THE ROLE OF HUMAN RESOURCE DEPARTMENT IN ORGANISATIONAL COST CONTROL AND REDUCTION

By Dr Aaron Koo

Business competition

All businesses are experiencing increasing competitiveness as a result of one or a combination of the following factors:
1)scarcity of resources, 2)sophisticated customer needs, 3)technological advancements, 4)social and economic factors.

Business competition
To be competitive, a business has to build its competitive advantage or core competency . . . . and sustain it as well!

Sustainable competitive advantage depends on the company size in the targeted market, on superior access to resources or customers, and on restricted options of competitors.

Hypercompetition
- is an environment characterised by intense and rapid competitive moves, in which competitors must move quickly to build advantages and erode the advantages of their rivals.
- Instead of creating sustainable advantages, strategists in hypercompetitive environments should focus on developing a series of temporary advantages. The rationale behind it is that there is no sustainable advantage competitors will move quickly to break and replace the competitive advantage.

- Eg Microsoft, American Airlines (early stage)

*DAveni, Hyper Competitive Rivalries, 1995]

Types of competitive advantages (Porter)

Competitive Advantages Lower Cost Broad Target Competitive Scope Narrow Target Focus Cost Differentiation

Differentiation Leadership

Cost Control & Reduction

IT IS NOT A PROGRAMME!!! Not an ad-hoc approach during economic downturn! It is a way of life to stay competitive and to stay alive! Planned long term approach and address in strategic planning

Cost Control
It is the prevention of waste within the existing environment. It is the procedure whereby actual results are compared against the standards so that waste can be measured and where appropriate action can be taken to correct the activity. It is the process of regulating the action so as to keep the elements of cost within the set parameters. This process is exercised by setting the norms, targets based on past actual. It is the process of utilizing the available resources economically.

Cost Reduction
This involves the examination of the purposes for which costs are incurred and, by a variety of means eliminates or reduces the reasons for spending. The existing standards are closely examined at the broad and detailed levels with a view to improvement. It seeks ways to achieve a given result through improved design, better methods, and new coordinated set of contingent actions to achieve the dual objective of reducing overall costs without corresponding loss of efficiency.

Importance of Cost Control & Cost Reduction

Strengthen the competitive muscle by cutting away fats Better utilization of resources To prepare for meeting a future competitive position Reasonable price for the customers Firm standing in domestic and export markets. Improved methods of production and use of latest manufacturing techniques which have the effect of rising productivity and minimizing cost.
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Cont
By a continuous search for improvement creates proper climate for the increase efficiency. Improves the image of company for long-term benefits. Improve the rate of return on investment.

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Cost Control v/s Cost Reduction

Cost Control 1. It is the competitive analysis of actual results with established norms. 2. The variances are appraised and reported and necessary course of action will be taken to revise norms, standards etc. Cost Reduction This process finds out the substitute by finding new ways or methods. The necessary steps are taken for further modification in the method.

3. It starts from established cost standards It challenges the standards forth-with and and attempts to keep the cost of operations attempts to reduce cost on continuous basis. of a process in line with those standards. 4. The emphasis is on the present and past behavior of costs. 5. It attempts to achieve the best possible results at the least cost under given conditions. 6. Cost control is a preventive function. The emphasis is partly on the present costs and largely on future costs. Under this no conditions are considered to be permanent where a change will secure a lowest cost figure. Cost reduction is a corrective function.

Cost Control Process

Steps involved in designing process of cost control system: Establishing norms: To exercise cost control it is essential to establish norms, targets or parameters which may serve as yardsticks to achieve the ultimate objective. These standards, norms or targets may be set on the basis of research, study or past actual.

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Cont..
Appraisal: The actual results are compared with the set norms to ascertain the degree of utilization of men, machines and materials. The deviations are analyzed so as to arrive at the causes which are controllable and uncontrollable. Corrective measures: The variances are reviewed and remedial measures or revision of targets, norms, standards etc., as required are taken.

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Cost Reduction Process

The achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended. Reduction in the cost of product must be brought about by the elimination of wasteful and unnecessary resources employed in its design, manufacture, sale and distribution.

