Using Lean Six Sigma for Fast Track SG&A Reductions
- 1. Using LeanSigma for Fast Track SG & A Reductions
- 2. “Every system is perfectly designed to achieve the results it gets” Donald Berwick, MD © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group. 2
- 3. SG & A Opportunities are “Huge” As one of the largest expense pools for any company, SG&A represents a key opportunity to improve bottom- line performance. In fact, a 5% reduction in SG&A for companies in the S&P 500 would result in an average operating profit increase of ~$183M.11 Source: Kaiser Associates analysis based on FY07 results for the S&P 500 SG&A opportunity is typically $70 million per billion in revenue Source: The Hackett Group and Standard & Poor’s But…despite the opportunity most American companies have been ineffective in managing overhead 3 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 4. A Study by The Monitor Group found that most U.S. Companies have a Poor Record of Managing SG & A… Despite investments in productivity improvements, average SG & A spending as a percent of sales continues to increase Average Revenue and Overhead Spending U.S. Public Companies CAGR $4,000 Average Sales $3,500 Average Overhead Spending Average Sales 7.9% $3,000 $2,500 $MM $2,000 $1,500 $1,000 Average OH Spending 8.4% $500 $0 1992 1997 2002 Average Overhead Ratio 23.5% 22.5% 24.6% (Overhead/ Sales) Source: The Monitor Group 4 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 5. …it also found a lack of results in SG & A Productivity Improvement Very few of the 900+ large U.S. public companies in the study had achieved significant SG&A productivity improvement Aggregate Change in Overhead Ratio over Time: All Industries $500M+ Change in Overhead Ratio 100% 15-30% 15% Less than a quarter achieved significant SG&A productivity 75% improvement 0–15% 34% Another third made modest gains 50% Nearly half let their overhead 0–15% 33% to revenue ratio grow 25% 15-30% 18% Source: The Monitor Group 0% 5 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 6. …but…those companies who had a consistent focus on SG & A were rewarded in the market… Firms that managed their overhead ratio consistently over time achieved significantly higher market value growth. Aggregate Change in Overhead Ratio over Time: All Industries $500M+ (1997 – 2002) 100% 15% 12.6% 15-30% 15% 10% 6.0% 75% 5% 0–15% 34% 0% -5% Low Level of Consistency High Level of Consistency 50% 10% 33% 6.0% 0–15% 5% 25% 0% 15-30% 18% -1.9% -5% 0% Low Level of Consistency High Level of Consistency Source: The Monitor Group 6 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 7. …however, the challenges is not “what”… • Still, the biggest challenge of SG&A optimization is not in recognizing its potential… • But many companies historically: – Struggle to identify specific SG&A optimization opportunities… – Are insufficiently “targeted” in their efforts, instead settling on across-the-board spending cuts, automating bad processes, etc. – Don’t have a systematic and flexible approach to SG & A optimization… – Don’t understand the implications/connections between SG & A and strategy execution… …rather the challenge is in “how” to optimize SG & A costs 7 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 8. Improving SG & A requires focusing on both efficiency and effectiveness…simultaneously EFFICIENCY EFFECTIVENESS • Process costs Process quality • Productivity Supplier development/management • Cycle times Analytics • Technology application Value Stream Alignment • Cost per transaction Spend Management • Staffing Levels FTE allocation Examples: Examples: Cost as a % of spend % of suppliers comprising top 80% of spend FTEs per $1B of spend Total spend cost reduction as a % of spend # of POs processed per FTE Percent of spend under procurement PO processing cycle time management influence Staff time allocation by process Percent of procurement activity allocated to Cost as a % of spend vs suppliers decision support “Doing things right” “Doing the right things” 8 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 9. Elements of SG & A Finance Sales & Service Marketing Every element of SG & A is made up SG & A of various discrete Human business processes Procurement Resources Information Technology LeanSigma is a proven methodology for making business processes both effective AND efficient 9 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 10. What is LeanSigma? LeanSigma is the combination of two powerful business process improvement methods that came out of the manufacturing sector in the 1980’s. In recent years it has been developed and successfully deployed in the service sector to include banking, retail, healthcare, staffing and financial services. WHAT DOES LEAN MEAN? Lean is the elimination of all forms of non value added work from the customers perspective (waste) in business transactions and processes WHAT DOES SIX SIGMA MEAN? Six Sigma is a statistical based methodology used to eliminate defects (errors or variations) in business transactions and processes © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group. 10
