Kaizen’s Operations & Research Entity Presents
COST REDUCTION THE GOOD, THE BAD, THE UGLY
By Lalit Singh
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EDITOR’SLETTER
“"Determination, Motivation and Persuasion lead to a new change..."”
Welcome to the eight edition of “LAKSHYA”, our monthly supplement designed for people who dare to think above the average and believe in connecting the dots. In an age where technology has taken over every sphere, information is abundant and data is omnipresent, we have conspired to bring to you a collection of thoughtfully created and carefully curated pieces of work by some bright aspiring minds of ICFAI Business School, Hyderabad on the current trends and hot topics in the field of Operations Management and their relevance in different industries. Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or product, the strategies can vary. Every decision in the product development process affects cost. Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market. We look forward to providing you with some valuable insights and inculcate the passion for reading once again within you all. We hope that you enjoy this first issue and do let us know if there are any topics you’d like to see covered in the future. Please write to us and become a part of this discussion Email ID: kaizenclub.ibs@gmail.com SUHAIL SHAIKH IT HEAD Kaizen – IBS Hyderabad
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CONTENTS
Cover Story: COST REDUCTION THE GOOD, THE BAD, THE UGLY OPTIMISING INBOUND FOR E-COMMERCE FULFILLMENT
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Cloud Kitchen
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COST REDUCTION THE GOOD, THE BAD, THE UGLY BY Lalit Singh
COST REDUCTION THE GOOD, THE BAD, THE UGLY Cost reduction can result in significant product cost saving, manufacturing cost saving, and life cycle cost saving when companies interested in cutting cost implement all 8 the elements of the following cost reduction strategy: 1. Cost Reduction by Design Many designs will work; only one will be the lowest cost! Develop that in half the time with these principles: Cost Reduction Opportunities: Product development determines 80% of product cost. The concept/architecture phase alone determines 60% of cost! See how Design Determines Cost See article on Low-Cost Architectural Breakthroughs shows the top 5 design strategies to lower cost: breakthrough concepts, designing out quality costs, eliminating change orders, vendor-partnerships, and designing to minimize part cost and material overhead. Article shows why cost is very hard to remove later after products are designed The Results: Significant cost reductions by design for parts, labor, material overhead, quality, and product development; designing for lean production can maximize lean savings.
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How to Reduce Product Cost by Design: Practice Concurrent Engineering with early and active participation of manufacturing, purchasing, vendors, etc. Implement Design for Manufacturability (DFM), Design for Lean, and Design for Quality For dramatic cost reduction - half cost to order-of-magnitude - optimize the concept/architecture phase To convert ideas, research, or prototypes into viable products, uses commercialization techniques to ensure success. Convert expensive welded frames to assemblies of CNC machined parts that are assembled rigidly and precisely using various DFM techniques. The Steel & Cost Reduction Workshop shows how design more manufacturable frames.
Activities Supportive to Low Cost Product Development: Co-locating Engineering with Manufacturing ensures the best teamwork; avoid distant off shoring If outsourcing, choose local vendors which ensures early and active vendor participation in product development teams Pre-select Vendor/Partners who will help develop products; avoid low-bidding So that vendors will help with design Implement standardization and good product portfolio planning for the best focus Total cost measurements (#8) to quantify all costs affected by design Correcting Counterproductive Policies. New ventures and startups will be able to implement these principles right away. Established companies may have to first correct counterproductive policies, by prioritizing portfolio planning, scrutinizing high-overhead sales, emphasizing thorough up-front work, quantifying all costs, and avoiding time-draining attempts to reduce cost after design, going for the low-bidder, or moving production offshore. See full article on counterproductive policies. 5 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
2. Lean Production Cost Reduction Cost Reduction Opportunities: Lean production benefits include doubling labor productivity, cutting production throughput times by 90 percent, reducing inventories by 90 percent, cutting errors and scrap in half errors The Results: Significant cost reduction possible by raising labor productivity and eliminating waste Even greater returns when lean is extended to a Build-to-Order business model (See # 3 Overhead Cost Reduction below) How to Reduce Manufacturing Cost: Implement Lean Production Activities Supportive to Lean Production: Design product families for lean production Concurrently Engineer flexible processes Implement standardization (#4) to enable dock-to-line distribution Rationalize products (#5) to eliminate the most unusual products with the most unusual parts and processes Total cost measurements (#8) to quantify all costs related to manufacturing Keep control of manufacturing in-house or with vendor/partners; avoid off shoring, avoid long and distant supply chains
3. Overhead Cost Reduction Cost Reduction Opportunities:
