Transcript | Cost Optimization in Manufacturing – with Shawn Seasongood and Andrea Vardaro Thomas

Well, it looks like a recession is coming. Or maybe it’s not. Or maybe it is. It seems like it’s been a long wait for the other economic shoe to drop. And in the meantime, many questions continue to arise around managing costs in organizations.

This is Kevin Donohue, a senior director with Protiviti, welcoming you to a new edition of Powerful Insights. CFOs and finance leaders continue to have a lot of questions and get even more from their internal stakeholders and customers about projections, cost management, supply chains and more. This is especially true for organizations in the manufacturing and distribution industry. They operate in multiple locations, they often are operating on different systems. They can be more susceptible to supply chains and any interruptions that might take place around the world. And they have unique talent management challenges.

Strategic cost optimization and management — that is something beneficial to commit to during any economic cycle, especially for organizations in this industry. I had the opportunity to speak with two experts on this topic, Protiviti Managing Directors Shawn Seasongood and Andrea Vardaro-Thomas. Both are leaders in Protiviti’s Business Performance Improvement group.

Shawn, thanks for joining me today.

Great to be here, Kevin.

Andrea, it is great to speak with you as well.

Great to be here as well.

Andrea, let me ask you our first question. Can you talk about what strategic cost optimization is and how it’s different from cost-cutting activities that companies may be considering?

As we think about the current economic landscape — all the uncertainties today — many companies are immediately looking to reduce costs to achieve the bottom-line results that they plan for. A lot of times, these decisions are generally a reaction. They focus on the short-term benefits as opposed to considering longer-term impacts to the business, or considering whether the costs that are being cut or being considered will actually limit the company’s ability to achieve their strategic goals.

Now, in comparison, strategic cost optimization is more of an ongoing business-focused discipline to help manage spending and reduce costs in a more meaningful way while maximizing value for the business. The challenge for many companies is how to define a sustainable operating model that balances the cost-effectiveness and the efficiencies while ensuring that the customer experience isn’t negatively impacted — and ensuring that the company’s strategic goals aren’t compromised in the process as well.

Andrea, just to be clear, this is the type of conversation that more companies are having and that we’re speaking to companies about away from the economic-uncertainty cycle we’re in. These are conversations that have been happening more and more over the past few years, aren’t they?

We’ve seen a lot of this starting with the pandemic. It’s a reaction to what’s happening. It’s a reaction to the unknown. When your strategic plan is built and things are operating as you would expect, you follow that plan. But when you start to think about all these unforeseen factors, if the company hasn’t done appropriate planning — maybe some strategic scenario analysis, thinking through all these different possibilities — they may just have a reaction to make sure that they can achieve their bottom line. And cost cutting is usually a tactic that’s taken. It’s a short-term focus, and less focus on that longer term. Strategic cost optimization is a way to think about it in a more meaningful way and a long-term way that’s going to be in alignment with the company’s overall strategic goals.

Excellent, thank you. And Shawn, we’re talking here about organizations specifically in the manufacturing and distribution industry. Why is cost optimization so important in this industry group in particular in our current environment?

Across the board, all industries are focusing on cost optimization. But when you think about manufacturing specifically, companies are looking at ways to improve their profit margins, particularly with the raw-material prices, labor costs and operational expenses. Over the last three years, a lot of them have been constantly fluctuating. Profitability with those labor costs and raw-material prices are specific focused toward manufacturing.

Also, if you think of the manufacturing industry broadly, there’s a globalization across that industry. It’s a very interconnected world within manufacturing companies. They a lot of times operate on a global scale, and they might, a lot of times, outsource certain components of their processes or outsource things to different regions or countries to take advantage of labor arbitrage. Cost-effective outsourced options around choosing the right suppliers, negotiating the right favorable terms is very important to the specific industry.

Supply chain complexity is very important around multiple suppliers, distributors, logistics networks involved. That’s very impactful to, specifically, the manufacturing industry. Each component of that supply chain adds cost to the overall bottom line. There’s a lot of focus on that. The other thing around that is, they’re so dependent on some of these supply chains that that can be a big driver when it comes to customer satisfaction. There’s an increased focus on that — making sure you have the right raw goods, you have the right supply chain operations in place to make sure that the endgame ± you’re driving the right results with your customers — is very important to them. That’s why it might be an increased focus within this particular industry.

