Hard and Soft Cost Savings What Counts Can Be Counted

Hard Cost Savings: Benefits brought about by LEAN/six sigma improvements that results in quantifiable reductions in costs & expenses or increase in revenue Common Hard Savings Reduction in unit cost of operations Reduction in unit cost of production Reduction in transaction cost Reduction in overhead cost Reduction in transportation cost Reduction in manpower Increased throughput, resulting in increased sales or revenue

Hard and Soft Cost Savings What Counts Can Be Counted

Soft Cost Savings: Intangible Savings Soft savings are the ones that are harder to measure directly Reduce costs through less labor, more efficiency, increased productivity, usable information, better compliance, better work environment, and other related areas Cost Avoidance (less rework and errors= hard savings but capacity increase= soft savings)

Common Soft Savings Increased Employee satisfaction, lower turnover, less absenteeism Improved service level , Increased Customer satisfaction Increased safety in the workplace Improving 5S score of an area Reduce projected warranty costs, Reduction in cash flow Avoiding the purchase of additional planned equipment or material Reduction in need for working capital, Avoidance of capacity enhancement Conformation to changes in the law

How Improvement Contributes to Financials

HARD SAVINGS Increase revenue and decrease costs
SOFT SAVINGS HARD & SOFT SAVINGS

Savings Spectrum: From Hard to Soft

D
SOFT Savings

Hard Savings On P&L For the current period. Its in the budget

Hard Savings Shift to Soft Savings More out in the future Savings on the balance sheet, cash flow, or working capital includes things like cost avoidance or capacity enhancement

The right thing to do (e.g. safety improvements, legal or environmental changes), No proof and no quantifiers

Making Soft Savings Harder

Liberated Financial Capital Savings reinvested in Marketing = increased revenue (ROM)

Decreased Spending of Capital

Reduce hiring & reduction in overtime = hard quantifiable savings

Free up FTE

Invest in safety and risk mgmt.

result in decreased accidents, which in turn could affect company insurance costs over a period of time = hard quantifiable savings cost avoidance or risk mitigations could be realized, depending on how a company budgets and provisions for mitigating risks and disasters

Back up

 Cost avoidance vs. true savings. Cost avoidance means that a planned new expense is no longer necessary. True savings occur when an existing expense is reduced. Lowering a scrap rate can reduce raw material expenses.