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PIP has extensive experience helping clients reduce their operating costs

Four Key Approaches for Cost Reduction

Each cost element can typically be tackled by considering four levers, each of which uses a different methodology. These levers are:

1. Non-Essential Usage (Discretionary): readily identifiable unnecessary usage can typically be impacted through rapid behavioural change using PIP’s SPIN Methodology
2. Essential Usage: detailed root cause analysis is required before effectively reducing usage
3. Price & Terms: Strategic sourcing or the renegotiation of price and terms
4. Wiring: implementing systems, processes, and skills needed to ‘hard wire’ both the existing improvement ideas and to drive ongoing cost reduction

Four main levers for each spend type.

1. Non-Essential Usage (Discretionary)

The change required is relatively straightforward analytically and these levers can be impacted largely by getting people to behave (and manage) differently. We call these non-essential or ‘discretionary’ because few hardware changes are required and major capital does not have to be spent – we just need the behaviours of employees, contractors, supervisors and managers to change.

Examples include:

• Absenteeism
• Overtime
• Use of consumables including PPE
• Use and management of contractors

Case Study: Absenteeism: - The SPIN Cycle was used to reduce absenteeism on a remote site during a commodity boom: when absenteeism and vacancy rates were very high across the whole industry. This rapidly dropped absenteeism by 43% in 6 months and simultaneously reduced the downtime associated with labour shortages.

This approach also works well with other discretionary categories such as consumables, equipment hire, PPE costs and contractor spend.

These cases illustrate the type of improvements requiring behavioural change, where the analytical answer is relatively clear. The next lever, Essential Usage, tackles the next layer of usage where more fundamental solutions are required to further reduce usage.

2. Essential Usage

Root cause analysis and problem solving are applied to understand essential usage and generally use a rigorous sequence. The Value Driver Tree (VDT) is used together with Root Cause Analysis and Idea Generation Sessions to prioritise ideas that will reduce costs by eliminating the need for the expenditure. These ideas are given specificity to ensure rapid implementation without adding extra risks. The implementation and results are tracked in Idea Owner Reviews.

An example of applying this approach is shown here for reduction of water usage and costs – something that is becoming much more important with climate change.

Case Study: Water Usage and Cost - One remote site spent $3m per annum on water, while running its own water treatment plant. More importantly, with climate change the site was facing closure due to inadequate water supply to run the processing plant. The team’s task was therefore to reduce both the cost and the use of water.

They focused on usage first as this drove processing costs as well:

• Mapping the site water mass balance to confirm the facts
• Populating the mass balance with measured flows and quality
• Estimating other flows without meters
• Critiquing each flow, starting from the highest, to understand: What is this water used for? Why does it need to occur? Does it need to be potable water? If not, what quality is needed? Where can we supply that from most cheaply? What is the minimum volume of water technically needed for this stage in the process?

From these initial investigations, the team:

• Prioritized ideas to select the 'precious few' ideas
• Developed specificity on these ideas to give them every chance of success
• Implemented ideas quickly and successfully by providing support
• Tracked KPI’s (water usage, process risk KPI's, water treatment costs)
• In areas where usages were dependent on people’s behaviours, provided training and used SPIN to review the usage KPI

The team then reviewed the costs of the water treatment facility. The main drivers were usage, followed by chemical costs and labour. To reduce chemical costs, they reduced dosage by altering dosage points to add chemicals at optimum points and increased dosage accuracy. After PIP left site, the site team identified further usage ideas and also identified a number of chemicals where cheaper suppliers and alternative products could be used, reducing the chemical price a further 3%.

Result: 45% reduction in water costs and usage before PIP left site and a further 3% still in development on departure.

3. Price & Terms (or Strategic Sourcing)

As a general rule, PIP tends to apply the price lever after the two usage levers above have been tackled, because usage work can fundamentally change the understanding of what really needs to be purchased. PIP manages to achieve results of 10-15% reduction in spend even with our big global clients with strong procurement groups. This work is covered more extensively in the section on procurement in the “Our Services” section of the website. These results are achieved by:

• Placing our top strategists with extensive operating experience on the sites
• Locking sourcing and operations together to achieve a combined solution
• Understanding the full economics of the business
• Using Strategic experience to shift the negotiating power balance even in situations when negotiating with what appear to be monopolists

Case Study: Cathode Purchase - At an electrolytic smelter, a major cost element was purchase of cathodes. The cathode supplier had set up a workshop adjacent to site to fabricate the cathodes (and repair spent and damaged cathodes) for supply. The team physically walked around the workshop and reverse engineered the supplier’s operation, developing a detailed model of its costs and margins and built up the economic case for insourcing the work. Discussions then took place with the supplier around alternatives and a 20% reduction in procurement spend was achieved in the second month. In parallel, we helped operations undertake a fundamental review of the use and management of cathodes – their layout, rotation pattern and maintenance.

