Sustain. Recover. Thrive. Prioritize Cost Optimization Efforts · your cost optimization...

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A Decision Framework for Finance

Sustain. Recover. Thrive.

Prioritize Cost Optimization Efforts


Potential Financial Benefit Small Medium Large

• How much will the function save if the action is implemented?

• How does the action affect cash flow?

Potentially to minimally improves cash flow or will generate hard/soft savings

Potentially to moderately improves cash flow or will generate hard/soft savings

Potentially to significantly improves cash flow or will generate hard/soft savings

Business Impact Negative None Positive

• What impact will this initiative have on business unit leaders?

• Will this initiative adversely affect business units’ day-to-day activities or operations?

Will have an adverse impact on business operations

Will have neither a positive nor a negative impact on business operations

Will have a positive impact on business operations

Time Requirement Long Term Intermediate Term Short Term

• Can we capture and realize cost savings within this fiscal year?

• How do we measure soft savings with this initiative?

Savings may or may not be realized upon (or within months of) full implementation

Expect savings to be realized within months of full implementation

Expect savings to be realized within weeks of full implementation

Not all cost optimization initiatives yield the same benefits. Use this tool to get an objective, visual representation of cost optimization ideas early on — by the level of benefit, cost, risk and viability.

Cost Optimization Decision Framework


Degree of Organizational Risk High Moderate Low

• Will our business unit leaders ensure the changes are made?

• Is our enterprise capable of adapting to the changes?

Layoffs and/or reengineering of processes and structures likely

Limited change in roles, structures and processes

No layoffs or changes in organization and processes expected

Investment Requirement Long Term Intermediate Term Short Term

• Does the initiative require a large, upfront investment before savings can be realized?

• Is the enterprise willing to make an investment at all?

Large upfront investment required before savings can be realized

Moderate upfront investment required before savings can be realized

Little to no upfront investment required before savings can be realized

Not all cost optimization initiatives yield the same benefits. Use this tool to get an objective, visual representation of cost optimization ideas early on — by the level of benefit, cost, risk and viability.

Cost Optimization Decision Framework (continued)


Greenlight Your Best Cost Optimization Initiatives

Map your cost optimization initiatives and visualize trade-offs

Investment, Time and Risk

High

HighLow

Low

Potential Financial Benefits, Business Impact

MergersShared Services

Server Consolidation

Mainframe Consolidation

Network Consolidation

Call Center Consolidation

Procurement

Portfolio Management

Enterprise Portfolio

Mgmt. OfficeAutomate Software

Distribution

Audit Device Utilization

Deferral of Spending

Application Standardization

Architecture Standardization

After using the decision framework, map your cost optimization initiatives to help your function visualize the effort required and the relative risks and benefits of each initiative.

The mapping shown here is only indicative. The perceived investment, risk, time, business and financial benefits depend highly on the function’s maturity and the organization’s industry and size.

Every function will have a different outcome when assessing these cost optimization initiatives — but aspire to select your top 10.

To learn more about how Gartner can help you optimize costs in this unprecedented time of disruption, contact us.


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A Decision Framework for Human Resources


Prioritize Your Cost Optimization Efforts



• How much will the HR function save if the action is implemented?

















Not all cost optimization initiatives yield the same benefits. Use this tool to get an objective, visual representation of your cost optimization ideas early on — by the level of benefit, cost, risk and viability.




Degree of HR Organizational Risk High Moderate Low

• Will our HR functional leaders ensure the changes required by this initiative are made?

• Is our HR function capable of adapting to the changes required by this initiative?



















High

HighLow

Low


FTE Reduction

HR OutsourcingHR Process

Standardization

HR Budget Review

HR Structure Reorganization

HR Technology/Automation

HR Shared Services

Compensation & Benefits Alignment






A Decision Framework for Information Technology










Degree of IT Technical Risk High Moderate Low

• Will the change undermine the ability of our systems to deliver services?

• Will this change cause delays in enterprise operations impacting few or many components of the architecture?