Shawn, you may have just covered this, but how have you seen executives approaching strategic cost optimization within organizations in this industry? You outlined some of the challenges —supply chain and talent and raw materials. Are there strategic steps some executives are employing that would be considered best practice?

If you’re looking to grow margins, even though I work for a global consulting firm, one of the things I would lean into first is getting your management team’s perspective. A lot of the time, you’ll see that the people within the organization know where there’s waste or they know where there’s redundancies — they know where they potentially could save money.

The first thing that leaders should do is work with their management team to identify them and lean into the institutional knowledge of their employees, because a lot of times, they have experience working through certain transactions or reviewing certain departments. They know a lot as far as if they needed to reduce or cut cost. They are probably one of the best assets you have as far as generating those ideas or formulating those strategies. Make sure that the questions are asked. You don’t necessarily have to lean into a third party right away, but make sure you’re exploring all those internal ideas first and making sure that they are looked at and identified.

But one of the areas that seems to be ripe for a lot of savings is looking at technology. There are several reasons we think technology does a lot, but usually, technology expenses represent a substantial portion of a company’s budget. Everything from hardware to software purchases to maintenance, contracts, all that stuff costs a lot of money. By scrutinizing technology spend, you can identify areas where costs can be more optimized or reduced. A lot of companies have outdated systems or redundant tools.

Looking at the ways to streamline those technology solutions going forward does seem to be very good as far as being able to achieve cost synergies, and then also, look at the different ways you use third-party support for technology. A lot of stuff around vendor contracts, consolidating software licensing, exploring alternative solutions that offer comparable functionality at a lower cost. Looking at technology spend, sometimes you can achieve a lot of those cost-optimization opportunities.

Everybody’s seeing the rise of cloud computing, and that in itself provides more scalability, more flexibility, and usually has some cost advantages. But look at that, because if you don’t have diligence around that, those management costs around cloud can start to escalate rapidly. Make sure that even though you’ve gone to cloud-based solutions, you’re also looking at the way those costs are being managed.

Everybody has been challenged over the last couple of years around security, around technology, and those costs sometimes haven’t been looked at in-depth as far as rationalization around security cost. Everybody knows the reputational risk you have around a data breach, but sometimes people have spent just to spend in those areas, and they haven’t done a lot of rationalization when it comes to data privacy and security.

Those are another couple of areas that if you look at and do some strategies around rationalization, you can achieve some of the benefits around reducing that overall technology spend.

And Shawn, as companies are looking at building out their ESG strategies, they may even want to consider how they can reduce cost over time by implementing some of those new technologies that might be more energy-efficient, environmentally friendly, more sustainable over time. And that is important in a manufacturing organization. As they look to build their ESG strategy, cost reductions over time could factor into those decisions as well.

I 100% agree with my partner Andrea on that. Looking at costs and ESG at the same time can definitely have some direct benefits from a company standpoint, from a compliance standpoint, but also from a cost-synergy standpoint.

I love that idea of going out and talking and listening to your people and getting that intelligence that way. That would seem so valuable — the people on the front lines.

A lot of times, when we go into an organization and look at how they want to drive cost optimization, a lot of the discovery is through conversations with management — and management, they absolutely know the business well. Sometimes, people are a little shortsighted as far as not asking their own leaders to try to drive some of this cost optimization themselves, because there’s a lot of awareness within the organization about where the savings could be driven from.

I want to talk about IT spend more in a minute. But Andrea, first, I imagine procurement is a big target area for organizations to go to, to look for optimizing costs, saving costs — however we want to term it. Can you talk more about that and some of the common themes you’re seeing when it comes to the procurement function?

Vendor management is, and should be, a key area of focus. That includes managing your vendor relationships, negotiating better terms, better prices, even consolidating or rationalizing vendors to help reduce costs, but do it in a meaningful way. And a critical component here is visibility into the spend and into the suppliers across your organization. To this end, sourcing and procurement teams should be partnering with their finance partners to help identify opportunities based on not only market dynamics but also data analytics that finance teams can do to provide some meaningful insights that can help shape and support actions to optimize the spend.