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Sequence of Steps in Cost Reduction Process

1. Analysis 2. Examination a) Vital activities b) Secondary activities 3. Developing solutions 4. Selecting a Solution 5. Obtaining Agreement

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Cost Reduction
Cost can be reduced through Reduction (prod time, waiting, inventory) Elimination (waste, bottle necks, barriers) Modification (system, design) Innovation (Re-engineering, methods of producing, equipment, tooling)

Identifying Areas for Cost Control & Reduction

1)
2)

Understanding cost concepts and behaviour

Analyse individual cost items systematically using value chain Identify areas to target for cost control or cost reduction

3)

Costs Concepts
Controllable vs non-controllable costs Avoidable vs unavoidable costs Discretionary costs - costs resulting from strategic and tactical decisions of managers and has no direct relationship between the level of spending on an activity and active production levels Sunk costs - costs of resources that have already been committed Opportunity costs - the costs of foregoing the next best alternative course of action

Costs Behaviour
Variable Cost Graph

Cost

Volume

Costs Behaviour (Contd)

Fixed Cost Graph

Relevant Range

Cost

Fixed Cost

Volume

Costs Behaviour (Contd)

Mixed Cost Graph

Cost

Volume

Cost

Volume

Identifying Areas for Cost Control or Cost Reduction

If avoidable, to reduce. If unavoidable, to control Assign cost control or reduction activities to those individuals who have direct control over them Minimise discretionary costs, and forget about sunk costs Weigh and focus on opportunity cost Generally, variable costs are easier to reduce than fixed costs. Therefore, reduce variable costs and control fixed costs

Porters Value Chain

SUPPORT ACTIVITIES
Infrastructure Human Resource Management

Technology
Development Procurement

PRIMARY ACTIVITIES

Logistics Operations Marketing/ Service Sales

Cost control through comparing actual to standard Cost reduction through reduction, elimination, modification or innovation

Some Techniques and Areas for Cost Control & Reduction

Product improvement (value analysis and reengineering) especially at design stage (design for manufacturing) Product standardisation and rationalisation Cost of quality and quality improvements Process improvement and do it right the first time approach Use of technology to improve processes or reduce labour usages Financial and working capital management to minimize cost of borrowings

1. 2. 3. 4. 5.

Freeze in hiring . Personal awareness to cost cutting. No bonuses or pay hikes. Night home drops and pick ups are charged. Reducing off-shore trainings.

1. 2. 3. 4.

Reducing work hours for trainees. Delay in freshers joining the company. Paycut of 5%. Annual shutdown of a week extended to a fortnight

1. Shutting down older fabrication units. 2. Freeze in hiring. 3. Reduced travel expenses, using video chats & voice chats as alternatives. 4. Reducing/reusing inventory. 5. Increasing personal awareness. 6. Avoiding discretionary expenditures.

1. 2. 3. 4. 5.

Introduction of new cost effective technology. Process re-aligning. Re-engineering of product. Restructuring of workforce. Rationalising input costs.

Precautions in Implementing Cost Control and Reduction

Cost control and reduction must be appropriate and reasonable to the organization. Their introduction and implementation must be planned soundly. Resistance by employees to control and reduce costs. Usually because the nature and purpose have not been properly explained to them, and they feel threatened by the change.

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Cont
The success in one area is not severely hindering or damaging other aspects of the business or that success in one area is not being eroded by failure in another area. The cost control and reduction measures should not have any undesirable effects on external parties e.g., suppliers of raw material, buyers of finished products etc.

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The Importance of Human Resource Function

the most important resource of any nation must be the talents, skills, creativity and the will of its people . . . . . Our people is our ultimate resource. Without a doubt, in the 1990s and beyond, Malaysia must give the fullest emphasis possible to the development of this ultimate resource.
Tun Dato Seri Dr Mahathir Mohamad , 28 February 1991, after unveiling the blueprint for Vision 2020

Human Resource Functions

HR functions consisted of mainly 3 sections :
Human resourcing which includes the planning, recruitment, selection and termination of human resources Employee development which encompasses the training, career development, performance measurement, compensation and rewards of human resources Employee relations which deals with issues like discipline, unions, employees welfare and health and safety of workplaces

Cost of Human Resources HR costs are related to these 3 functions:

Human resourcing - cost of hiring (advertisements and recruitments) -job fit (cost of wrong person on wrong job, wrong person on right job, and right person on wrong job) -cost of bad hires (loss of productivity, cost of rejects and wastages, cost and time in training and counselling, cost of removal and replacement, cost of lost opportunities and lost customers, etc) -other than cost of hiring (unavoidable, hence to control), others are avoidable and can be minimised by using psychometric profiling tools!

