Wednesday, January 27, 2016

Cost Cutting versus Optimization ?

What are ‘enterprise assets’? They are all the resources and activities that make it possible to set up and run a business. They include not just tangible assets – capital, buildings, equipment, vehicles, and so on – but also what are called ‘intangible assets’: the business’ brand identity and processes, and the know-how of those who run it. The job of managers is to manage all of these enterprise assets – not just the material resources – so that the business can deliver sustainable and growing profits to its shareholders. 

When the supply and demand in the enterprise starts to unravel, typically from the demand perspective, managers pull out the only tool they know - "cost cutting" ! In the current state of world economic affairs we see it everywhere.

Business school students hate the portions of Operations Research they encounter during their studies, but it contains a hidden gem - "Optimization".

From a managerial perspective optimization is the approach one follows to get more out of less  -but without resorting to cost cutting - i.e. staff retrenchments.

So it is a clever way of moving resources around until an optimal configuration is achieved. We typically see 10% improvements, but the figure below is one we frequently encounter - 90% improvements. And this is without any losses in people or expensive restructuring exercises.

Using a "business Controller" we predicted and optimised the stock levels in this company and as a result, reduced the average stock holding by 90%! The return on this investment was less than 6 months !

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