Saturday, December 09, 2006

McKinsey highlight #1: the art of cost cutting or how to save 70m with a measuring spoon

Paris, November 1998. First week on the job.
The phone rings - it was the staffing manager: "Philippe, come in my office, your life is gonna change!". I come to her office to learn that I would be on the next plane for Rome, where a team was waiting for me to start a TOP project in an electronic components factory. I was super excited!

TOP or Total Operational Performance, is a cost cutting approach, where your objective is to cut 40% of all the "not-strictly-necessary costs" by doing things differently. The methodology is simple: run brainstorming sessions and generate ideas to save costs. Any investment has to breakeven in less than 18 months.

I was in charge of the SG&A budget. As you probably guessed, 100% of SG&A costs are "not-strictly -necessary", so we had a good share of the objectives. After looking at all the major ideas to redesign the QA process, outsourced payroll, cut the office supplies ect... we started to tackle the plant food service where the 2,000 employees had their daily lunch. The options were simple: either we could find creative ways to reduce the spend, or we would have to outsource the whole operations and reduce the quality of the meals (it was one of the best restaurant I ever found in a company - the social pressure was high). The overall budget was around $2.5m, so we had to find a way to save $1m. After a week of brainstorming, we were still short of 4% of the savings or $40k. This close to the objective, we had to find something...

As I was queuing up for lunch, I realized that the employee in charge of adding the parmesan on each pasta plate was using a normal spoon and was VERY generous - a bit TOO generous for the acute eye of a cost cutting project leader. Back to the team room, I looked at the yearly cost of parmesan and discovered that the spend was above $75k per year, or equivalent to 15g or parmesan per person per lunch! Simply by replacing the traditional spoon with a 7g measuring spoon we could save more than 50% of the parmesan or close to $40k. Done deal: after a quick syndication with the kitchen team (their job was at stake, so they were easy to convince...), we bought a $4 measuring spoon with an expected return of 1,000 times in the coming year. This spoon saved the in-house restaurant and Lira 70m (I never said it was USD!)

Happy ending? Yes, for a couple of years, after which the new plant manager decided to outsourced the whole thing. I guessed the measuring spoon was not used diligently...