Impacts operating system, database, middleware and applications

Impacts few components of the architecture

Little more than “moving boxes”














High

HighLow

Low


MergersShared Services

Server Consolidation

Mainframe Consolidation

Network Consolidation


Procurement

Portfolio Management

Enterprise Portfolio

ManagementAutomate Software

Distribution

Audit Device Utilization

Deferral of Spending

Application Standardization

Architecture Standardization







© 2020 Gartner, Inc. and/or its affiliates. All rights reserved. CM_CF_919354© 2020 Gartner, Inc. and/or its affiliates. All rights reserved. CM_CF_919354

A Decision Framework for Marketing







High

HighLow

Low


Divest Underutilized

Martech

Cut Paid Media Expenditures

Adjust Marketing Channel Alignment

Adjust Training & Travel Policy

Invest in Marketing Ops

Launch Rebranding

Enter New Market

Marketing Staff Reduction

Restructure Agency/In-House Model

Adjust Media Strategy








A Decision Framework for Sales




Degree of Technical Risk High Moderate Low

• Will the change undermine the ability of our systems to deliver services?

• Will this change cause delays in enterprise operations impacting few or many components of the architecture?

Impacts sales operations/enablement, customer relationship management (CRM)/sales force automation (SFA) and supporting applications

Impacts few components of the architecture

Little more than “moving boxes”


















High

HighLow

Low


Sunset Low-Use Enablement

Support

Compensation Plan Redesign

Adjust Sales Channel Alignment

Adjust Travel Policy

Down Tier Strategic Accounts

Mergers

Acquisitions

Sales Force Reduction

CRM/SFA Migration

Adjust Coverage Strategy









A Decision Framework for Customer Service & Support






High

HighLow

Low


Staff Reduction

Automation

Improve Self-ServiceChannel

Rationalization


Outsourcing/Offshoring

Optimize Scheduling and Forecasting

Optimize Business Processes

Reevaluate Vendor ContractsIncrease Supervisor

Spans

Streamline New Hire Training

Adjust Service-Level Agreements








Focus on Operating Outcomes, Not Reduction Targets, to Optimize Supply Chain Cost

Paul Lord, Senior Director Analyst

24 May 2019

Gartner Research

Focus on Operating Outcomes, Not ReductionTargets, to Optimize Supply Chain CostPublished: 24 May 2019 ID: G00382831

Analyst(s): Paul Lord

Supply chain and business roles must align and collaborate aroundoperating outcomes, rather than reduction targets, to optimize total cost.Supply chain leaders can use this research to adjust how they engagestakeholders and propose initiatives that achieve breakthrough costimprovements.

Key Findings■ Reduction targets for cost and inventory create apprehension and resistance among

stakeholders, inhibiting the collaboration and innovation required to drive and sustainimprovement.

■ Attempts to reduce cost within individual sites and functions put quality and service at risk, orcreate constraints that limit improvement potential.

■ Companies often pursue too many initiatives simultaneously without investing in the talent andtechnology required to enable improved performance.

■ Supply chain organizations focusing on improving strategically aligned outcomes havedemonstrated that trade-offs among cost, service and quality are not always necessary.

RecommendationsSupply chain leaders pursuing cost optimization should:

■ Drive collaboration and innovation for improved performance by aligning multiple functionsaround cost-optimized operating outcomes.

■ Enable decisions by defining metrics and developing cost analysis models that align to thescope and performance objectives of specific operating outcomes.

■ Justify investments by proposing initiatives based on their potential to impact performance anddeliver improvement to specific operating outcomes.

Table of Contents

Analysis..................................................................................................................................................2

Big Picture Approaches Are Useful but Not Fully Actionable............................................................. 4

Focus on Efficient Operating Outcomes to Sharpen Focus and Align Stakeholders...........................6

Respond to Short-Term Pressure by Clarifying Outcomes.................................................................9

Growth Strategies and Events Complicate Cost Optimization........................................................... 9

Gartner Recommended Reading.......................................................................................................... 10

List of Figures

Figure 1. Cost Management Remains Short Term and Functionally Focused.......................................... 3

Figure 2. Five Levers for Supply Chain Cost Optimization....................................................................... 5

Figure 3. Align Stakeholders on Efficient Operating Outcomes................................................................6

Figure 4. Optimize Operating Outcomes to Support Strategic Value Imperatives.....................................7

AnalysisProfessional golfers long ago learned to focus on the process rather than the result, as it gives themboth a plan and positive focus before each shot, while also letting them visualize the shot’strajectory before taking their swing. Without this approach, self-doubt, negativity and consequences

of bad shots can creep in.1

Top-down cost reduction targets cause similar negativity within organizations. Resulting pressureand conflict limits a supply chain’s ability to meet its full performance potential. Figure 1 presents

results from a recent Gartner survey,2 elaborating on top challenges faced by supply chain leaders in

their pursuit of cost optimization. Short-term cost pressure cultivates skepticism surrounding long-term business value being overlooked.

