Using Lean Six Sigma for Fast Track SG&A Reductions

Using LeanSigma for Fast
Track SG & A Reductions

“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

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

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

…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

…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

…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

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

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

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

10

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

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

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

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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

… 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


Improving the SG & A

Your most
powerful
competitive
advantages are
where the work
gets done

“The secret is in the dirt.”
-Ben Hogan

16

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

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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

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

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

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

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

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

Thank you

Guidon Performance Solutions, LLC
Email – rwince@guidonps.com
Website – www.GuidonPS.com
Phone – (866) 986-4414

24

Using Lean Six Sigma for Fast Track SG&A Reductions

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