For much of the last three years, operations leaders worked in crisis mode. They had to overcome supply chain and procurement bottlenecks, radically fluctuating demand, and workforce challenges. They bulked up on inventory as a hedge against shortages and invested in excess capacity to prepare for increased, more volatile demand. They added people to ensure business continuity and counter burnout and tight labor markets.

Now, operations leaders are being asked to transform yet again. They are being asked to make operations more efficient and productive to free up resources for companies to invest in new technologies, capabilities, talent, and skills to support future growth.

Put another way, operations leaders face pressures to create both short-term benefits and long-term impact. Balancing the two can be challenging. It’s relatively straightforward to make quick cuts, and some companies need to. But cuts can erode a company’s ability to meet customer needs, invest in their people, and retain a competitive edge.

Read more on Cost Management

Read more on Cost Management

Cost Management

BCG’s cost advantage approach resets costs within a framework that is customized, precise, and thorough.

We see another way. If leaders take a more precise approach to managing costs, they can create value through new operating models and capabilities that let them improve what they offer. The ideal end state of such a cost transformation? Driving competitive advantage through cost management in a way that is sustainable and lasting.

Optimizing Operations by Optimizing the Manufacturing Cost Base

For a cost transformation to work, companies have to address their biggest cost base first, since it presents the biggest potential cost savings. For companies that make products, manufacturing and the materials that go into them represent up to half of total cost of product. For example, pharma companies’ manufacturing costs include raw materials, formulations, production, packaging, the labor needed to make products, and costs associated with supply chain. Pharma companies also incur costs related to depreciation and functional support such as quality control, compliance, and environmental health and safety.

When reviewing manufacturing operations, companies in pharma and other industries should:

• Consider the costs associated with each major cost category, and the actions they could take to make each more efficient.
• Create a cost base map with proposed actions by category and potential savings those actions could produce.
• Determine which actions to take based on priorities for their overall business strategy, the value that the actions would create, or the amount of resources they would free up that could be invested elsewhere in the business.

Addressing Variable Manufacturing Costs

Fixed costs are difficult to change, so many cost transformations begin with looking at opportunities to reduce variable costs, such as making manufacturing more efficient.

Companies have several options for making manufacturing more efficient. One is automation. Another is helping the workforce develop new capabilities.

Upgrading manufacturing through automation is an option if companies can afford it and hit a target return on investment for the upgrade. Automation is attractive because once an upgrade is complete, it produces a continuous, sustainable performance improvement. However, not all manufacturing operations are candidates for automation. Some are extremely complex and would require extensive capital to upgrade at a time when capital is constrained.

If companies can’t automate, they can address manufacturing costs through lean process improvements. Lean processes improve manufacturing productivity by training staff to better plan and organize their work, spot problems, and problem-solve solutions. When these processes are successful, they reduce the labor required for the same output. A company could use this as an opportunity to move employees whose positions have become redundant into similar positions in different product lines or have them take on new roles.

Potential Sticking Points and How to Fix Them

Companies’ cost transformations may be well intentioned but fail to live up to their potential for a number of reasons. Sometimes it’s a matter of not having people with the required experience or capabilities to lead the change. In other instances, a company’s strategy may be unclear. Or operations may be so complex that it’s difficult to know where to start.

Data is another potential sticking point. If companies haven’t fully digitized or if data from different internal operations isn’t pulled together in a unified data structure, it’s hard to have clear insights into performance or productivity. Without those metrics, it’s harder to pinpoint which actions would be the most beneficial to manage costs in order to free up resources.

To improve outcomes:

• Make sure the enterprise’s requirements for transforming operations are clear.
• Craft a detailed plan for what the transformation must deliver.
• Provide the resources needed to support the transformation effort, determine the order of priority for transformation-related actions, and map out how they’ll be delivered.
• Establish specific metrics, KPIs, and tracking to ensure that transformation activities are delivered as intended.
• Incorporate proven change management processes to ensure that the transformation proceeds at pace and that the changes are sustainable.
• Bring in outside experts as needed to coach a transition team through the transformation and work alongside company leaders to execute a plan.

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For organizations transforming operations, it’s not enough to cut costs. Operations leaders must also build capacity to create a sustainable impact. By taking a holistic, strategic approach, you can create a competitive advantage and enable future growth.

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