Page 2 of 12 Gartner, Inc. | G00382831

Figure 1. Cost Management Remains Short Term and Functionally Focused

Logistics leaders who completed the survey3 also cited challenges with achieving ongoing cost

reduction targets within their function while, at the same time, struggling to acquire sufficient talent.This illustrates the paradox of taking functional approaches to cost improvement. They placeisolated pressure on operating functions, such as logistics, which are primarily responsible for thereliable, safe and compliant delivery of materials to warehouses, factories and customers. At thesame time, these functions have limited direct influence over distribution plans and commitments tocustomer orders that drive operating activity.

These narrow approaches create sentiments that range from dejection to resignation. At best, thereis superficial compliance in the form of routine diligence using the most obvious tactics. Leadersknow their efforts will create skepticism within the organization. Stakeholder reactions can rangefrom passive resistance to open conflict. Even so, the assigned targets leave them no choice: theirhands and feet are active, while their hearts and minds are elsewhere.

Cost reduction attempts are further stifled by simplistic approaches that overlook complex impactsof constraints, variability and system interdependencies. Gartner has observed examples thatinclude:

Gartner, Inc. | G00382831 Page 3 of 12

■ Price over value. Supplier substitution or contract renegotiation to obtain price concessionsacrifices elements of quality, service or flexibility, which impairs the nature of the networkresponse. One common example is contract manufacturing arrangements with minimumvolumes and long commitment lead times — increasing the difficulty to optimize inventory andservice levels.

■ Shifting fixed costs. Outsourcing, offshoring or contract labor are employed to reduce theoverhead costs attributed to full-time employees. This creates the need to develop newcapabilities for managing service providers and may not even reduce total cost — impactingboth work quality and organizational morale.

■ Supplier financing. Many purchasing strategies target the extension of payment terms or forcesuppliers into consignment arrangements. Doing so puts the reliability and security of supply atrisk — particularly for suppliers with weaker financial health than their customers.

■ Inventory reduction. Inventory is often confused for cost, and cash flow impacts are notalways distinguished between fixed cost absorption or allocation. While inventory has a cost,the full range of its contribution to efficient, reliable supply is not fully appreciated. Cycle stocksupports the leverage of scale to reduce unit supply costs. Anticipation stock is often used tomaximize the use of constrained capacity that serves event-based demand peaks.

Big Picture Approaches Are Useful but Not Fully Actionable

Attempting to reduce cost by adjusting budgets or metrics is similar to declaring a target final scorein a golf tournament. The goal will not result in success until it is broken into actionable initiatives.Practice time is allocated to the phases of the game — from driving and fairway approach shots tochipping, putting and hazard recovery shots.

Gartner defines cost optimization as a business-focusedcontinuous discipline to drive spending and cost reductionwhile maximizing business value. The distinction between costreduction and cost optimization is more than rebranding.Aspirations to improve efficiency are constrained by the primaryresponsibility of supply chain to deliver high-quality productsand timely service to customers.

Figure 2 provides the visual overview of a previously published Gartner framework for supply chainoptimization. Supply chain leaders have five levers to manage in pursuit of end-to-end costoptimization (see “Use Gartner’s Supply Chain Cost Framework to Analyze Categories and ManageLevers”).


Figure 2. Five Levers for Supply Chain Cost Optimization

This framework represents a more complete and effective approach to performance improvement,compared to fragmented control of individual sites, functions and cost centers. It also promotes asystemic understanding about the specific supply chain levers that impact cost and must besynchronized to optimize overall performance. The main principles illustrated in Figure 2 include:

■ Starting at the bottom of the inverted pyramid, tactical approaches, like supplier pricenegotiations (“deals”) and more efficient operating plans (“tactics”), are relevant but hold limitedimpact. They are actionable and have the potential to yield results within a short time period,and should be pursued continuously. Annual impact ranges from 2% to 5% of revenue, andmay suffer from decreasing marginal return on effort over time.

■ A significant portion of supply chain cost is structural in nature — as illustrated toward the topof the pyramid — which cannot be impacted by operating decisions. When competition drivesincreased complexity into product and service portfolios, supply networks must be aligned toenable reliable, efficient fulfillment of demand. This requires revisiting previous design choicesto ensure networks have the necessary capacity, speed and flexibility to support business go-to-market strategies.