- 11. Why LeanSigma? LeanSigma incorporates the principle of Lean’s simplified flow and speed to increase business process velocity… …and incorporates Six Sigma’s approach to eliminating errors, variation and instability… …the combined tools, principles and methods of LeanSigma attacks the “hidden factory” of complexity in your business 11 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 12. Time is the Underlying Measurement of LeanSigma… The key is to reduce end-to-end system and effort to “core value” • Customer’s definition of “core value” provides a common lens to identify, prioritize and achieve both tactical cost reduction and strategic advantage – simultaneously • Common element of time consumption allows for engagement and participation at every level in the organization • Drives a rapid shift in paradigms by sifting “what we do” through a simple, common-sense filter • Accelerates bottom-line and operational results which can be leveraged for growth 12 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 13. Core Value Value is always defined from the customer’s perspective Value-Adding Activities Transform products or information into products and services the customer wants Non-Value-Adding Activities Consume resources, but don't directly contribute to process or service 13 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 14. Business Process Waste SG&A costs, or overhead, often are related to non-value added activities that can be eliminated or streamlined using LeanSigma principles. 14 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 15. … focus for SG & A Improvement with LeanSigma… End-to-End Time Reduction Identify and eliminate Procure to Pay (P2P) waste • Reduced invoice processing • Defects and loop-backs time from 44 days to minutes • Hand-offs • Increased FPY rate from 2% to 87% • Over-producing • Decreased error rate from 80% • Unnecessary to 0.7% processing • Increased cash discount $300K • Decisions in process • Reduced expenses of faxing, bank fees, postage and forms • Excess transportation $200K • Waiting Bottom Line = $1.6MM savings 15 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 16. Improving the SG & A Your most powerful competitive advantages are where the work gets done “The secret is in the dirt.” -Ben Hogan 16 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 17. SG & A “Hunting Ground” Marketing/Sales Planning Field Sales Management Finance Human Resources •Pricing/incentives process, •Service delivery model •Budgeting •Compensation approach standardization, and optimization •Business/geographic alignment •Management reporting/analysis standardization •Market Incentives vs. end-to-end •Offices-Real Estate consolidation •Revenue cycle: Billing, •Incentive/Bonus standardization impact of unevenness Collections, Cash Application and award process •Effectiveness measures •Accounting /External Reporting •Pension/Benefit plan •Invoice/AP processing, T&E rationalization •Treasury management •Recruiting and hiring process •Reporting and compliance Sales Information Technology Purchasing •Selling administrative processes •Infrastructure – •Service delivery model •Effectiveness measures support/maintenance process •Business/geographic alignment Engineering •Development process •Sourcing processes (vendor •Service delivery model •Project prioritization and selection, POs, …) •Business/geographic alignment management •Metrics •Design process •Testing process Supply Chain and Inventory Management •Project management process Corporate Services •Efficiency and effectiveness •SKU rationalization measures •Real Estate and Facilities Customer Contact Center •SKU velocity management •Minimums/pull systems •Order cycle process •Legal •Distribution Center strategy •Complaint/return processing •Communications •Logistics •Capacity management 17 