The by-product savings in variable overhead costs
The sixth profit driver is variable overhead costs. It can include things like electricity usage, temporary storage, some insurance and taxes, travel and entertainment, and occasionally a few somewhat odd ones like overtime and temporary help. We don’t always think enough about this cost area but we should, it can be significantly impacted as a by-product of improvement projects. If the improvement project can reduce the number of hours an organization needs to operate, it will also reduce many variable overhead costs.
Finding the opportunity here requires trying to understand how these costs are allocated in the financial statements and then analytically drawing some correlations between those costs and the process hours. Some are quite linear so you can derive fairly strong correlations. Others aren’t quite so easy. Energy costs, for example, are usually based on both usage and peak demand, so you might reduce usage while actually increasing peak demand. Understanding that can also be helpful as it might suggest some ways to manage the demand profiles (like staggering the start up of equipment at the beginning of a shift).
Professional fees are also sometimes thrown into this cost bucket and so of course we’ve had a few finance directors point out to us that one quick way to reduce these costs would be to stop hiring external consultants like us. As you can imagine, it’s never our specific intention to put a spotlight on our own fees, but it is a valid point and many recurring professional fees have a way of drifting upwards over time and being sometimes unaccountable to the value they bring an organization. However, challenging professional fees requires a specific focus and isn’t usually correlated to other improvement project work. Generally the simpler opportunity here is to recognize the costs that are being impacted while focusing on other parts of the organization.