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COST REDUCTION THAT WORKS WHEN EMPLOYEES' IDEAS CREATE SIGNIFICANT, RAPID AND LASTING SAVINGS AT SAS CARGO

By Adam Norsker and Jesper Flach

www.quartzco.com

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CONTENTS CASE: "AGILE" COST REDUCTION AT SAS CARGO ........................................................................................... 2 BACKGROUND AND RESULTS ......................................................................................................................... 2 PROCESS AND METHODS ................................................................................................................................ 2 IDEA GENERATION ............................................................................................................................................ 2 REFLECTION: WHERE DO "IDEAS" COME FROM? ......................................................................................... 2 THE INVISIBLE AND VISIBLE HAND OF COST REDUCTION .......................................................................... 2 THE PROJECT'S FINAL PRODUCT AND RESULTS ......................................................................................... 3 WOULD YOU LIKE TO KNOW MORE? .................................................................................................................. 3 CONTACT THE TEAM BEHIND THIS ARTICLE ................................................................................................. 4

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CASE: "AGILE" COST REDUCTION AT SAS CARGO Cost reduction is an ongoing "must" for all company executives. But if executed the wrong way, savings programmes risk becoming unnecessarily complex and accompanied by dissent and controversy in the company. However, significant savings are achievable with brief and focused processes. This article describes how Quartz+Co assisted SAS Cargo Group A/S with an intensive project that resulted in significant cost reductions.

Management technologies such as Lean and Six Sigma are making triumphant progress as instruments to reduce complexity in production and service processes. The aim is typically to reduce costs, but it could also be to confront internal dogmas (the "not-invented-here" syndrome).

At Quartz+Co, we have consciously chosen not to work with the Lean tag as it is often associated with comprehensive programme offices and protracted project processes. However, our co-operation with SAS Cargo illustrates how cost reduction can be facilitated, identified and executed quickly and "agilely".

Through a brief, intensive process involving employees, SAS Cargo established a clear direction with a thorough portfolio of initiatives that have succeeded in creating solid results in a very short time.

BACKGROUND AND RESULTS 12 months ago, SAS Cargo conducted a project to identify concrete initiatives to create significant and robust savings in the company's trucking costs.

Trucking costs arise in the transport stretches in transit where products move by land rather than by air. This is a significant expense item for SAS Cargo and an important factor in the company's overall profitability and service offerings. Within one year of the project completion, SAS Cargo has reduced their trucking costs by 13-15%.

"It has been a process with employee involvement, which has created a high degree of acceptance on many levels" Teddy Zebitz Presiden, Business Systems Division

PROCESS AND METHODS The project involved a short and compact six-week process with two middle manager workshops and two steering group meetings. The actual method and process of the work is entirely generic and can be used for nearly all expense groups, regardless of whether these are external expenses (i.e. to external suppliers) or internal expenses. In this case, the expense group involved a number of suppliers in multiple countries.

Figure 1 Project phases

1.Idea generation

Output over time

2.Analysis 3.Prioriand tisation description

Idea catalogue with outlined initiatives and concluding workshop with steering groups (six weeks)

4.Implementation and followup

Implementation in SAS Cargo (12 months)

There is a set of important rules in a project of this nature: 1. There must be openness throughout the process – no "holy cows" or limitations on solutions 2. Focus on the quantity of ideas to begin with and trim them away later 3. The ideas must be subject to uniform treatment – in other words, the ideas must be described and analysed on a uniform level that enables the steering group to understand and prioritise them Three groups with different roles were formed. The task of the first group, the steering group, consisting of four persons from various management levels, was to approve the proposals and ensure correct placement of responsibility in the organisation. The task of the second group, consisting primarily of middle managers (a group of six key persons), was to generate ideas in workshops, provide wellfounded argumentation, collect data for the ideas and verify calculations. The third group, consisting of two consultants from Quartz+Co, was responsible for directing and managing the process, including facilitating workshops, calculating effects and describing initiatives as well as providing specialist knowledge within selected areas.

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IDEA GENERATION The first critical phase which involved generating ideas for cost reductions was conducted as a combination of workshops with middle managers and financial analyses, while detailed description was carried out by the consultants. This resulted in a number of ideas generated during the two workshops, and some additional ideas arose via the financial analyses. The method employed here was deductive – the ideas were formulated as hypotheses and then quantified and outlined.

"It was surprising how simple and easy the ideas were to implement – most of them were already present in the organisation" Ronald Christiansen Manager, Trucking As with all other forms of problem-solving, some discarding of initiatives occurred in this project. This was typically the case if they had too little financial impact or were very difficult to implement.

The various ideas could be divided into three general categories: 1.

2.

3.

Closer co-operation with suppliers globally (e.g. investment in longer trucks for certain destinations to reduce the number of trips and utilisation of empty space above pallets in the trucks by using a lifting and stacking system) Internal changes at SAS Cargo (e.g. closer management of driving rules and invoice auditing as well as assessment of needs and levels for service level agreements) Renegotiation of prices in selected areas (e.g. handling of selected routes based on cost calculations)

"There is no doubt this way of working has been vital to achieving our target" Kenneth Furhmann Head, Revenue Management & Traffic Execution

THE INVISIBLE AND VISIBLE HAND OF COST REDUCTION REFLECTION: WHERE DO "IDEAS" COME FROM? The introductory phase of the project has given SAS Cargo and the Quartz+Co team a perfect occasion for reflecting on the sources and nature of ideas.