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 18. LeanSigma SG & A Optimization Roadmap • Focus on Time and Customer Value – Improve cost by improving customer value… Improve cost and service and quality, same time… Identification and prioritization of performance gaps • Leverage Speed of Lean and Precision of Six Sigma Statistical tools – Rapid and collaborative approach… Analyze current SG&A… Identify opportunities… fact-based and data driven • Focus on both functional opportunities and cross-functional opportunities – Some of the “fastest” improvements can be made vertically (functionally) – The biggest impact improvements are found horizontally (cross- functionally or end-to-end) 18 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 19. Enterprise-wide SG & A Transformation Future State Realization • Focus on the customer Tactical “Quick Hit” • Lean, customer-centric Improvements processes • Functional opportunities with • Relentless focus on waste limited impact on the customer • Leveraged for competitive value stream advantage Awareness & • Finance & Acctg. Assessment • HR – Leadership Engagement and • Legal Buy-in • Aligned to end-to-end as well to – Pilot End-to-End & manage cross-impacts Functional Assessments • Leverage collaborative problem • Value Stream Maps solving to develop solutions and • Metrics/KPIs rapidly implement • Volume Data • Begin end-to-end/systemic • Supplier Performance improvement • Business Case • Start with the customer • Prioritized Improvement and work backward to the Opportunities vendor • Scorecard – Organiztional Awareness 19 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 20. Typical SG & A Timeline 6 – 8 Weeks 3 – 4 Months 4 + Months Alignment, Awareness & Tactical Improvements End-to-End Focus Assessment • Executive Leadership • Shared Services • Best Sourcing Alignment • Tactical cost savings • Identify gaps in • Value Stream transformation • Energy savings assessment data from • Process reengineering • Organizational transformation SCI, PBM and Specialty – waste reduction – complete assessment • Push ownership of improvement to lower • Staffing models levels of leadership • Communication plan • Begin focus on value • Focus on leadership development for and leadership stream sustainment awareness • End-to-end flow of • Launch Sponsorship & • Adopt “Process Mental Model” goods and services Steering Committee • Cross-functional • Knowledge transfer to internal resources • Begin actions for opportunities previously identified savings • Processes aligned to/support the value stream Financial Benefit 20 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 21. Lessons Learned • Active leadership and ownership from Senior Leadership – Top organizational talent should be assigned to the effort to drive the on-going change – Aligned metrics and incentives – Everyone has to play – Create a “burning platform” if one does not exist – Walk the talk • Build “tension” – stretch goals • Connections – integrate with other initiatives and teams, customer councils, governance • Invite self and promote contributions • Service Level Agreements – two way relationship • Communicate, communicate, communicate – WIIFM – Solicit participation at every level – Complaints are a gift • Passion around Process – LeanSigma – Metric-centric: (scorecards, business reviews, operating reviews, performance boards) • Quality, Cost, Delivery – End-to-End Focus • Savings and improvements need to be integrated into the on-going budgeting process • Do not mistake effort for results • Expect results – not “let’s see if it works” 21 21 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 22. Water and Fueling Systems Manufacturer The Need WTS Tech Support Opportunity • Average call abandon rate is 49% • Average weekly overtime is 29 hours 500 450 400 350 Abandon call reporting not available until 50 45 40 35 Management Reporting – Rebate Accrual Demonstrates waste of Resource Hours 5/13 Call Volume • 800 number on packaging is directed to 300 30 Tech Support - Many calls regard non-tech 250 25 Waiting, Over-Processing; A global water and fueling systems manufacturer 200 20 issues (pricing, shipping, availability) 150 100 15 10 Rework, Potential Defects 50 5 • Without addressing operational gaps 0 0 (possibly scheduling, process, and volume) 5/1/09 5/4/09 5/5/09 5/6/09 5/7/09 5/8/09 5/1 1/09 5/1 2/09 5/1 3/09 5/1 4/09 5/1 5/09 5/1 8/09 5/1 9/09 5/2 0/09 5/2 1/09 5/2 2/09 5/2 6/09 5/2 7/09 5/2 8/09 5/2 9/09 6/1/09 