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Reducing the Costs that Matter

Reducing the Costs that Matter

Sharing their learnings on cost reduction at the recent Lavery/Pennell Sustainable Innovation Breakfast were Pepsico, Nestle, Shell, Rexam, the University of Cambridge, Imperial College London and 2degrees. This note summarises the discussion.

Do Some Costs Matter More than Others?

Economists and managers have focussed traditionally on reducing labour costs. This resulted in the loss of 1.5 million UK manufacturing jobs from 1998 to 2011, reducing manufacturing labour costs from £100 billion p.a. to around £75 billion. But the £25 billion p.a. saved previously kept staff in meaningful employment, supported their households, and stimulated the economy through spending.

And the loss of those staff (representing over a third of UK manufacturing jobs) has placed increased burden onto the welfare system and in many cases resulted in economic hardship for individuals and their communities.

At the same time, non-labour manufacturing costs, comprising mostly raw materials and energy, have increased from £335 billion in 2004 to £345 billion in 2011 – an annual increase of 0.4%. Compare the impact of a 3.7% p.a. improvement from 1998 to 2011 (a similar rate achieved in labour headcount reduction) which would have saved £122 billion p.a. in costs by 2011. This 35% overall reduction in non-labour costs would have substantially improved the UK’s competitiveness and boosted exports, in turn creating more jobs and wealth.

While the economic benefits resulting from a focus on non-labour costs attractive, so are the environmental and social benefits:

  • Reduced biodiversity damage from mining and energy extraction
  • Reduced transportation and refining impacts, including water take and waste
  • Reduced greenhouse gas emissions
  • Improved balance of payments for the UK from reduced importing of materials and energy
  • Improved resource security and reduced supply risk
  • Reducing non-labour resource use creates skilled jobs

So it would appear that the costs that matter, and which should be the focus of improvement efforts, are raw materials and energy.

Significant Non-Labour Resource Savings are Possible

Research by the Next Manufacturing Revolution collaboration between the University of Cambridge’s Institute for Manufacturing, Lavery/Pennell and 2degrees has shown that leading manufacturers have reduced non-labour resource use by 8% p.a. for decades.

This 8% p.a. rate of improvement has occurred across sectors and been achieved in energy, water, packaging, materials, waste and transport. Usually this has occurred while meeting a 3 year or less investment payback requirement.

Leading companies have therefore opened up a significant cost advantage compared to many of their competitors, which continues to grow as leading companies continue to find further efficiency savings.

How Do They Do It?

Four themes were identified by breakfast attendees which consistently occur in leading non-labour resource efficient companies:

  1. Value in Waste

Leading companies recognise that waste has substantial value – not just the cost of disposal but the cost of raw materials and the processing that has been done on it. Recognising the full value of this waste has transformed views on waste and encouraged staff to find valuable uses and buyers for what would otherwise be disposed of.

  1. Focus on People

Conventional resource efficiency efforts focus mostly on machinery and processes. However, leading companies achieving significant resource efficiency improvements focus on people.

Key to engaging staff is Purpose – the subject of an earlier breakfast entitled How Purpose Drives Sustainable Innovation in Leading Companies.

Staff are motivated and engaged through setting up sites as profit centres and using goal alignment. Efforts are made to tap into the power of the collective knowledge of staff who have been making the products for decades and intimately understand the resource trade-offs made.

Champions are appointed based on their previous resource efficiency efforts and passion for the subject; their passion (combined with corporate support) can be infectious.

Some of the biggest successes have occurred from peer groups working together to identify improvements. Here innovation occurs in an informal way by bringing staff together.

  1. Measurement

Quantifying resource use enables benchmarking, a powerful tool for driving resource efficiency.

Measurement also provides direct feedback for staff to observe the impacts of initiatives that they try – enabling them to continue to build on early efforts as their understanding grows.

  1. Supplier and Customer Collaboration

Leading resource efficient companies treat suppliers and customers as valuable sources of innovation and insights. Laggard companies continue to interface with suppliers and customers through procurement and sales staff, who are not equipped or incentivised to engage in meaningful resource efficiency discussions exploring how both parties can collaborate for mutual benefit.

Traditionally, supplier collaboration has been done poorly and not been fruitful as suppliers are naturally suspicious about revealing potential cost savings to the customers who can demand all of the savings. Where supplier collaboration has been done well, such as by Asda Walmart supported by 2degrees, Golden Rules have been set up which are policed by a trusted third party such that savings identified are carefully apportioned to pre-agreed ratios.

Further expert views on successful collaboration are available in the write-up of the breakfast entitled How to Collaborate for Sustainable Innovation.

Conclusion: Time to Act

With leading companies achieving 8% p.a. improvement in their largest costs (non-labour resources), those companies not achieving these levels of improvement will soon be uncompetitive.

Valuing waste, focussing on people, measuring and driving supplier/customer collaboration enable companies new to non-labour resource efficiency to make substantial savings quickly.

 

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