The impact of these behavioural and root cause ideas led to more than a 50% reduction in cathode costs from month 4 and 5.

Case Study: Fuel Usage Reduction (carbon footprint)

A blast furnace operator used coking coal to heat their blast furnace. The supplier was the only supplier within an economic travel distance of the site so the site did not feel that its negotiating position was strong. We started with usage a) because it would take us longer to build a negotiating position on price and b) to ensure we understood the drivers of total spend. We assisted the client to reduce his coke costs by:

• Building a working mass balance of coke usage and loss on site. We then developed a Pareto of losses and areas to work on
• Deducing that less coal was arriving on site than they were paying for, a detailed observation back to the Coking Site exposed that the steaming coal was being hosed down at the supplier AND by the truck drivers prior to arriving on site. Because our client paid by weight over the weighbridge and had stopped testing for moisture content, they were purchasing water at the price of coal. Discussions with the supplier highlighted their practice of wetting the coal. They had not only stopped the addition of water but were on the back foot in subsequent price negotiations. Procedures and accountabilities for measuring water content and delivery weights were established with periodic audits to maintain these disciplines
• Identifying a number of areas on the site where the coke was getting wet (requiring extra coke in the furnace to evaporate the water)
• Optimising the furnace coke size specification and the pre-heat procedures to ensure optimum burning of coke and complete combustion
• Sharing the coking coal specification requirements and measurement approach with the supplier and renegotiating the price and quality with tight penalties for non-delivery of any of these elements, resulted in a 3% price reduction. This was achieved despite the site being dependent on the supplier as the only economic supplier in town.

Result: 7% reduction in coke usage + 3% reduction in coke price

4. Wiring

Wiring at the individual idea level means putting processes, systems, incentives or training in place to ensure the idea’s improved results are embedded in the organization on a self-sustaining basis. Once done, it becomes easier to maintain the new behaviours and systems than to return to the old ways of working or work around it. There are many wiring changes possible, covered in our article on cost wiring - please contact us if of interest.

This Industrial Cleaning case study illustrates a combination of these features.

Case Study: Industrial Cleaning: Remote Metal Smelter & Refinery - 

At a large smelter, industrial cleaners were used at various points around the site for high pressure water blasting, vacuuming and shot blasting. We helped achieve almost 50% savings by:

• Identifying what work was being done where, for whom, at what cost and price
• Tracking, reporting and reviewing this by area and by supervisor within weeks. We ran informal sessions with the spend owners to understand why the task was needed at all and whether the work could be done internally ‘for free’. This led to the first reduction in spending using the SPIN cycle.
• Implementing solutions to address root causes. We structured Idea Generation Sessions that focused on reducing or eliminating remaining tasks and task time: e.g. ideas on alignment and maintenance of conveyors to prevent materials spilling off the conveyors. This in turn reduced the costs paid to clean these spillages.
• Improving the planning and scheduling of industrial cleaning on site (Wiring) by schedule resources evenly through the week. This reduced the number of rigs and people that the supplier had to keep to handle peak loads, reducing equipment rental, overtime and flying costs for contractors. The scheduling and planning for each job was also improved, so that parts, permits and equipment access were ready when the contractors arrived on site reducing payment for standing time.
• Reporting and Data integrity: Assigning accountability to Supervisors, Superintendents and Managers for spending on their shift or in their area, cleaning up the recording, reporting and timeliness of data so accountable people could see trusted Industrial Cleaning spend data for their area in good time and how their efforts were impacting it.
• Closing the loop by reviewing at the Site Cost Review Meeting
• Industrial Cleaning costs vs. agreed targets
• Completion of assigned actions
• Progress of Improvement ideas to check that they were working.

Industrial cleaning costs were reduced by $1 million from a base year spend of $2.2 million. This was achieved through usage, scheduling, review and price levers

While it’s always a good time to be driving a focus on costs and business profitability, drops in prices make this an urgent focus for many of our clients. We hope the examples described provide insight into of the types of savings that can be achieved in your organization.

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