Cost Minimization
Cost Minimization uses the same maths as does Optimisation, but with minus signs all around!
We offer this service as part of our optimisation consultancy if the subject is appropriate. It is not just for clients who blend or mix things to make a product. It can work at the component level as well.
In our free half day of optimisation consultancy, we can easily explore it this applies to your company, bu using your own figures.
This sort of work originally started off with blending clay and blending ores and metals for smelting, but now extends to anything for which we can write an equation for the cost functions.
Management accounts: And no, you cannot do this sort of work on a management accounts spreadsheet or even a cost analysis spreadsheet. Without Linear Programming, you are unable to see how one item adds costs to another item which itself might be the best candidate to get rid of or, alternatively to use in your production process.
In blending, for example, there are excellent case studies which show that the cost of a particular mix, falls off a cliff when a certain decision point is reached, with no detriment to the desired product specification. Finding that cliff is then what our algorithms will do, and you save a fortune. It can apply to everything you buy where choices can be made from different supply pools.
We do not usually have to contemplate shedding staff when we look at cost minimization because, like profit optimisation, the model usually shows you ways to re-deploy staff to produce yet further profits.
New capital investment modeling: Consider when you decide to purchase a capital item of manufacturing automation. It appears to be capable of doing the work of 5 people and replacing them with one supervisor. No doubt you will have received a cost-benefit analysis as part of the argument for buying the new machine. Using our model and all the figures we then have at our disposal, we can then model the outcome as far as your company profits are concerned.
Firstly we run the optimisation model for your company as it currently is - without the new machine.
Next, we run the model with the new machine in place, including all the figures relating to its ability to replace 4 people. The optimisation model will take the currently available labour and see if they can be redeployed.
We can usually see this by running only one step of our maths. If that shows that labour is a limiting resource, then we will know already that redeployment might be a profitable option. Running the model again, including the new machine, but retaining the existing labour will give you a new optimal profit. The decision is then easy. If the profit increase is greater than the entire cost of the 4 people minus redundancy costs, who would otherwise be dismissed, then you can afford to keep them, and their skills and yet still make more profits.
You intend to shed labour costs but end up keeping them to make an even greater profit: It probably all sounds a bit confusing. You set out to lose costs through automation. The payback on the new machine is probably 5-6 years and is paid for from the savings made by losing 4 salaries and lower costs of production. We, however, might suggest that, no, you should not lose these people. You should redeploy them for yet further profits. The automation does its job and produces additional products to sell at a lower cost, which will also boost sales. Our model says, fine, do that, but to make even greater profits, let the automation do its job, but let the model show you how to gain the highest profits for the company through redeployment.
It is usually a surprise to the directors. You set out to automate and thus lose the cost of 4 people, but instead, you keep them and make yet further profits by redeployment and the payback on your new investment is shorter still.
Use our model to make decisions: The optimisation model allows you to examine every possible outcome other than sacking people and to explore every option you wish to get the best result you can both live with and increase your profits.
