06.12.2017

Case Study: Overhead Cost Reduction

Background:

The business was going through a period of rapid growth and pressure was being applied to reduce overhead costs to maintain margins. The situation was made worse because this growth wasn’t forecast by sales, causing increased pressure on all departments. This meant we had to be selective on which overheads we targeted.


Challenge:

The challenge was to try and reduce overhead costs, but continue to keep the same level of support to production and maintain customer expectations. This meant the solution had to come from somewhere that didn’t impact production directly or effect our customers experience. In addition, the savings had to be big enough to make a difference.

Solutions:

We investigated all overhead costs by type and by department before evaluating possible options based on value and the degree of impact that any change would have on production.

This examination identified two key areas of overhead expenditure which could yield cost savings without a negative influence on production. These were:

• Insurance costs were extremely high.
• A non-critical department experienced overtime costs much higher than all the other departments of a similar size.

Further investigation led us to uncovering the causes of these issues:

• On the insurance premium costs: It came to light that the business had never gone out to tender or used any competitive tools to review the costs of insurance. They had used the same brokers for many years, leading to continual incremental cost increases.
• On the overtime question: Detailed inspection revealed that the department in question was operating an historic shift pattern that was so misaligned with the rest of the operation that it was generating unnecessary overtime every month, but with no added value to the business

Step 1 INSURANCE COSTS: Introduction of a new tender process. A tender process was introduced and four companies tendered for the business through a presentation, including the incumbent broker.

Result:

Following on from this process a new broker was appointed to look after all insurance renewals and day to day management of insurance issues for the next three years. This generated £80k in annual insurance premium cost savings.

Step 2 DEPARTMENTAL OVERTIME COSTS: Introduction of a new shift pattern after a round of consultation which brought the department in question in line with the rest of the site.

Result:

Following some initial resistance from a few more experienced members of staff, the reorganisation of the shift pattern meant an increase in production due to better cover. This resulted in the combined benefits of increased monthly take home pay for the majority of the department and an annual overtime saving of £50k.

Benefits:

The outcome was a £130k annual overhead saving, increased production through enhanced efficiency and a more engaged working relationship with the new insurance broker.

"Whatever level of financial expertise your business requires, we are ready to help you achieve what YOU need to run your business"

If you need any help in growing your business, do not hesitate to contact me now for a free of charge consultation.

Mark Davis

☎ 07877 922 791
  • FInance Director
  • Financial management
  • Accounting
  • Financial Controller
  • Cost Reduction

Profitability-driven finance leader with expertise in all facets of accounting, financial management, financial analysis, and controllership within corporations with extensive regulatory compliance…

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