We saw a lot of this as the pandemic hit with, in New York, a lot of rent reductions, and finance organizations were working closely with their teams to identify, where are those opportunities, where can they renegotiate some of those contracts and what does that mean from an overall perspective to their company’s P&L? We saw a lot of teams working very closely with finance in that respect. But the common challenge we see related to this is that companies sometimes relax available data or relevant data in addition to tools and resources to help them be able to develop those analytics that are necessary to identify where opportunities may exist.

It’s important to think about the upfront investments that you’ll need to have to be able to support this type of analysis. It’s also important to make sure that there’s some form of strategic alignment across the organization on supply partners, spend categories across the organization, and defining that program or a strategy and roadmap that can help drive this alignment. Shawn talked about including management in these conversations and these discussions. They should be involved, and they can help drive the necessary focus.

And then, engaging that finance organization is so critical. Finance can not only provide the transparency and visibility to spend both current spend and projected spend, they also can do the ROI analysis to support the types of programs and support the alignment across the organization to ensure that the goals that might be set for annualized target cost savings are achieved and how the organization will achieve those on a consolidated basis.

To add to some of the excellent points Andrea made, one of the things I see, Kevin, is the data analytics. Having awareness as far as where the dollars are being spent and having that transparency, it seems like a simple exercise, but we see a lot of organizations that don’t have a viewpoint on where they’re spending dollars. Once they get that viewpoint, there are some strategic decisions they can make. But a lot of companies don’t have the data analytics to understand where their dollars are going or where that awareness is around what they’re spending money on.

One of the first steps, which Andrea talked about, is having that overall transparency and awareness to look at a spend analysis — where are we spending dollars, and to what third parties, and where can we potentially drive some of the contract negotiations around that spend? Tying this back to the industry, that’s more and more important when you think of the supply chain challenges that have happened within manufacturing companies in the last three years.

I would make an educated guess that if we look at the advanced analytics capabilities of manufacturing organizations, they, on average, would probably be below that of, say, an organization in consumer products or retail or a technology organization. Would that be a fair assessment?

That depends on the maturity of the organization specifically, but that’s a fair assessment. Finance should have a seat at the table. They should be a part of that decision-making. And having a finance organization that has the business acumen to support the operators within the business is a critical component. Without that business acumen, regardless of which industry you’re in, that can have a major impact on your ability to be able to find those opportunities and even identify where there might be risk as well.

Shawn, circling back to IT and IT spend containment specifically, what are some of the common themes you’re seeing here?

One common theme is, a lot of companies spend a lot of money to upgrade their technology platforms. But they have a lot of redundancies where they’ll have a new system, but they’ll continue to use the old system, and there’s not as much sunsetting of some of those old technologies, so you almost have shadow systems. Your original ROI was, “We’re going to actually bring down our technology costs with this new technology.” What you’re actually seeing is an increase in spend, because they’re maintaining two or three systems where that was not something that they originally thought was part of the plan. The plan was to upgrade and to sunset, and that has not happened as strategically as a lot of organizations had hoped.

Also, cybersecurity investments such as firewalls, encryption tools, security audits, all are essential to protect data and prevent against breaches that can have a significant financial and reputational risk. But now is the time to do some rationalization of that. Nobody wants to downgrade the spend they’re making in cybersecurity, but there are ways to look at some of that spend at this point.

Some of it is driven by regulations, which we all understand — you need to be compliant. But maybe with these new technologies, there is some stuff that has become obsolete. You might be able to not have to support them. There might be an opportunity to renegotiate or consolidate software licenses and explore alternative solutions. Maybe some of this stuff can be offshored. Some of this stuff could be done by a third party more cheaply. Regularly reviewing your spend around technology is a very good practice. A lot of companies have been in the mode of spending, but not a lot of companies have been in the mode of rationalization. That’s the next phase as we take this initiative future — rationalization of IT spend.

Andrea, I want to next ask you about cost cutting, if that becomes necessary. We’ve been talking a lot about cost optimization. But there is going to be a time when companies are considering cutting costs, and we often see this in the form of, say, reductions in force or restructurings. What should companies be considering as it relates to the organization and its people in making these determinations?

