3-Step Approach to Closed Loop Cost Management in CPG
Consumer packaged goods (CPG) companies are under pressure. The complexity of their businesses has grown, with greater regulation and the pressures of globalization. At the same time, they must reduce cost and become more competitive or otherwise they might quickly become takeover targets.
Cost management therefore tops the list of strategic priorities for many of these companies today. The challenge is not to strip out cost for the sake of doing so, but to make it sustainable over time turning cost management into a competitive advantage. It requires not undertaking one-off projects that generate a certain level of savings, but embedding cost management into the company’s culture — with new processes that continually identify and realize efficiencies.
To support this, CPG businesses need to adopt a closed loop cost management approach: a system of cost control that continuously challenges the company’s cost levels in order to give the business the best possible chance of competing effectively. Achieving that goal requires a three-step approach that many industry leaders are now investigating or actively implementing.
1. Increasing visibility – identifying the quick wins
The initial challenge is to create full visibility around what the company spends. This is especially true for selling, general and administrative expenses (SG&A) or overhead costs, because cost accounting systems don’t generate sufficient levels of detail or consistency. When one US-headquartered CPG firm conducted a more in-depth analysis of its spending, it discovered that its travel spending, as one example, was far higher than initially expected. The simple reason is that its travel expenditure was fragmented across several budget areas: staff training, internal and external events, and so on.
This limited visibility is a problem, as companies can only address the part of the picture that is in plain sight – procurement, for example, can only negotiate on the volumes of travel it can explicitly see.
The task, then, is to go through spending line by line, reclassify it into standard cost packages, and create full visibility on what the company is spending and who is spending it. With that level of detail available, comparisons with the experience of industry peers make it possible to identify cost reduction opportunities being it through better price negotiations, more competitive policies or simply doing more with less.
When building the full visibility on in-house and external training, one multinational CPG company discovered that the different business units were spending a significant amount of money on the wrong training and developing training materials that already existed in other parts of the company. The visibility helped this client to reprioritize its training budget globally towards the critical capability gaps and to leverage new, low-cost technology solutions like e-learning.
2. Establishing ownership – the accountability matrix
Ownership is the key to sustainable cost management: people must be accountable for their budgets, right down to the level of detail identified in the first step. They must have the mindset to question the need for cost and continuously strive to reduce or avoid costs.
This is often absent in larger firms; people do not treat the company’s money like it was theirs. Furthermore, managers and budget owners are accountable to meet their overall budgets, not to reduce them. They have been n able to move expenses around within the headline figures. By introducing a second dimension of responsibility – appointing individuals with global responsibility for each cost center – greater rigor is achieved.
So, for example, the manager of the North American business might want to move money out of training and into marketing. To do so, he would need to negotiate with the global owners of those two budgets. If it makes business sense, it can be done, but the manager needs to explain how the changes will be compensated for. Over time, this brings a positive tension to the budgeting process: people begin to discuss what cost is really needed – and what isn’t.
This also will happen in the budgeting process every year, with the cost centers working together with the business, challenging each other on an ongoing basis. It also needs to happen throughout the year, with tracking and filtering programs that require people to show whether they are on target to achieve their budgets and the actions they are taking to remedy any problem.
The matrix structure, in which both business leaders and cost centers have ownership responsibilities, cements accountability into the business. Furthermore, as one European brewing company discovered when implementing this approach, it helped drive an organizational culture where people spent money as if it was their own, making the firm far more cost conscious than before.
This cultural shift can lead to significant change, beyond what policies alone can help embed—a firm may tightly define how to contain costs on travel while can limit spending in that area, but in a cost conscious environment, employees are more inclined rethink the need for travel altogether.
3. Cultural change – towards the zero-based budget
Over time, the challenge is to change the culture of CPG companies so that this sustainable cost management philosophy becomes second nature. The aim should be to embed the idea of zero-based budgeting – that is, a budget not simply set each year by taking the previous year’s budget and adding an allowance for inflation, but starting from scratch and challenging the need for every cost item.
Of course, such a change is only possible where people are continuously prepared to openly and constructively engage with one another on cost management. This again highlights the importance of embedding a more cost conscious culture, which in turn can help functions more actively embrace the merits of zero-based budgeting.
This approach is now being implemented by Mondelez International, the US-based consumer goods manufacturer, as part of an effort to deliver $3 billion in savings over three years. In doing so, it will tackle budgets on the basis of what it really needs to spend.
The journey to best-in-class cost management is not easy, however, crucial to become more competitive and to win in the current environment. A closed loop for cost management means every single dollar that the company spends makes a difference.