To begin with, ideas usually come from employees.

The majority of the ideas that were suggested and ultimately implemented in the project were originally "on standby" in the minds of the employees.

Typically, these ideas were not concrete – that is not quantified and outlined according to a logical, systematic approach. Of the ten final initiatives, eight originated from employees.

Furthermore, it is often not just an idea but also a catalogue of many ideas in unison that is necessary to create significant savings. This was certainly the case for SAS Cargo.

A closer analysis of the overall idea catalogue demonstrated clear regularities and patterns in which multiple concrete initiatives needed to function together.

A beneficial element of the SAS Cargo project has been that most of the initiatives provided savings for both the supplier and SAS Cargo. Therefore, it has, of course, been relatively easy to agree on changes in the customer-supplier relationship because the basis is mutually beneficial value creation. Adam Smith's so-called "invisible hand" often benefits many parties in industries where value chains and transactions closely link the customer and supplier in a more or less formalised network. In short, it is good (mutual) business to reduce costs in such a context. In Quartz+Co's experience, this observation applies across industry lines and expense groups when dealing with external supplier expenses.

Nonetheless, successful cost reduction is primarily driven by a "visible hand": leadership and factbased analysis. The analysis process to confirm the ideas at SAS Cargo began with a series of general financial analyses to create basic agreement within SAS Cargo (especially in the steering group) regarding the financial basis of the project. The aim was to establish an overview of the most important focus areas and to create a common financial basis for the project – a baseline – to calculate future savings. Thus, the impact calculations at the idea level were carried out from below and progressing towards this baseline.

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The establishment of this common basis also made it more transparent where the "big fish" were found, and it established a neutral basis for further discussion and debate.

THE PROJECT'S FINAL PRODUCT AND RESULTS The SAS Cargo project's final product was an idea catalogue with a 3-5 page outline of each initiative and a workshop in which the steering group agreed to explore the initiatives fully. With this product in hand, the steering group could select which initiatives to begin with, which middle managers were responsible for their implementation and a time frame for implementation they could reasonably expect.

A year after the original six-week process, SAS Cargo has prioritised the catalogue, delegated responsibility, allocated resources for the initiatives and implemented it all with ongoing follow-ups on the overall progress. The cost category, trucking, has been reduced by 13-15% since the project was initiated, while quality and service are still at a high level. Of the ten identified ideas, nine have been initiated and implemented in 12 months. In addition to this, nine extra initiatives have been added since the initial process.

The combination of the steering group's ability to follow up on the initiatives and the motivation in the SAS Cargo organisation is critical in the subsequent implementation phase. Involving those who are to carry out the initiatives early on in the process is not just for the sake of identifying good ideas, it is also significantly easier to generate motivation and carry out the initiatives when the entire organisation, and not just the purchasing department, participates in the initial process.

A new standard method for presenting, prioritising and following up on ideas "Elaboration" of existing innovation at SAS Cargo Increased quality and awareness of the factors that influence quality The SAS Cargo project's combination of tangible and significant results (including those not based on purely financial parameters) fulfils Quartz+Co's aspiration to deliver management consulting that provides significant results and relevance in close partnership with our clients.

WOULD YOU LIKE TO KNOW MORE? Operational strategy is primarily a question of executing a company's strategy on the basis of the right business model and a flexible system of business processes. Other types of operational strategy analysis are usable as feedback or input for strategy development or as a means of measuring performance. Operational strategy must ensure that the strategy is capable of actual execution and that the daily operations function cost-efficiently.

Quartz+Co has compiled the methods and experiences necessary to help companies carry out their activities as optimally as possible. Our overall experience with business improvement gives us an unsurpassed expertise in the area of value chain optimisation, both within our key sectors and more general business processes.

Our strengths in benchmarking, process modelling and stringent data analysis enable us to help companies evaluate their activities and implement changes that increase the efficiency of, and improve trust in, operational decisions.

In short, the execution of this project has provided SAS Cargo with consensus, wisdom and a clear direction for how to achieve the general ambition to reduce costs. This includes clarity and prioritisation of the concrete initiatives (who are responsible, the financial impact of the initiatives and implementation strategy).

Furthermore, there have been a number of desirable side effects in connection with the project: Positive environmental impact as a result of several of the initiatives (reduced CO2 emissions)

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CONTACT THE TEAM BEHIND THIS ARTICLE

M: +45 21 21 99 19 E: adam.norsker@quartzco.com W: www.quartzco.com

M: +45 61 61 66 42 E: jesper.flach@quartzco.com W: www.quartzco.com

Adam Norsker

Jesper Flach

Adam is the co-responsible for Quartz+Co's operational strategy practice and has extensive experience in company transformation, including transformation of purchasing, purchasing functions, performance improvement and process excellence.

In his work with strategic clarification and business improvement, Jesper has always had a quantitative and fact-based approach to tasks, which derives from his broad understanding of the businessrelated consequences of numerical analysis, such as ABC analysis and product/service profitability analysis.

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