Cost optimization through efficient processes and digitization
Planning for the coming year is on the horizon. The challenges remain considerable. The risk of high costs persists. Therefore, you should already plan your costs holistically for 2024.
In this context, it is crucial to pay attention to costs instead of prices. Costs can be influenced and controlled more directly and easily within the company than prices for purchased parts. Prices are set before parts are procured, based on specifications, requirements and drawings. In contrast, costs in the company arise from internal processes and procedures that have a certain momentum and may not develop optimally. Costs can be reduced and influenced by reviewing, automating, digitizing and optimizing these processes. Not every step in a process is mandatory. Therefore, it is important to distinguish between purchase prices and internal costs in the company. Purchase prices are strongly influenced by external market conditions and the products purchased, while indirect costs can be better controlled.
Different types of costs
Direct costs: These costs include purchase and purchase prices for all materials, whether direct or indirect, including services. They are closely linked to the procurement processes and can be directly influenced.
Indirect costs (process costs): Indirect costs are closely linked to a company’s internal processes and procedures. One example of this is the process costs in the purchasing area. For example, Kloepfel Consulting is currently analyzing the purchasing process costs at various locations in Europe for an Austrian group, especially in the area of maintenance (MRO = Maintenance, Repair and Operations). In doing so, the Kloepfel consultants are examining in detail which costs are incurred for orders that are processed via a catalog system on the one hand, or that are placed in the classic mode via BANF (requisition) through the system on the other hand, or that are even – as in the case of maverick buying – not recognized until the invoice is received by the company. This makes it possible to show transparently what potential there is for cost savings at process level through automation and digitization.
Cost of capital: Cost of capital refers to the costs associated with the procurement and use of capital, such as loans or equity. They include interest, depreciation, and other financial expenses associated with investments.
Personnel costs: These costs result from employee salaries and compensation. The automation and digitization of processes can help to free up resources by completing tasks more efficiently. Freed-up employee resources can be used internally for other tasks. As a result, one or the other position no longer needs to be filled externally. In this way, personnel costs can be saved in the long term.
The general point is that processes are subject to evaluation. Companies should examine their processes, also with regard to costs. Here, Kloepfel Consulting can evaluate the purchasing costs or purchasing processes at the respective customer and then present an optimization proposal. This shows the customer how he can reduce process costs. The customer receives an assessment of how much money he can save through process optimization.
Example of successful review of process costs
A concrete practical example for the review of process costs with the help of Kloepfel Consulting is a project at the Austrian corporation which was already mentioned.
There, the CPO was asked by a board member why certain products were more expensive in the catalog solution than on the open market. The advantages of the digital solution were process costs and automated processes. Kloepfel Consulting was commissioned to evaluate the actual costs of this process in eight subsidiaries and to identify optimization potential. Companies like this group with multiple locations naturally have varying degrees of digitalization. This means that not all sites use the digital systems currently in place to the same extent. A process cost analysis was therefore carried out.
Such an analysis reveals the level of digitization at each location and what a structured implementation plan for digital solutions can look like for the individual companies. The focus is on the following questions, among others: Where are the costs currently the highest? Why are there the highest costs?
The Kloepfel consultants look at the processes, i.e. take a look at the process costs. In the process, it also becomes clear how differently processes run or can run in larger companies with different locations. From this information, the Kloepfel consultants create a best practice case, so to speak, within the group – as was also the case in the aforementioned project at the Austrian company. Precise consideration is given to which site is assessed as best practice. This site assessed as best practice is then taken as a model for the further development of the other sites.
Procurement cost optimization 2024: Strategies and tools for sustainable savings
It is important to continue to carefully review the market and identify alternative suppliers or sources. This includes retrospectively analyzing price increases that have occurred in the last year or two.
After a critical review of price increases, negotiations should be conducted with suppliers. This is the only way to return to a price level that is in line with your own cost structure. This may require intensive negotiations and the identification of key suppliers.
Very specifically, the issue of cash discounts should also be mentioned. Companies should have realized that liquidity and cash flow are of great importance. After all, borrowed capital is now expensive.
The role of digitization in cost planning 2024: automation and increased efficiency
On the one hand, Kloepfel RePrice should be mentioned here, with which price increases can be easily warded off. On the other hand, the entire topic of digitalization plays a significant role in the holistic view.
This leads back again to the original focus of this article – on business processes. It is time to take a closer look at your own processes. In doing so, it is necessary to evaluate which processes still run in an analog manner. How many interruptions in the processes are there? When do you have to step out of a system, possibly print something and forward or send it for signature? Such a process analysis will quickly reveal where there is room for improvement.
What benefits can be expected? Among other things, it is possible to make processes more secure. A frequently discussed example concerns order confirmation processes. For example, if you use a purchasing platform to send orders, the supplier can transfer the order confirmation directly to his customer’s system with a simple mouse click. As a result, customers no longer need to take any manual steps.
Additional cost factors in 2024: Default risks
There is one cost type in particular that deserves special mention: the so-called default costs when suppliers become insolvent. Here, the costs can even be considerably higher if no risk assessment is carried out. This type of cost is likely to come increasingly into focus next year or in the next one or two years.
Consequently, it is advisable to think more intensively once again about risk management and monitoring. How can I regularly assess and review my suppliers to understand their current situation? Particularly important, however, is the question of what happens when my property is with the supplier, as in the case of tools, for example. In other words, tools that a supplier, for example in the area of casting, uses for its customer, such as a machine builder. The machine builder has commissioned and paid his supplier for these tools. These tools are then the property of the customer, so to speak. This must be clearly regulated in the form of a tooling contract. This is the only way that, in the event of the supplier’s insolvency, the customer can get back the tool he has paid for.
Consideration should now be given again to the following questions: What risk assessments and supplier evaluations have existed to date? What new risks have now been added, such as supply chain problems, protective legislation, etc.? And how can all this be integrated back into comprehensive risk management to avoid unexpected problems and high costs? Basically, then, the topic of risk management should be rethought and updated.
Personnel costs and leased personnel in the cost planning 2024
Temporary staff or leased employees are, to a certain extent, an additional purchase. Here, it is necessary to check which service provider is being worked with. Does this work efficiently? What costs are incurred? How are these costs developing? If necessary, new invitations to tender must be issued for this. As with any purchasing topic, the cost development of temporary personnel should be evaluated regularly.
When it comes to personnel, it is also necessary to look at how processes can be optimized. There are certainly opportunities for automation and digitization. For example, a well-structured catalog system can also be created here if everything relevant has been defined in advance. This can be used to place orders for temporary staff quickly and easily.
Are you interested in planning for 2024 and optimizing your cost structure? Then contact Kloepfel Consulting today for customized solutions thanks to expert advice.
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