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Standard products can be built to-order without forecasts or inventory and specials can be mass-customized on-demand; see articles on Build-to-Order and Mass Customization The Results: Inventory carrying costs can be eliminated Procurement costs can be reduced with automatic, on-demand resupply Better responsiveness leads to more sales How to Reduce Overhead Cost: Implement Build-to-Order and Mass Customization to build products ondemand without forecasts or inventory Activities Supportive to Build-to-Order & Mass Customization:
Implement lean production (#2) Rationalize products (#5) Total cost measurements (#8) to quantify overhead costs Keep control of manufacturing in-house or with vendor/partners; avoid long and distant supply chains; avoid off shore manufacturing
4. Standardization Cost Reduction Cost Reduction Opportunities: Standard part lists can be 50 times less than proliferated lists; see Standardization Results Standard parts are easier to get and fewer types need to be purchased; see Standardization Benefits
The Results: Economies of scale result from larger purchases 7 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
Material overhead of the standard parts can be one-tenth that of proliferated lists How to Reduce Cost with Standardization: Implement Standardization with a practical procedure has been developed to standardize part and materials for new designs Activities Supportive to Standardization: Rationalize products (#5) to eliminate or outsource the most unusual products that have the most unusual parts and materials Total cost measurements (#8) to justify standardization efforts and encourage picking standard parts Don’t merge acquired products into the same plant or build others’ products;
5. Product Line Rationalization Cost Reduction The Results: Eliminate the "loser tax" on cash-cows to subsidize low-margin products Identify and remove products that are losing money on a total cost basis Reduce overhead demands and costs for hard-to-build "loser" products Free up valuable resources to work on cost saving efforts in engineering (#1), operations (#2 and #3), and supply chain management (#6)
How to Reduce Cost with Product Line Rationalization:
Implement Product Line Rationalization to eliminate or outsource low-profit products that have high overhead demands and are not compatible with cost reduction strategies Activities Supportive to Product Line Rationalization: Product Portfolio Planning focuses new product development
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Total cost measurements (#8) to identify opportunities and supports rationalization decisions 6. Supply Chain Management Cost Reduction Cost Reduction Opportunities: Supply Chain Simplification can greatly simplify Supply Chain Management Spontaneous supply chains can pull parts into production on-demand without forecasts or inventory The Results: Material overhead can be reduced by a factor of 10 for standard parts and materials Purchasing leverage results from high quantities of standard parts Automatic resupply eliminates forecasts, purchase orders, inventory, and expediting costs How to Reduce Cost in Supply Chain Management: Design products around standard parts to simplify Supply Chain Management Standardize parts to focus Supply Chain Management on high-volume, easy to get parts Rationalize away the most unusual products which have the most usual, hardestto-get parts Establish Vendor/Partnerships, which saves more money than low-bidding Activities Supportive to Supply Chain Cost Reduction: Total cost measurements (#8) to encourage and justify standardization and rationalization Don’t merge acquired products into the same plant or build others’ products; see article on Negative Effects of Mergers and Acquisitions
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7. Quality Cost Reduction Cost Reduction Opportunities: The Cost of Quality can be 15% to 40% of revenue; The Results: Quality costs can be greatly reduced; in some cases reducing quality costs can double profits How to Reduce the Cost of Quality: Eliminating quality costs starts with designing in quality Quality costs in manufacturing can be eliminated with Six-Sigma programs Rationalizing away unusual products raises net factory quality and avoids wasting quality resources on inherently lower quality products
Activities Supportive to Quality Cost Reduction: Total cost measurements (#8) to quantify the Cost of Quality
8. Total Cost Measurement to Support All Cost Reduction Activities Cost Reduction Opportunities:
Total cost measurements are imperative to encourage and support the above activities to reduce all cost categories The Results: All the above cost reduction activities are encouraged and supported; the results are quantified, thus encouraging more total cost reductions. How to Reduce Cost with Total Cost Measurements: Implement total cost measurement with the easy-to-implement cost driver approach 10 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
Activities Supportive to Total Cost Measurements: Until total cost can be quantified, everyone must make decisions based on total cost thinking Senior management understands the importance of quantifying total cost, implements total cost measurements, and encourages all cost decisions to be made on basis of total cost How Not to Lower Cost; Short-sighted attempts prevent real cost reduction Don't try to remove cost after the product is designed because cost is designed into the product and hard to remove later; Don't use low-bidding, which only appears to save one category of cost, but can substantially raise many less-obvious costs and compromise other important goals like quality, delivery, and missing out on the major contributions that vendor/partners can make when they help product development teams design products.