It’s something we hear more often than not as of late, and it’s reflected in some of the data we’ve seen too. Some of the top priorities from CFOs and finance leaders today are the rising cost of wages and the ability to not only retain talent but also recruit qualified candidates. But the complication here is that there’s a lot of uncertainty.

As I said earlier, there’s a tendency to react and to implement some short-term changes such as hiring freezes or RIFs, as you mentioned, or even compensation adjustments. What we recommend typically, when you think about significant organizational-related changes, is that you have a clear understanding as to what your transformation roadmap may look like. Shawn mentioned implementing new technologies. With technology changes and investment will come changes in your process, and you need to identify where those changes in your process will reduce or change the workload. The teams have to identify where those areas of opportunity are to either reduce the team or reassign and shift the responsibilities.

Have a clear understanding of what your roadmap is not only from a technology and process perspective — and aligning the organizational changes is important — but also in considering that there are some long-term talent shortages, as we know. Anticipate what are the needs that you have today and what are the needs that you’re going to have in the future organization through transformation and making sure that you have those appropriate skill sets.

If you’re moving more toward an analytical technology that’s going to drive more informed decisions, do you have the right team in place to understand not only how to use that technology but also how to articulate requirements and understand the analysis to be able to feed that back into a clear decision? Make sure you have the right skill sets.

Companies should take that step back and review those functional areas for cost savings. Through that process engineering and automation, you may find that there’s a target operating model that will look different from today because you can migrate certain repeatable transactional activities to a shared service center or a center of excellence. That may reduce the number of individuals sprinkled throughout the organization doing the same types of functions, where you can centralize that, reengineer those processes, incorporate the technology. You could help identify other areas where there might be some leakage, or transformational opportunities as well.

Again, shift the focus so you’re getting more productivity and value from your employees so that you can drive the top line and support that growth. One of the problems with transformational change is that you have to have a clearly defined strategy and prioritization, and that is people aligned with technology and process changes.

Andrea covered some excellent points. A lot of this is around, the work needs to be done, but it’s delivered through a different operating model. Andrea pointed to a shared service, but before going to a centralized way of doing work, driving consistency, driving standard processes, looking at the way that, by centralization or a shared service, you can achieve a different operating model that can help achieve some of these cost efficiencies is a great way of doing it, but the work in itself still has to be delivered. But the way it’s delivered might change when you look at things that become much more standard, much more automated, and much more done in an alternative location, or it could be done through a centralized location. That theme that she’s pointing to is a very relevant theme that everybody should keep top of mind.

And an observation specifically for this industry group: We’ve written before on the fact that in an environment where there continues to be a war for talent, it can be even a greater challenge for manufacturing organizations, say, to recruit talent, because they may not be in the type of industry a lot of candidates are interested in going into. They’re also based, many times, outside of the more desirable urban centers that certain generations want to be near. Is that something finance or the broader group is accounting for in their calculations here?

They should be. If you’re building your planning and your modeling appropriately, you should be accounting for that. You mentioned the locations of where the talent is. With the new hybrid world, or remote world, organizations are able to source talent outside of their current markets. And we see that in the finance organizations, you’re able to support the team, if you’re a U.S.-based organization, nationally or even internationally. There are certain creative solutions to source the right talent in different locations, but ultimately, maintaining some of the focus from a spend perspective should sit with finance partnering with their HR teams to identify what the costs look like in different scenarios.

Andrea, following up on some of your prior comments here, what role should the finance function in particular play in strategic cost-optimization initiatives?

I talked earlier about the business partnership with sourcing and procurement, but more broadly speaking, finance should be partnering across the organization. That partnership is critical for transparency and for spend, and when you couple that with the analytics, you can drive more informed decisions.

One of the ways finance organizations can provide that necessary level of transparency is through zero-based budgeting or zero-based forecasting. And to do this successfully, first, finance needs to understand the business objective related to the spend or the allocation of capital and quantifying the spend that’s planned for that investment. With this information, finance can build up from the bottom, starting at zero, the spend model that can be leveraged to build a forecast. And it provides that basis for an evaluation of plan spend over time so you can determine, is it aligned with the business strategy? Can this spend be justified? Is it associated with an actual activity or project? If it is, can it generate ROI if not in the near term, then at some point in the future?