ABOUT THE AUTHOR
Robert Willems, Managing Director, Consumer Goods & Services, Accenture can be reached at [email protected].
Copyright © 2014 Accenture. All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.
Cost management therefore tops the list of strategic priorities for many of these companies today. The challenge is not to strip out cost for the sake of doing so, but to make it sustainable over time turning cost management into a competitive advantage. It requires not undertaking one-off projects that generate a certain level of savings, but embedding cost management into the company’s culture — with new processes that continually identify and realize efficiencies.
To support this, CPG businesses need to adopt a closed loop cost management approach: a system of cost control that continuously challenges the company’s cost levels in order to give the business the best possible chance of competing effectively. Achieving that goal requires a three-step approach that many industry leaders are now investigating or actively implementing.
1. Increasing visibility – identifying the quick wins
The initial challenge is to create full visibility around what the company spends. This is especially true for selling, general and administrative expenses (SG&A) or overhead costs, because cost accounting systems don’t generate sufficient levels of detail or consistency. When one US-headquartered CPG firm conducted a more in-depth analysis of its spending, it discovered that its travel spending, as one example, was far higher than initially expected. The simple reason is that its travel expenditure was fragmented across several budget areas: staff training, internal and external events, and so on.
This limited visibility is a problem, as companies can only address the part of the picture that is in plain sight – procurement, for example, can only negotiate on the volumes of travel it can explicitly see.
The task, then, is to go through spending line by line, reclassify it into standard cost packages, and create full visibility on what the company is spending and who is spending it. With that level of detail available, comparisons with the experience of industry peers make it possible to identify cost reduction opportunities being it through better price negotiations, more competitive policies or simply doing more with less.
When building the full visibility on in-house and external training, one multinational CPG company discovered that the different business units were spending a significant amount of money on the wrong training and developing training materials that already existed in other parts of the company. The visibility helped this client to reprioritize its training budget globally towards the critical capability gaps and to leverage new, low-cost technology solutions like e-learning.
2. Establishing ownership – the accountability matrix
Ownership is the key to sustainable cost management: people must be accountable for their budgets, right down to the level of detail identified in the first step. They must have the mindset to question the need for cost and continuously strive to reduce or avoid costs.
This is often absent in larger firms; people do not treat the company’s money like it was theirs. Furthermore, managers and budget owners are accountable to meet their overall budgets, not to reduce them. They have been n able to move expenses around within the headline figures. By introducing a second dimension of responsibility – appointing individuals with global responsibility for each cost center – greater rigor is achieved.
So, for example, the manager of the North American business might want to move money out of training and into marketing. To do so, he would need to negotiate with the global owners of those two budgets. If it makes business sense, it can be done, but the manager needs to explain how the changes will be compensated for. Over time, this brings a positive tension to the budgeting process: people begin to discuss what cost is really needed – and what isn’t.
This also will happen in the budgeting process every year, with the cost centers working together with the business, challenging each other on an ongoing basis. It also needs to happen throughout the year, with tracking and filtering programs that require people to show whether they are on target to achieve their budgets and the actions they are taking to remedy any problem.
The matrix structure, in which both business leaders and cost centers have ownership responsibilities, cements accountability into the business. Furthermore, as one European brewing company discovered when implementing this approach, it helped drive an organizational culture where people spent money as if it was their own, making the firm far more cost conscious than before.
This cultural shift can lead to significant change, beyond what policies alone can help embed—a firm may tightly define how to contain costs on travel while can limit spending in that area, but in a cost conscious environment, employees are more inclined rethink the need for travel altogether.
3. Cultural change – towards the zero-based budget
Over time, the challenge is to change the culture of CPG companies so that this sustainable cost management philosophy becomes second nature. The aim should be to embed the idea of zero-based budgeting – that is, a budget not simply set each year by taking the previous year’s budget and adding an allowance for inflation, but starting from scratch and challenging the need for every cost item.
Of course, such a change is only possible where people are continuously prepared to openly and constructively engage with one another on cost management. This again highlights the importance of embedding a more cost conscious culture, which in turn can help functions more actively embrace the merits of zero-based budgeting.
This approach is now being implemented by Mondelez International, the US-based consumer goods manufacturer, as part of an effort to deliver $3 billion in savings over three years. In doing so, it will tackle budgets on the basis of what it really needs to spend.
The journey to best-in-class cost management is not easy, however, crucial to become more competitive and to win in the current environment. A closed loop for cost management means every single dollar that the company spends makes a difference.
ABOUT THE AUTHOR
Robert Willems, Managing Director, Consumer Goods & Services, Accenture can be reached at [email protected].
Copyright © 2014 Accenture. All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.