Don't offshore manufacturing for cost, which will not result in a net cost savings because of hidden overhead costs and because it inhibits, compromises, or thwarts 6 out of the 8 cost reduction strategies (presented on the home page) due to the following reasons:
Offshoring manufacturing separates manufacturing from engineering and thus thwarts Concurrent Engineering and compromises the 80% of the cost determined by the design. Further, transferring, supporting, and dealing with quality and delivery problems of remote manufacturing absorbs many resources in engineering (in one case, 75%), manufacturing, and purchasing whose time would be better spent developing low-cost products.
Offshoring manufacturing to distant contract manufacturers increases the delivery time, which makes it hard to pull parts just-in-time and makes build-toorder impossible. Further, parts may be batched for shipping, which is opposed to the one-piece flow aspects of Lean Production. Finally, offshoring
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manufacturing removes production from the control of the OEM manufacturer. All of these effects conspire to:
Compromise lean Production.
Make it impossible to implement Build-to-Order and Mass Customization. Make it hard to implement standardization because contract manufacturers' preferred parts probably won't correspond to your standard parts, so, in order to realize the production benefits of standardization, part numbers may have to be changed, which may increase a company's part proliferation. Make it hard to optimize supply chains. Make it hard to maximize quality and implement Six Sigma without data and control over manufacturing; see Quality Cost Reduction summary and the article designing in Quality. If all 8 cost reduction strategies are implemented, the cost savings will be much greater than appeared possible through off shoring.
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OPTIMISING INBOUND FOR ECOMMERCE FULFILLMENT BY Benazeer Khan
OPTIMISING INBOUND FOR E-COMMERCE FULFILLMENT
E-commerce is changing warehousing. Consumers want to purchase merchandise at any time, from anywhere—whether it is online, mobile, or in a store. As a result, efficient and reliable omni-channel fulfillment has become an imperative for retailers. To better align business models with the new paradigm, retailers and logistics providers are augmenting their distribution networks to focus on the consumer, resulting in several interesting warehousing trends. 13 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
Several of those trends involve the physical size and location of distribution centers (DCs). Increases in order throughput, in conjunction with larger numbers of stock keeping units (SKUs) and greater order complexity, are catalyzing the need for additional aggregate DC capacity. Retailers are also pushing inventory carrying costs and direct fulfillment activities upstream of storefronts, adding to the need for a larger DC footprint.
At the same time, more demanding consumer expectations, relating to delivery times and returns, are necessitating the proliferation of smaller and more regionalized warehouses and DCs, as opposed to the mega DC model. The resulting scheme comprises increasing numbers of potentially smaller DCs located close to major population areas. This positioning also gives retailers access to the greater workforce needed for running e-commerce fulfillment operations. BRINGING FOCUS BACK TO INBOUND With e-commerce spurring rapid change in warehousing, retailers and logistics providers need to evaluate how inbound logistics can help optimize e-commerce fulfillment operations. Inbound logistics has a major impact on the customer experience—even if it is well hidden from the consumer's view. As an example, many online retailers promise two-day shipping, but that does not equate to two days for the retailer or logistics provider. Shipping, fulfillment, and inventory availability all play symbiotic roles in enabling two-day deliveries for customers. Given their symbiotic relationships, it is vital to evaluate the supply chain from a holistic point of view.
THREE KEYS FOR BETTER INBOUND There are three key aspects of inbound logistics that enable a better e-commerce experience: demand planning, modal selection, and product availability. For consumers, the most visible of the three is product availability. If a product is not available to order, it stops a sale dead in its tracks. Depending on the timeframe a consumer may need a product, lack of availability could drive business elsewhere, opening the door for other retailers to take market share. 14 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
Less visible to the consumer—but no less important—is modal selection. This needs to be considered with great care, as it can become a balancing act between optimizing profit and ensuring availability. Transportation leaders are being challenged by the ebbs and flows of the pricing environment, all while juggling the choice between less-than-truckload (LTL) and truckload.