■ To enable timely decisions and scalable execution, changes in product supply and servicedelivery networks require upgraded planning and operating capabilities. Investing in processcapabilities (enabled by talent and technology) is required to maximize value from the productportfolio and supporting network. Tactical strategies will not realize their full value potential if notenabled by sufficiently robust decision, transactional and operating process capabilities.

While holistic frameworks, such as shown in Figure 2, provide useful insights to address systemcomplexity, they are difficult to operationalize within organizations composed of traditional operatingfunctions. Modeling for decision support is complex, and it is not realistic to align all stakeholdersaround every design choice and operating decision.

Focus on Efficient Operating Outcomes to Sharpen Focus and Align Stakeholders

Top performing golfers remain focused on the present moment, planning and executing each shotbased on the ball’s location and that hole’s hazards. Figure 3 illustrates a cost optimization “sweetspot” for supply chain organizations. Focusing on discrete operating outcomes breaks down costoptimization problems into measurable, repeatable events and conditions.

Figure 3. Align Stakeholders on Efficient Operating Outcomes

This allows organizations that operate complex supply networks to avoid the conflicts caused bycost reduction targets for individual functions. Multiple groups can align around design choices andoperating decisions that minimize waste, while ensuring target performance for outcomessupporting business value.

Cost reduction efforts are constrained by the need to both protect and maximize business value(see “Supply Chain Brief: Advanced Supply Chains Add Business Value to Cost Focus”). This valueis manifested within the company’s products and proprietary technology, its commercialrelationships, brand image and organization capabilities. Supply chain leaders must find a method


to define and communicate how the operating outcomes they deliver translate directly to supportingmaximization of business value.

Figure 4 provides a schematic illustration for this essential alignment between business value andsupply chain operating outcomes. In this case, three strategic imperatives are defined andsupported by three discrete operating outcomes: efficient demand fulfillment, cost-optimized supplyfor established products and risk-optimized capture of new business (or launch of new products).

Figure 4. Optimize Operating Outcomes to Support Strategic Value Imperatives

Depending on the industry and business strategy, the nature and relative weighting of strategicimperatives will vary. However, the framework of Figure 4 provides an opportunity to ensurestrategic alignment and minimize conflict in the pursuit of cost optimization. Profitable growth withsufficient investment return will almost always be a strategic imperative for commercial enterprises.Government and nonprofit organizations will have slightly different financial imperatives — perhapsexpressed within the constraints of available funding.

Articulating strategic imperatives has an influence on how discrete operating outcomes are defined,enabled and prioritized. In Figure 4’s example, the product-centric supply chain’s performance isdecoupled into three measurable outcomes:


■ Cost-optimized product supply (whether purchased from suppliers, produced internally oroutsourced to external manufacturers)

■ Efficient service delivery, accompanying the fulfillment of product demand

■ Acquisition of new business via events that include business acquisition and integration,expansion of the supply and distribution network, new contract agreements, and new productlaunch

This engagement approach has the potential to change the nature of supply chain discussions withbusiness stakeholders. It reduces conflict by reaffirming a commitment to support the business.Debates and negotiations about spending cuts and budget allocations can be replaced with aligningand clarifying specific network performance required to support the business. This process canpotentially catalyze new thinking that identifies breakthrough improvement opportunities by definingtarget outcomes in a way that unleashes collaboration and innovation.

The potential of strategically-aligned outcomes is illustrated in two Gartner case study examples,summarized below:

Tech Supplier Cisco Optimizes Product Supply Cost and Quality

Cisco, a leading high tech supplier, described its approach to product quality as “fear based,” over-testing across every step of its value chain. This resulted in increasing costs for testing equipmentand high levels of rejected supplier parts — particularly in the early stages of a new product launch.

The company organized an initiative to collaborate with its suppliers, with investment in advancedanalytics for adopting quality testing protocols informed by process analysis. This enabled areduction in testing equipment costs and lower rejected supplier parts rate. Quality testing protocolswere managed and adapted during a product’s life, based on process and product data analysis.Product quality continued meeting performance requirements, while supply cycle times werereduced to improve responsiveness (see “High-Tech Manufacturing Supply Chainnovators 2016:Connecting, Collaborating and Capitalizing on Complexity”).

A Leading Supplier of Industrial Coatings Improves Delivery Service and Efficiency

A leading supplier of industrial coatings evaluated its supply capabilities in support of an aggressivegrowth strategy. It discovered gaps in its demand fulfillment capabilities and performance, based onresults from benchmarking and maturity analysis. A combination of legacy mindsets and incentivesoriented around meeting functional cost goals emerged at the root of this gap.

