Annualised Savings

I am at a project in Germany right now and had to explain the concept of annualisation of savings. I actually quite liked what I wrote and want to keep it on my blog, for future reference: 

There are 2 kinds of savings - some can be annualised, those are recurring ones that get regularly consumed. This can be raw materials, planned maintenance, discount (Skonto), and some cannot be annualised, such as one-off repairs, or a sell-off of old stock. 

If we do NOT annualise we would start every year from 0 and count up savings till the year is over. And then back to 0.

Any non-annualisable saving would count as as one off. All other savings count for the rest of the year from the date of when the saving initiative started to take effect. 

The concept of annualisation is more like a speed test in order to show that savings, once they have reached a certain level, remain on that level. It is an extrapolation and it should show confidence that once you have reached a certain speed or level of saving, you will not lose it. 

It is like driving a car. If you need to drive a distance of 50 km in 30 mins you will need to accelerate for a bit and then keep the accelerated speed on a certain level, something about 100 km/h. And this is annualisation. Your annual target is those 50 km. But "annualised" it is 100 km/h. 

Let's look at the one work stream of ours, the price discount where you agreed on € xxx. This is an annualised saving, adding to your annualised target. We assume, once the CFO letter and all the other tasks are done, from then on we can assume, that for the running time of a year (52 weeks) we have € xxx savings. This is the speed for this workstream so to speak. If you do NOT annualise those € xxx, you would only be able to claim a fraction of it.  

So, going back to our project, by mid September you should be at the speed of € yyy and by mid November at a speed of € zzz. This does not mean you need to have the cash in the pocket by then, it only shows a confidence level that your initiatives will be worth € zzz after one year if you keep on going like you did getting those savings. 

Otto Bock - OTP Installation

OTP is an interesting workstream as it comprises all other areas of the project, apart from R&D which we also looked at.

Viola's interfaces were mainly with the workstreams sales, order entry, production, logistics, payment control, whereas the latter 2 were her own areas.

OTP basically works like this: All major processes should be mapped and critiqued. Times of sub-proceses should be taken to understand how long "the average" process takes.

And then, after those critique sessions, improvement plans have to be developed and implemented. Best would be to do this with the 6 Sigma methodology, but in those days we decided not to.

After the improvements have been implemented, new standard times have to be taken and financial savings calculated.

On the pictures is Viola and her task force, who luckily was also responsible for ISO.

Business Reviews (2)

So what is the concept of an analysis which would last ideally for 2 weeks?

Week 1, Sunday: Consultants arrive, briefing in the hotel about the client and the sales effort so far.
Week 1, Monday: Kick-off meeting with the client, plant tour, consultants get introduced to client's managers, consultants make appointments with them.
Week 1, Tuesday: Consultants undertake studies.
Week 1, Wednesday: Consultants undertake studies.
Week 1, Thursday: Consultants undertake studies, the analyst pre-presents first findings.
Week 1, Friday: Consultants undertake studies and are about to die and curse the analyst....

Week 2, Sunday: Travelling to client's site, briefing in the hotel.
Week 2, Monday: Consultants undertake studies, project director and analyst work on project themes according to the weaknesses found.
Week 2, Tuesday: Consultants undertake final studies, tentative project plan is being developed. Analyst has another pre-present meeting with the top client.
Week 2, Wednesday: Analyst concludes with savings potential, calculations are being made how many consultants can be applied and how long the project should last.
Week 2, Thursday: Final presentation to the client.
Week 2, Friday: Hopefully a go-ahead and the project can start on Monday next...

Throughout week 2 the project manager and director must be very vigilant that the analyst does not over-sell and savings cannot be reached. Ooooops, yes, we have all been there!!!

Humbly Bowing one's Head

I found that 1/2 person. Later in my consultant life there were more of them. It is difficult to describe how one feels when being held responsible if someone gets sacked. I told my friends and their reaction was somewhat mixed - some found it actually funny, some where understanding, and some asked me how I felt about it meaning they were shocked.

Initially, it is difficult to justify this part of my job. And that first company I worked for specialised in that. It is the old American way of thinking that most problems lie in too high a headcount. Nowadays this is far too simplistic and a consultant has to come up with more clever solutions to cash problems than sheer manloading.

Back to my reaction. I felt bad and tought a lot about it. I justified by saying that if it were not me, it would have been someone else who did the job. But that's not good enough.

All in all, I know I am selling a service to my client. This client wants a company which runs on the lowest possible cost and should deliver the highest possible service to the market. A company is not a welfare state, it has to be profitable to survive. And a job is not a lifetime guarantee anymore. Bearing this in mind will make this part of my service offering acceptable. I would do it over and over again.