In the dynamic world of business, where growth and expansion often bring their own set of challenges, unit cost management and operational efficiency become key for sustained success. Enterprises strive to strike a balance between scaling their operations and keeping costs in check. This article dives into operational due diligence as a strategy for unit cost reduction, exploring real-world scenarios and successful approaches without resorting to the well-trodden path of streamlining.
Operational challenges can arise from seemingly successful periods of growth. Consider the case of a company experiencing remarkable expansion over the years, only to find its warehouse bursting at the seams with inventory, inefficiencies, and operational bottlenecks. The knee-jerk response to this situation might be to hire more staff to address immediate concerns, but this approach often masks underlying issues that need a more comprehensive solution.
In such a scenario, the operational due diligence approach comes to the fore. Rather than simply tackling the symptoms of inefficiency, it involves a strategic introspection of the entire process. Operational due diligence takes root in understanding the pain points and capacity demands, performing a thorough analysis of current processes and flows, and crafting hypothesis-driven solutions that touch multiple aspects of the operation.
Operational due diligence is not about streamlining alone, but about understanding the complexities of operations and seizing opportunities for improvement. Let’s take a closer look at the strategies applied in real time scenarios.
Plant layout optimization may seem like a behind-the-scenes endeavor, but its impact is felt across the entire operation. An inefficient layout can lead to longer production cycle times, increased labor costs, and excess material handling. Contrarily, a well-designed layout enhances workflow, reduces material handling, and ensures the safety of employees.
In a real word scenario, when a leading automotive supplier found itself with a full production capacity and a lucrative order at its doorstep, the operational due diligence approach saved the day. By delving deep into the plant’s operational areas, space utilization, and processes, the approach identified that a significant portion of the footprint was occupied by storage areas. By moving these storage areas to an external warehouse, the plant could create more production space, leading up to 30% increase in production capacity. This wasn’t just about cost savings; it was about capitalizing on a strategic opportunity by leveraging the available resources optimally.
The transportation of goods, especially in industries reliant on shipping and distribution, can significantly impact unit costs. Factors like transportation mode, route planning, and packaging contribute to the expense. Introducing the concept of freight optimization illuminates the potential for substantial cost savings. Strategies such as route optimization software, consolidating shipments, and skillful contract negotiation with carriers can effectively cut down freight expenses. Furthermore, the ripple effect extends beyond cost reduction, contributing to a reduction in carbon emissions and a more sustainable business model. This connection to Environmental, Social, and Governance (ESG) factors holds great significance in today’s thoughtful business world.
In a real world scenario, A US-based automotive supplier, feeling the pressure of looming sales decline, embarked on the journey of optimizing its inbound supply chain. The company moved away from tactical, day-to-day routing decisions and embraced a strategic approach. Through comprehensive data analysis of supply cycles, carriers, modes of transportation, and more, the operational due diligence approach was able to identify the potential to reduce freight. By negotiating direct partnerships with selected logistics partners, the company achieved not only significant cost savings but also a 28% reduction in transit times.
Operational due diligence is about more than just saving costs. It’s about realizing untapped potential within existing operations, finding innovative solutions to challenges, and ensuring preparedness for the future. It involves a meticulous analysis of the data and a deep understanding of the business’s intricacies. Companies should consider:
• Monitoring Metrics: Establishing relevant Key Performance Indicators (KPIs) that provide insights into various aspects of operations.
• Implement Lean Principles: Apply lean manufacturing principles to your warehouse operations. Eliminate waste, reduce unnecessary movements, and implement standardized work processes. Implement techniques such as 5S (Sort, Set in Order, Shine, Standardize, Sustain) to maintain a clean and organized workspace.
• Accessing Data: Gathering and analyzing data on inventory, order processing times, staffing, and equipment usage can uncover hidden inefficiencies.
• Resource Allocation: Dedicate the necessary financial, human, and technological resources to effectively implement the changes recommended by operational due diligence.
• Outcome Vision: Envision a scenario where optimized operations lead to significant cost savings, improved efficiency, and a stronger bottom line.
Operational due diligence is not a one-size-fits-all approach. It’s a mindset that embraces a thorough understanding of operations, a willingness to challenge the status quo, and a commitment to unlocking hidden value. By taking a holistic view of operations and implementing strategic changes, companies can drive unit cost reduction, enhance operational efficiency, and position themselves for sustained success in an ever-evolving business landscape.