Leadership for this supply chain took timely and comprehensive action: changes included incentiverealignment across the organization to emphasize service performance. Supply lead times saw over30% reduction by working with suppliers, as well as increasing their planning agility. Processimprovements within warehouses increased the speed and accuracy of order fulfillment. Thesechanges saw results that were immediate and dramatic. In addition to raising their on-time, in-fulldelivery metric by 15%, they also experienced a 5% efficiency benefit in reduced freight costs.These results demonstrate the potential for avoiding traditional cost-service trade-offs by taking a


comprehensive focus on the entire fulfillment process (see “Case Study: Industrial MaterialsSupplier Translates Assessment Into Action for Improved Customer Service and Reduced Cost”).

Respond to Short-Term Pressure by Clarifying Outcomes

The examples above illustrate the breakthrough potential of systemic approaches that exceed whatis possible with top-down control and reduction targets. During periods of short-term financialpressure, supply chain leaders must advocate for cost optimization strategies to be sharpened, notabandoned in favor of traditional practices. Rather than abdicating the responsibility to deliverefficient, sustainable outcomes, supply chain leaders should clarify specific performance targetswith their stakeholders.

■ Do customers still demand (and do product and marketing leaders still commit to delivering) thesame levels of product quality as before? Is the business prepared to make trade-offs of qualityto reduce cost?

■ Are sales and service leaders committed to the same customer service levels? Are theyprepared to institute new service rules (for some customer segments) related to minimum orderquantity, order placement methods and lead times, cancellations and returns?

■ Are manufacturing and finance leaders prepared to strike a different balance between workingcapital and manufacturing asset performance? Would higher inventory levels be acceptable toincrease asset efficiency or reduce freight cost?

A focus on outcomes provides a mechanism to maintain organizational focus in an environment ofpressure and uncertainty. Service and delivery organization leaders can maintain morale of theirpeople by emphasizing outcomes, reinforcing the importance of redoubling efforts to protectprecious company revenue and margin. Sourcing and operating organizations can also useoutcomes, here to reinforce the importance of quality and reliability, while expanding their thinkingto collaborate and innovate in search of changes that improve cost without putting outcomes andstrategic imperatives at risk.

Growth Strategies and Events Complicate Cost Optimization

Business models are increasingly impacted by discrete events which must be managed asoperating outcomes that impact cost and value. Examples include successful projects for industrialconstruction businesses, promotions for consumer products and seasonal demand peaks inagriculture and many other sectors. Future Gartner research will define and elaborate on theoperating outcomes most applicable within specific industry sectors.

Figure 4 acknowledges the growth of advanced operating models that consolidate product, serviceand content into integrated solutions. Mastery of the operating outcomes defined here can serve asan intermediate milestone toward these more complex operating models that offer “outcomes as aservice” to their customers. This topic will be addressed in Gartner’s research on supply chainstrategies for supporting digital business transformation.


Focus on Operating Outcomes, Not ReductionTargets, to Optimize Supply Chain CostPublished: 24 May 2019 ID: G00382831

Analyst(s): Paul Lord

Supply chain and business roles must align and collaborate aroundoperating outcomes, rather than reduction targets, to optimize total cost.Supply chain leaders can use this research to adjust how they engagestakeholders and propose initiatives that achieve breakthrough costimprovements.

Key Findings■ Reduction targets for cost and inventory create apprehension and resistance among

stakeholders, inhibiting the collaboration and innovation required to drive and sustainimprovement.

■ Attempts to reduce cost within individual sites and functions put quality and service at risk, orcreate constraints that limit improvement potential.

■ Companies often pursue too many initiatives simultaneously without investing in the talent andtechnology required to enable improved performance.

■ Supply chain organizations focusing on improving strategically aligned outcomes havedemonstrated that trade-offs among cost, service and quality are not always necessary.

RecommendationsSupply chain leaders pursuing cost optimization should:

■ Drive collaboration and innovation for improved performance by aligning multiple functionsaround cost-optimized operating outcomes.

■ Enable decisions by defining metrics and developing cost analysis models that align to thescope and performance objectives of specific operating outcomes.

■ Justify investments by proposing initiatives based on their potential to impact performance anddeliver improvement to specific operating outcomes.

■ Winning in the Turns: A Supply Chain Action Guide


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