A third aspect of inbound logistics is demand planning, which can help alleviate the pressures of pondering modal selection. Demand planning is informed and influenced by many different departments within an organization—with marketing among the most important. If not integrated with demand planning, marketing initiatives can seriously disrupt fulfillment. A website may offer a bundle of products at a discounted rate, but the online special will result in many dissatisfied customers if a DC was not prepared with the appropriate stock for timely fulfillment. THE FUNDAMENTAL FIX FOR A BETTER SUPPLY CHAIN Poorly planned inbound operations can be disruptive to an otherwise-adequate fulfillment operation. The fundamental fix to the problem is supply chain visibility. A more comprehensive approach to supply chain management—one that includes visibility into the complexities of inventory supply, inbound transportation, order fulfillment, and outbound transportation—can help to provide for a great omni-channel experience, one that encourages customer loyalty and optimizes profitability.
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CLOULD KITCHEN
BY SUMEDH GARG
The food industry has always been competitive, whether in terms of taste, revenue or clients. Nevertheless, this industry can never slow down; for one can never deny when presented with good food. Even the top 10 successful startups find food aggregators at the top due to huge customer base at all levels. Startups like Swiggy employ a cloud kitchen model to help their partner restaurants with back end services. With its new platform known as ‘Swiggy Access’ launched last November in Bangalore, it is slowly integrating itself with the model to provide better services. The fact that Chinese investors like Alibaba want to recreate the success story of their delivery model in India points to the fact that this is a pretty profitable market.
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Basic flowchart of the model
In general, a cloud kitchen is a restaurant kitchen that accepts incoming orders only through online ordering systems and offers no dine-in facility, distinguishing itself from traditional restaurants which need a physical presence to provide dining facility. They just have a base kitchen that delivers food to the customers’ doorstep. The model is loosely categorized into two kind of segments: Infrastructure Services and capturing unit segment. While for a brand, Infrastructure service provides better profit margin and control over the market, the latter provides better service model and options to the customer. Zomato, for example has moved from Zomato Infrastructure Services to unit capture segment and has halted its Dwarka operations due to loss of operations and failing cost.
Guide to start your own cloud kitchen
Another successful startup in this scenario is Faasos. While the name might not sound very familiar, it has created a market for itself pretty early in this field. Being one of the first ones to employ the concept of cloud kitchen as a mainstream model, it has earned heavy profits. In the first six months of the fiscal year 2017, it made sales equal to that of the entire fiscal year 2016. When 17 |K A I Z E N ’ S O P E R A T I O N S & R E S E A R C H E N T I T Y
other foodtech companies were shutting down, it was profiting heavily from this model because the model requires little expenditure and low rent cost.
Even the future market projects a high tide in upcoming startups that might use exclusive contracts with restaurants to provide back end services. Nevertheless, such operations only profit the customers as they have the variety and cost to choose from.
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ABOUT US:
The word “Kaizen”, where “Kai” = change “Zen” = good, simply means “change for better”. In English Kaizen is typically applied to measures for implementing continuous improvement. It is an approach to activity organisation based on common sense, self-discipline, order and economy and is a strong contributor and fundamental part of a lean production process model in lean manufacturing. Kaizen- The Official Operations Club of IBS Hyderabad believes in relishing in the essence of "Constant Change and Evolvement" and hence we, as an organization work willingly for the betterment of the student community. KORE- Kaizen’s Operations and Research Entity, one of our primary wing which flaps to cater to the needs of students and motivate them to soar high by polishing their technical competencies. KORE’s area of expertise includes Case Based Research, Consultancy, Live Projects and Workshops. LAKSHYA, an initiative taken by KORE primarily focuses on the concepts of operations management and various articles based on the day to day operations and logistics of an organisation - Shalini Jha
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LAKSHYA is an academic print and is not for any commercial sale. Reliability and Responsibility, for sources of data for the article vests with the respective authors. Please feel free to drop in your suggestions at kaizenclub.ibs@gmail.com KORE: Kaizen’s Operations & Research Entity. Kaizen – The Official Operations Club of IBS Hyderabad All Rights Reserved
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