One of the methods of cost reduction is to analyse the time associated with doing an activity or a complete process. There are two categories of time we must take note of: Execution time per activity and Delay time.
Execution time per activity: That is the time required to complete a single activity in a process. For example, recording customer data takes 2 minutes.
Delay time: This is the time lag associated with the task in process. There are 2 kinds of delay:
- A delay in a process due to the unavailability of a third party e.g. system or person not available.
- A delay in the process due to not prioritizing the activity E.g. I received an order but I did not act upon it immediately.
There are two informative measurement opportunities. The first is the time per activity and the second is the time of the process.
The time measurement per activity leads to the calculation to answer the question of how much time we are spending on CVA, BVA or NVA activities. For example, the process has 3 NVA activities.
NVA activity one = 2 minutes
NVA activity two = 1 minute
NVA activity three = 4 minutes
That means that in one process alone, 7 minutes of time is wasted. The time measurement for the complete process is called Process Cycle Time. It is easily calculated by adding the time taken for all activities in the process + delay time.
Generally, process cycle time is expressed annually. To achieve this, the frequency of the process must be considered. For example, the process cycle time is 30 minutes and its frequency is twice per week. Hence, on an annual basis, the organisation is spending 52 hours on this process. If 7 minutes of the 30 minutes are dedicated to NVA activities, on an annual basis the organisation is wasting 728 minutes or over 12 hours on non-value adding activities!
Process Efficiency, also known as Process Cycle Efficiency, signifies a level of performance that describes a process. In short, An efficient process uses the lowest amount of inputs to create the greatest amount of outputs.
Process Cycle Efficiency is a measurement, expressed as a number. This number represents the amount of value adding time in a process. The higher the number, the more efficient the process becomes.
The Process Cycle efficiency is calculated by totalling the value adding activities (BVA & CVA) time in the process and then dividing it by the total Process Cycle Time of the process.
In other words, process cycle time = process execution me + delay time
Process Cycle Efficiency is improved by decreasing the cycle time through the reduction of delay time. Let us look at a scenario:
Process Cycle time = 50 minutes
Execution time = 10 minutes
Hence, there is a delay time of 40 minutes in the process.
Divide Execution time by process cycle time. That is: 10/50 = 0.2
To represent the decimal as a percentage, multiply it by 100.
Therefore, the efficiency of this process is 20%.
Hence, if we want the process to be 100% efficient, we need to remove the 40 minutes delay time. As a reference, for transactional processes, that is anything non-manufacturing, 25% efficiency or above is acceptable.
The blog series covered some of the many approaches to improve business processes within your organisation. It is important that before executing any of these, risks and costs are properly calculated to avoid failures and instead get excellent results from the improvement initiatives.
Activity and Process Cost Analysis
Cost reduction is a critically important goal of every organisation. Decrease in operational costs signifies higher profit margins and a better organisational budget. It is also one of the key measures of success for Business Improvement programs. According to the PEX Network Biennial State of the Industry Report 2015, around 22.2% professionals consider Cost Savings as the primary measure of success for their Process Improvement Programs.
Analysis of cost is essential for crafting a reduction strategy and process analysis is essentially the foundation of it. A process can be analysed in either quantitative or qualitative way. The quantitative aspects of a business process analysis are usually classified as the following:
- Process Value Analysis
- Process Cost Analysis
- Process Time Analysis
- Process Efficiency Analysis
Through our blog series, we have already shared how you can do value analysis. In today’s blog we are going to focus on Process Cost Analysis.
ACTIVITY AND PROCESS COST ANALYSIS
Analysing the cost of a process is another way to identify cost reduction opportunities; what the cost saving could be if we were to slightly redesign the process. Role cost and overhead cost needs to be considered to calculate process cost and identify cost reduction opportunities.
A process model indicates the activities performed by respective roles. Identify the role(s) and source the annual cost from the Human Resource department. For example, role XYZ has an annual cost of $100,000. Secondly, the business overhead cost must be calculated. An overhead or overhead expense refers to an ongoing expense related to operating a business. Overhead costs include rent, accounting fees, taxes, telephone bills etc. but does not include labour costs, material costs and direct expenses.
An overhead cost is usually expressed as a ratio and this can be sourced from the finance department. For example, the overhead rate is 0.31 or 31 percent, which means that $0.31 in overhead costs is incurred for every $1 in direct labour costs. Hence, if role cost is $100,000 per annum, the overhead cost is $31,000 per annum. Translate the overhead cost and the role cost into minutes. This can then be multiplied by the minutes it takes to do the activity. Hence, the result is a per activity cost. Allocating a different role to an activity can significantly change the cost of the activity.
Following the Value Analysis described above, calculate the annual process execution cost of your process for:
- Customer Value Adding activities
- Business Value Adding activities
- Non-Value Adding activities
Non-Value-Adding activities represent waste in the organisation; hence these costs can be immediately removed to deliver cost savings
Process cost analysis is one of the approaches to analyse a business process. However, it is important that before executing any of the shared analysis techniques, risks and costs are properly calculated to avoid failures and instead get excellent results from the improvement initiatives. Additionally, based on the objective of the analysis, one needs to choose a technique hence, you need to be very cautious while choosing one.