It’s the level of visibility that can provide a basis for areas where companies can identify where there might be opportunity to reduce spend. Maybe they’re overspending, or maybe they’re underinvesting. It’ll help provide that information to better align your resources with your goals as well. You can get a lot of information from zero-based budgeting, but it can also be leveraged to build a scenario-based planning model.

Again, scenario planning is something that is a significant planning tool to help organizations make those informed decisions based on changing circumstances. And we’ve seen it over the course of the past couple of years — many companies are implementing this type of analyses. It’s difficult to do when you don’t have the level of detail, especially when it comes to spend. You want to understand what areas where you may want to reduce cost or you may want to invest that will result in reduction of cost over the course of a couple of years, and be able to model that out and look at all those different scenarios.

The finance organizations that have done this well, we’ve seen them leverage the technology and tools that they have. They leverage robust data that is available and clean, making sure that there’s a governance strategy around that data too — that’s so important. And data is so critical — internal data as well as external data. And the finance organization needs to be well versed in analytics. They need to understand the business — how certain business decisions may impact the financials. That meaningful, cross-functional collaboration throughout the process is important. And then, by obtaining the zero-based budget or a zero-based forecast, you can, over the course of time, incorporate that into the ongoing forecast to provide that ongoing visibility for risk and opportunities as you build each subsequent forecast. And it helps make those decisions more quickly as well.

This has been an interesting conversation today. Thank you both for your insights. I have one more question. Shawn, based on your experience, what is something that is underestimated when you or when organizations are performing cost optimization?

Andrea will have a take on this as well, but the first thing that comes to mind for me, Kevin, is tone at the top. A lot of organizations start cost optimization, and they do it as a onetime project, but they don’t build it into their ongoing annual DNA. They do it once, and they declare victory. They sometimes have a short view on it and think that since they do it once, or there’s a onetime focus on this, they’re successful. And the organizations we feel are the most successful have ongoing steady governance around this, and that’s an important factor as far as driving the success.

The other point is on the change management side. There are a lot of companies that want to be successful, that have the right motivations to be successful, but they underestimate change management. Starting with the tone at the top, make sure that this is driven from a senior-executive perspective and that it’s a consistent message. As you’re going through this cost initiative, what is the end game? Make sure that you’re communicating on a frequent basis. That’s very important so the entire organization understands the vision and which way they’re driving and how this is an important initiative that’s going to be a benefit for the future success of the organization.

And then sometimes, through change, the things Andrea talked about in some of her excellent answers, there’s a component of this that’s focusing on new training. As things change, make sure that people are trained on the new processes. If you’re moving to a shared service, if you’re doing different reporting, if you have different cadence around making requests for spend, all that stuff is going to be a big change in the organization. The right communication and the right training around that change is very important.

Top of mind, that is probably the thing most underestimated around these efforts — people think of it as a short-term project over two or three months, and then they’re successful and then they can move on. They don’t view it as a long-term change in the way that the company operates. And change management, specifically around communication and trading, are sometimes things are heavily underestimated as companies go through this process.

Shawn, you hit on all excellent topics, and the only thing I would add to that is that tone at the top should set the overall alignment of goals to make sure that the entire organization is aligned with what they’re trying to achieve. But it is an iterative process. It’s not a onetime cost-reduction or cost-optimization strategy. It’s a culture change, a culture shift. If you think about some of the topics that we have talked about — reengineering your processes, realigning the skill sets with future-state automation — it’s a culture change. Change management, to Shawn’s point, is so critical in this process. And communication throughout collaboration across the functions is another critical component to ensure success.

My thanks to Andrea and Shawn for this great conversation. They shared a number of things that stood out to me: These areas of strategic cost optimization represent long-term changes that that company should pursue in the way they operate. Tone at the top is critical. It’s also vital to listen to your management and people, and there needs to be alignment of goals. This is an iterative process, and it’s going to take time, and organizations need to commit to that.

For more information, I encourage you to visit the Manufacturing and Distribution industry group page as well as the Business Performance Improvement pages on Protiviti.com. And, as always, I encourage you to please subscribe to our Powerful Insights podcast series wherever you get your podcast content.