Get Ready For Budget Season, COVID Edition!

Budget season is upon us!

Budget season is upon us, and the COVID pandemic is sure to complicate the process. After working to keep employees safe while operating and managing volatile demand, companies must now also return to the work of saving money. Budget owners seeking to ensure next year’s objectives are challenging yet achievable will need to consider pandemic-driven demand uncertainties and impacts to production schedules and supply chains.

For manufacturers, the usual back-and-forth over conversion cost objectives and an acceptable rate of year-over-year improvement may intensify. If you got a pass in 2020 due to COVID, do you have to make two years’ worth of savings goals in 2021? If you benefited from increased demand due to COVID, have you set a new bar to achieve going forward? As such, analyses of manufacturing losses and cost reduction potential are likely to be scrutinized like never before.

Four tips to get through this year’s budgeting process unscathed:

1. Disaggregate the identification of cost reduction opportunities from realization plans and budget setting

Nothing kills a budding cost reduction opportunity like the promise to build it into your budget before you’ve figured out exactly how you’re going to realize it. Operations teams need the freedom to analyze losses and seek out improvement opportunities without fear that they are unwittingly signing up to capture everything they find. By disaggregating the loss analysis step from the budgeting process, you allow for more opportunities to be identified, with a larger aggregate value.

2. Compare your performance to its theoretical limit rather than to benchmarks.

Similarly to how comparing your children to each other is a bad idea; comparing two operations, even if widely similar, can do more harm than good. Operations leaders can always dispute a benchmark’s relevance, citing mitigating factors to explain differences in performance. 

Alternatively, demonstrating that your loss analysis considers all opportunities up to the theoretical limit shows that you’ve turned over every rock in search of savings (remember point 1 above when encouraging this). For direct labour and material costs, your theoretical limits are your maximum throughput and minimum crew size for each production line. For raw material yield, it is the minimum requirement of each material type from your bills of material after removing any built-in loss factors. The entire gap between the current cost per unit and the theoretical minimum implied by these ultimate limits should be considered potential value to capture.

3. Be realistic about the resources required to pursue a bigger-than-usual improvement agenda.

Senior executives (and consultants) are prone to the kind of hopeful optimism that imagines you can capture the full value of every identified opportunity in the coming year. Making a clear-eyed assessment of your organization’s available bandwidth and capability to drive cost reductions is critical to making the whole process work.

If a bigger-than-usual improvement in conversion costs is required, then a larger investment of people’s time, effort and potentially funding will be necessary as well. Making the resources match the target should be just as much a part of the discussion as setting the target itself.

In addition, some opportunities will prove more challenging to realize, or the conditions that created them will change. As a general rule of thumb, an operation should target twice the opportunity it needs to realize.

4. Seek out scrutiny of your plan rather than trying to avoid it

You’re better off proactively courting scrutiny of your cost reduction plan than hoping it will sail through the budgeting process unscathed. By making your opportunity analysis process transparent from the start and bringing your stakeholders along, you get to have the tough conversations about target setting and resource requirements earlier and with the data in full view.

Transparency is easier when organizations have a common process and language for loss analysis, opportunity identification and improvement plan development. With everyone utilizing the same process and being on the same page, it becomes possible to set an achievable budget that satisfies your business objectives while maintaining organizational harmony!

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