Businesses are continually on the lookout for ways to contain and reduce escalating costs. When I started thinking about how the OEM marketplace approaches this ongoing concern, it occurred to me that there's an opportunity for some real savings that many companies are missing.
In today's streamlined business model, it's a common practice to develop goals in departmental “silos,” then set overall business goals, objectives, and annual performance review criteria based on the departmental goals. When goals are developed this way, there's a risk that one department's goals will be at odds with another's or that there won't be appropriate resources available to implement successfully. Here's an example of how this works:
Engineering sets goals to:
- Reduce field failures to less than .0025 percent
- Deliver new products on time.
Purchasing's goals are to:
- Deliver a five percent cost reduction on raw materials
- Reduce the vendor base by 20 percent.
There's nothing inherently wrong with these goals. However, in this scenario, issues arise when Purchasing asks for the engineering resources it needs to actualize the cost savings its plan will generate. Engineering's resources are allocated to meeting its departmental goals. While Engineering won't openly refuse to help Purchasing, the way these goals are set up, chances are good that Purchasing's needs will take a back seat to the engineering department's own goals. After all, that's what Engineering will be measured on at the end of the year. The product must be delivered. Yet, without Engineering's support, the purchasing department's opportunity to realize cost reductions that will positively affect the entire company will be lost.
This isn't simply hypothetical. Take a look at what happened to one real OEM client. This high-volume OEM presented Engineering with multiple ideas that had the potential to generate annualized savings of more than $250,000. These ideas were part of the plan to meet the purchasing department's goals, but they needed Engineering's review and approval to implement. Engineering resources were tied up in projects to meet their goals, so the necessary reviews and approvals didn't happen and the savings did not materialize.
When you consider that many projects have life cycles of seven to nine or more years, that $250,000 in lost savings quickly grows into the millions. And this is a scenario I've seen play out time and time again. Here are some best-practices that can turn a loss like this into a big success:
- Make cost reduction a goal of every department
- Have a top-down mandate that requires departments to act quickly to support cost savings ideas, even when they are part of another department's goals
- Assign a liaison to ensure that resources are available when needed to support cost reduction programs originating in another department
- Schedule periodic interdepartmental meetings to review progress on the cost savings goals
- Make sure that a department providing support for another department's goals gets a fair share of the credit for achieving the cost savings.
Developing collective goals based on overall organizational needs first, then developing departmental goals to support them, can eliminate missed opportunities. When the goals of the company supersede departmental goals, real and positive changes can occur. Have you seen cost savings opportunities missed because departmental goals got in the way of company goals or cases where big savings were realized when the goals of the organization were the priority? What's worked for you and what hasn't? I look forward to your comments and suggestions.