6/2/09 6/3/09 6/4/09 6/5/09 additional 10-60% FTE required to had experienced 87% growth over three years while eliminate overtime and handle calls Supplies Approach Impact CallsTaken ScheduledHrs RequiredHoursCT AbdCalls OvertimeHrs RequiredHour sPD managing multiple acquisitions and product-line Opportunity • Assess flow, volume, complexity • Cost avoidance of adding resources to • Consolidate spend to one vendor • LeanSigma Workforce Management to current operation 714220 Object: ($25-90K) Span of Control by Business/Level best (StaplescapacityOffice) match and Bell to volume by • Improved customer experience • Nearly 50% of the hour, day, and week. YTD spend is WTS (reduced abandoned calls, reduced expansions to solidify its market share and long- 14 outside printing …. Consider in scope transferred calls) • Continue to address demand root with Marketing Spend project causes 12 Manager Salary/Bonus 10 • $4.0M … Span 1-2 term earnings potential. During that same period, Span of Control 8 • $3.0M … Span 3-4 7 6 • $4.6M … Span 5+ Approach Impact SG&A as a percent of sales, had grown from 17.7% Facilities Lease • Re-negotiate with Staples or other vendor on overall Supply ~$900K Opportunity • $90K+ savings • Consider $350KApproach as part of WTS buy 4 2 4 3 4 3.5 • Leverage pull system if not in place • At Corporate/AWS the average cubicle the marketing spend project ($35K) 1. Restack main building from 84 to 0 to 19.8%. space per person is 102 ft2 • Typical cubicles are 6x8, 8x8, or 8x10 maximum similar to Fueling 154 cubicles at 6x8 and 8x8. Move 45 employees from Annex. Still have space for 25 cubes Summary of Impact 1 2 3 4 Management Level in the Organization “There are a lot of working managers in this organization 5 • Sales offices may also not be fully 2. Eliminate Annex office Lease $210K … get called to meetings and spend more time managing Cross-FE Corporate AWS WTS FFS FE Total Low High Low High Low High Low High Low High Low High leveraged or utilized 3. Re-evaluate sales rep space than contributing.” - Franklin Employee with Span of 1 Functional Improvement $1,088 $1,108 $13 $90 $240 $370 $1,341 $1,568 • Fort Wayne – 1 sales rep ($7K) requirements and option to work Legal, IS, Finance, FFS & WTS • Dublin – 2 offices in one city ($19K) from home. Tech Support, FFS Engr • Siloam Springs – 1 office ($3K) Spend Reduction $320 $700 $210 $285 $0 $35 $440 $1,090 $970 $2,110 Telecom, ,Supplies, T&E, Approach Facilities Cross-Functional Improvement $100 $150 $523 $689 $172 $265 $153 $238 $948 $1,342 Management and Financial Reporting, Concessions, Marketing Spend Shared Services $200 $300 $194 $338 $394 $638 Customer Service, Marketing Services • Conducted executive and SME interviews to gain Corporate Corporate Fueling Service Delivery Model $888 $1,468 $654 $838 $1,542 $2,306 Marketing/PM, Engineering Performance / Incentives $200 $470 $165 $270 $365 $740 holistic perspective on pain points and Span of Control $1,637 $2,013 $128 $738 $636 $1,024 $528 $836 $2,929 $4,611 TOTAL $3,345 $4,441 $2,114 $3,750 $1,669 $2,590 $921 $1,444 $440 $1,090 $8,489 $13,315 opportunities • Performed detailed analysis within high-impact SG&A functions, focusing on organizational design, Results performance management, process efficiency and • $8.5M reduction in costs, a reduction in SG&A of effectiveness, and spend management. 6% • Developed execution roadmap for quantified opportunities • Executed a series of Kaizen events to redesign processes 22 © 2008 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 23. Functional Examples • Support Call Center – Focus: Sales concessions and customer support – Approach: 2 kaizen events – Result: • Productivity improvement by 20% on Call Center operation • Improve customer experience =>decrease call volume • $1.2 million in savings • Marketing – Focus: Poorly executed shared services model for managing marketing collateral, advertizing spend, etc. – Approach: 3 kaizen events – Result: • Exhibit & Trade Show costs reduced by $-220K • Collateral costs reduced by $310K • Promotional costs reduced by $150K • Overall reduction in Marketing costs of 18% 23 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.
- 24. Thank you Guidon Performance Solutions, LLC Email – rwince@guidonps.com Website – www.GuidonPS.com Phone – (866) 986-4414 24 © 2009 Guidon Performance Solutions, LLC. All rights reserved. Guidon Performance Solutions is a licensee of LeanSigma®, a service mark of TBM Consulting Group.