AND
PROCESS AUDIT SUPPLIER COST DELTA OR VALIDATION OF COST REDUCTION
SUPPLIER BREAKDOWN RESPONSE. SPEND EXPERT
NEGOTIATE
RECOVERY AMOUNT
COST REDUCTION OJT ANALYSIS AND METHOD FOR DOLLAR VALUE AND PROCESS
EXPERT METHODOLOGY COMPENSATION FOR RECOVERY PURCHASING
6. Work Flow Diagram
Request Cost
List POs Cost Information
Purchasing Reduction Cost Information Supplier
Expert negotiation
Report
Recovered Money Suggested
and/or validation of Ancillary
quoting/spending projects for cost
process reduction.
7. MEASURES
NUMBER OF
PURCHASE
ORDERS
THAT HAVE
ENOUGH VOLUME OF RETURN ON INVESTMENT (ROI)
DETAIL EXPENDITURE FOR HOURLY COST OF
FOR ANALYSIS IN COST REDUCTION
REVIEW PROCESS EXPERT/SAVINGS
REPORTING OF RETURN ON INVESTMENT (ROI)
SPENDS VALUE OF FOR HOURLY COST OF
REPORTED EXPENDITURE COST REDUCTION
ON TIME S IN PROCESS TEAM/SAVINGS
SUPPLIER TURN
AROUND
TIME FOR
BREAKDOW TIME FROM
N OBTAINING
INFORMATI LIST TO
ON CLOSURE
