Look after the pennies

Posted on 7 May 2008 by The Manufacturer

…and the pounds will look after themselves. While cost control has the big targets in sight, Colin Chinery asks whether the many smaller spends are proliferating off screen?

Surveying the quality of British cost management, the Chartered Institute of Purchasing and Supply estimated that up to 60 per cent of corporate spend is uncontrolled. “It surprises me how much companies really don’t know about what they are spending money on,” sighed one supply chain research director.
On big ticket spends like raw materials and labour that judgement seems excessive. Can there be a managing director or chief executive careless over their impact on profitability in fiercely competitive markets? Among SMEs, however, energy consumption management produces a mixed though fast improving performance. While on indirect spends such as staff expenses, heating and lighting, the costs can slink under the radar – or among large organisations vanish in bureaucratic slack.
There is little sign of slack at Barton Cold Form, Droitwich. “These days everything in the manufacturing environment must be placed under scrutiny to save money,” says managing director Paul Denning. “We look at absolutely everything, from how many light bulbs are switched on in the factory, and we’ve installed light sensors that pick up movement throughout all offices, so when people leave, the lights automatically go off.
“On the shopfloor we have looked at high efficiency lighting and also at changing the intensity of the lights during daytime. We’ve put a lot of effort into this type of thing. And on energy we use a local consultant who tries to buy from a number of different companies to give us cost benefits. Everything is looked at these days.”
Denning had just completed a waste item ‘amnesty’ among his 100 employees, a check on pens alone revealing 25 in one desk drawer. “We probably go a little bit into finite details but you have to, to stay in business. You have to keep the costs of everything down to an absolute minimum.”
Competitiveness is everyone’s responsibility, “not just the guys controlling the big stuff like energy, raw materials, labour, logistics etc,” says Nissan UK’s David Swerdlow. “We take a holistic approach to cost control, and last year ran a Challenge Cost Programme which asked every employee to put forward their ideas for cost improvement.
“We received lots of responses and engaged with the staff across the board, and I think it helped to involve everyone – not just management – in thinking about cost.”
At its Sunderland auto plant – Britain’s biggest – Nissan UK runs frequent ‘no energy’ weekends in which all non-essential machinery is turned off – and extending to all lighting, vending machines and personal computers. Nissan also scrutinises company travel, while promoting increased use of i-meetings and video conferencing.
“It’s important to us as a plant to do whatever is necessary to maintain our overall competitiveness,” says Swerdlow. “The stakes are too high not to – and this is a job for all functions and all employees.”
At Sheffield Forgemasters there is a more than usual incentive for the individual employee to scrutinise unnecessary costs, says director Peter Birtles. “Apart from many other control and monitoring mechanisms, what we have done is create a situation where over 70 per cent of the employees are also the shareholders of the business and therefore have a personal, vested interest in the company’s financial performance and success. That alone has done much to focus people’s attention on efficiency, wastage and cost control in the small things as well as the large.”
The centrality of individual staff involvement in cost management is endorsed by Steve Brittan, managing director of BSA Machine Tools, Kitts Green, Birmingham. “Very much so, and this philosophy has spread in British industry over last 10 years. The bowler hat, big gob, leave- your-brain-on-the-peg type of management has largely gone.”
According to last year’s Trends in Human Capital report by Saratoga, a division of PriceWaterhouseCoopers, it costs less to employ people in Britain than in any other western European country.
“We’ve all done the lean and mean thing over the years and I don’t think we are seeing much out of control there,” says Brittan. “But with the dramatic increase in energy costs, manufacturers need to look at issues like efficient lighting and energy use, which have not perhaps had the attention they should have. They must keep on top of insurance premiums and cover, and as with fuel, switch, switch and switch. If you get complacent or idle, they will rape you.”
At the Saint-Gobain’s manufacturing plant at Eggborough, west Yorkshire, all staff are empowered to scrutinise costs, with cost centres openly available to managers, says managing director Dr Alan McLenaghan.
Every cost centre has an owner and a verifier, and owners are measured against cost centre management.
“We share costs through our internal communications to get ideas on how to bring them under control or to get staff input into the value of items. We use simple communication tools like plasma screens in the canteen and notices to let people know how much certain things have cost us in the past month.” Through a programme styled ‘my contribution’, the company “seeks ideas on how we might do better, more cheaply, or by using less, and so on.”
Parallel with this, an all-departmental energy management team examines ways of cutting consumption through initiatives and input into new equipment purchase. Changing the capital purchase approval process to look at whole life rather than purchase costs alone was one outcome. Another, the setting up of the ‘switch it off’ campaign with, for example, information sharing on the cost of a single light or screen on overnight standby.
“We incentivise people through bonuses to hit cost centre targets, not just sales or profit targets,” says McLenaghan, “with impressive environmental as well as cost saving initiatives resulting.”
At Eggborough, purchasing professionals measure the savings negotiated each month on contracts and goods bought, reporting them as a purchasing metric.
“When relationships have been established with suppliers, we set them up so that our employees can purchase directly with them without need for the PO process. This is all done electronically, saving time and money in the purchase process itself. It’s crazy to be buying a £10 item from RS components and paying £3 for administering the process.”
The think small approach has had impressive results. “Using a printer cartridge refill company, for example, rather than constantly buying new, made a £4,000-plus per annum saving for us. When the Cartridge World rep met with us I think he couldn’t believe his luck. We joked with him that he came onto our site in a yellow Cartridge World liveried VW Beetle and would be leaving in a gold Aston Martin!
“But it was good business for both of us and still is. Strangely we had an unstated view that big companies don’t work with little guys like Cartridge World – that they are just for the general public. But we have been really impressed with their ability to give us great service and cope with our volume.”
“As far as marketing is concerned, we do everything we possibly can ourselves, and get marketing intelligence from wherever we can,” says Paul Denning. “I spend an awful lot of time overseas – next week I’m in Poland where I will see 16 to 20 companies in a week and talk to as many customers as I can, maximising the cost.
“It will cost you £1,000 for the week and if you see three or four companies it will set you back £250 a visit. I will see 20 companies, maximising the time I’m out there to get the biggest benefits. I will be in Taiwan in three weeks, and in four days I will see at least 20 companies. We haven’t got a sales and marketing budget, and because of that we look at every single penny we spend.”
Denning feels that many SMEs pay insufficient attention to the fine details of cost control. “I think people take it for granted that you have to pay X amount of money for power, insurance, and everything else, and just pay it. There are so many companies, so many SMEs, who don’t have proper purchasing departments and never challenge a price.
“We had this many years ago at Bartons, and every single time we get a quote, whether it’s insurance or whatever, there is always a way of doing it cheaper. You need to understand that, and once you’ve got professional people in your organisation looking at every single tiny thing you buy, you can save money. And in a lot of companies I don’t think this kind of attention is given.”
Denning had just been speaking with his electrician who had completed an analysis of every machine in the plant: how much power each consumed, how this could be reduced. “We found, for example, that the motors in some machines continue to rotate after they have been switched off. We are looking at this because it would save us an awful lot of money.”
Paul Denning’s advice is short and sharp. “Shop around for every single thing you buy for your company, and look from the top of the roof to the ground and see where you can save money. You have to look at everything these days to stay in business.”