Optimizing Operations Costs to Drive Growth
For the most part, operations leaders have been in crisis mode for the last three years. They have had to deal with manpower obstacles, shifting demand, procurement difficulties, and supply chain disruptions. Many ramped up capacity to brace for higher and uncertain demand, while many built up inventory to alleviate shortages. In order to handle burnout and maintain business continuity in times of tight labour markets, they also increased their personnel.
These leaders now have a fresh obstacle to overcome. In order to free up resources that may be reinvested in technology, capabilities, people, and skills to support growth, they are being pushed to increase operational efficiency and productivity.
In other words, operations leaders are under pressure to deliver both immediate results and lasting impact. Striking this balance is no small feat. While quick cost cuts may seem simple and necessary for some, they can undermine a company’s ability to serve customers, invest in its workforce, and stay competitive.
There’s a better path forward. Leaders who adopt a more focused approach to cost management can unlock value by developing new operating models and capabilities that elevate their offerings. The ultimate goal of such a cost transformation? Achieving a competitive edge through sustainable and lasting cost management.
Optimizing Operations by Streamlining the Manufacturing Cost Base
For a cost transformation to succeed, companies must start by tackling their largest cost base, as this is where the greatest savings potential lies. For product-based companies, manufacturing and the materials involved typically account for up to half of the total product cost. For example, in the pharmaceutical sector, manufacturing expenses encompass raw materials, formulations, production, packaging, labor, and supply chain-related costs. These companies also incur costs for depreciation and functional support such as quality control, compliance, and environmental health and safety.
When evaluating manufacturing operations, companies in pharmaceuticals and other sectors should:
- Examine costs tied to major categories and identify actions to make each more efficient.
- Develop a cost base map outlining proposed actions and the potential savings they could deliver.
- Prioritize actions based on business strategy alignment, value creation potential, and the resources freed for reinvestment.
Addressing Variable Manufacturing Costs
Since fixed costs are inherently difficult to change, many cost transformations focus initially on reducing variable costs, such as enhancing manufacturing efficiency.
Organizations have several strategies for improving manufacturing efficiency. Automation is one avenue, and upskilling the workforce is another.
Automation, when financially viable, offers sustained performance improvements once implemented. However, automation isn’t always a practical solution. Especially for complex operations, which might require large financial investments to be automized, companies can seek to improve them by adopting lean-processes.
Lean practices enhance productivity by equipping employees with the tools to better plan and organize tasks, identify issues, and implement solutions. Successful lean processes reduce the labor required to maintain output. Businesses can then reassign employees whose roles have become redundant to other positions or new opportunities.
Potential Challenges and How to Overcome Them
Even with the best intentions, cost transformations often fall short of expectations due to various obstacles. Sometimes, the issue lies in a lack of experienced personnel to lead the change. In other cases, the company’s strategy may lack clarity, or operations may be too intricate to determine an effective starting point.
Data can also present a significant challenge. Without fully digitized operations or a unified data structure, gaining clear insights into performance or productivity is difficult. Without reliable metrics, pinpointing the most impactful actions to manage costs and free resources becomes harder.
To improve outcomes, organizations should:
- Ensure clarity about what is required to transform operations.
- Create a comprehensive plan detailing the expected outcomes of the transformation.
- Allocate sufficient resources to support the transformation, set priorities for related actions, and develop a roadmap for implementation.
- Define specific metrics, KPIs, and tracking mechanisms to monitor progress and ensure intended results.
- Implement robust change management strategies to maintain the pace of transformation and ensure changes are sustainable.
- Bring in external expertise as needed to guide the transition team and collaborate with company leaders on executing the plan.
Creating Lasting Impact Through Strategic Cost Management
For companies undergoing operational transformations, cutting costs isn’t enough. Operations leaders must also build capacity to create a lasting impact. By adopting a holistic and strategic approach, companies can achieve a competitive advantage and lay the foundation for future growth.
