Cost avoidance is not the same as cost reduction

25 Nov 2013
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R2

In order to cut costs, the first thing that many organizations do is to reduce salary costs: the laying off of employees. When this does not help with a significant enough result, they reduce training budgets and innovation programs. What follows are even more unpleasant and ineffective cuts. All these activities may help to reduce overall costs on an immediate or even possibly mid-term basis but the future of the organization is in jeopardy.

This is firefighting - Not fire prevention. Let us examine the analogy of a typical approach to curing a headache. Simply taking a tablet only suppresses the symptoms but does not cure the cause. It is the same with cost reduction. We do not address the root cause but just suppress it. This is achieved through unpopular activities like short - time working and redundancies - unfortunately not totally without side effects. Reducing Cost by retrenching employees is not part of the R2 Initiative at all. Instead of reducing cost, the focus is on avoiding cost, because:

  • Cost Avoidance is more sustainable thancost reduction
  • Cost Avoidance is more powerful than cost reduction
  • Cost Avoidance is more transparent than cost reduction
  • Cost Avoidance is healthier than cost reduction and
  • Cost Avoidance is more popular than cost reduction.

How to avoid cost?

To answer this question it is necessary to determine the root causes of corrective action. Failures occur as a result of work done based on unclear/inaccurate/insufficient information and by not ensuring the conformance before use. In other words - if we always know exactly what to do and how to do it, if we follow the defined process step-by-step and have others prove that it has been followed, there will be no need for corrective action.

A fundamental principle is at play here: All work done must be authorized work, validated by a work order, and in conformance to the latest released documented specifications. Any work begun or completed without a work order is unauthorized work. This constitutes a direct waste of company resources, materials, time and cash, whether done consciously or unconsciously, and it particularly egregious if done as a quick-fix, just to get product out the door.

For this we need to separate two types of activities:

a) Creating revising and validating documents (specifications, drawings, bills of material, etc.) and

b) Creating, modifying or purchasing products, assemblies, components, parts, etc.

Non-conformances occur if b) is not based on a) or, in other words, if products lead and documents follow. In addition, failures will occur if the content of documents is wrong, missing or unclear: this is a sign that the requirements are unclear too.

On the other hand, there will be no failures if the content of the documents are clear (free of ambiguity), concise (exactly contain what is needed – no more no less) and valid (reviewed and released).

In summary, the root causes for avoidable cost based on corrective action theory boils down to the quality of requirements and documents. This is nothing new to many organizations – but many of them continue to work with unclear requirements. If the process is good then the product will be perfect.

Original source:http://r2initiative.org/downloads?download=4:r2-initiative-whitepaper

Last modified on Monday, 25 November 2013 13:20
Hans-Georg Dück

Hans-Georg Dueck is a senior consultant and trainer for configuration, communication and change management. He owns an engineering degree in computer engineering and has been working in the field of configuration management for more than 15 years. Since 2001 he is trainer and lead assessor for the worldwide accepted CM II Standard, the PCM (Practical Configuration Management) and an R2 Specialist. He consulted many customers in process improvement projects of different sizes and is often booked as speaker and moderator of national and international conferences.

Website: am-sys.com/en/home/

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