Cost of Human Resources

Human resourcing (Contd) - Many psychometric profiling tools, eg Myers Briggs, Thomas International, The Big 5, Unique Profiling etc - Be aware of the pitfalls of most tools: a) instrument is based on one or two theoretical constructs b) Putting a number on the typology of personality c) Assuming that our behavior pattern is constant and is not affected by the environment d) Classifying human differences using polar traits, type nouns and adjectival descriptors

Cost of Human Resources

Human resourcing (Contd) e) Assuming that human being is simple and their behavioral pattern is recognizable, predictable and is consistently persistent across situations and over time f) Limit its interpretation of personality to positive traits g) The report of psychometric instrument is not free from human bias - Overall Unique Profiling has an edge over the rest and is reasonably objective and accurate. Cost is much lower than the rest.

Human Resource Functions (Contd)

Employee development - Cost and time of identifying performance gaps and training needs - Time and cost of training - Time and cost of designing and implementing performance appraisal, compensation and rewards of human resources - All unavoidable, hence can control only - May use certain psychometric profiling tool to assist in identifying training and especially individuals growth needs

Human Resource Functions (Contd)

Employee development (Contd) - Imperative for organization to identify employees with high growth needs before they are sent for competency training. Sending employees with poor attitude and low growth needs is a waste of training funds as no transfer of training will takes place - For effective performance appraisal, to implement management by objective where Key Result Areas (KRAs) are identified beforehand and agreed by both parties, and their achievements tracked throughout the year to determine rewards - To ensure more complete appraisal, should include all aspects as depicted in Kaplans Balanced Score Card

Balanced Scorecard - Kaplan & Norton

Financial perspective To succeed financially, how should we appear to our shareholders? Customers perspective To achieve our vision, how should we appear To our customers? Internal business processes At what business process must we excel?

Vision & Strategy

Learning & growth To achieve our vision, how will we sustain our ability to change and improve?

Human Resource Functions (Contd)

Employee relations Cost of employees welfare Cost and time of unhealthy employees Cost of safety of workplaces Above costs can be categorised as statutory or voluntary - Statutory requirements: EPF, SOCSO, OSHA, annual leave, maternity leave, public holidays etc unavoidable and non-controllable - Voluntary: Insurance, medical and hospitalisation benefits for employees and families, paid vacation, additional annual/maternity leave etc all are avoidable and discretionary.

Human Resource Functions (Contd)

Employee relations (Contd) - Voluntary benefits - Some are expensive eg medical and hospitalisation, paid vacation, additional leave etc; whereas some are relatively cheaper, eg insurance - Benefits of insurance: Containment of costs via a) collective bearing of risks, and b) increase perceived value of benefits - HR initiative for the employers. It is an employee friendly gesture which promotes a feeling of satisfaction and helps in reducing attrition

Human Resource Functions (Contd)

Employee relations (Contd) - Voluntary benefits - Types of insurance and their benefits: - Many risks can be offset by buying insurance Midsize and large employers can buy insurance more cheaply than can individuals. This makes employer-sponsored insurance a preferred benefit - Group term life insurance is one of the oldest and most widely available employee benefits. Most full-time employees of medium/large private firms are covered

Human Resource Functions (Contd)

Employee relations (Contd) - Voluntary benefits - Types of insurance and their benefits: - Medical and hospitalisation insurance is a preferred benefit due to ever increasing cost of healthcare. Most employees and their immediate families get basic or major medical and/or hospitalisation coverage. Research shown that those with these benefit will do regular check up more often. Healthy employee means productive workforce! - But these benefits cease once the employees leave the employment!

Leveraging on Insurance to Contain Cost

3 ways HR can help to control and reduce cost - Protecting the interests and assets of the company with general insurance on assets and fidelity insurance on employees - Avoiding unpleasant surprise and upsurge of costs with group life, hospitalization and medical insurance - Keeping cost of employees benefits low by increasing the perceived value of benefits with insurance, to leverage on the group coverage which is not available to employees

Thank you
Questions & Answers Session