So it’s the new year and you say you have way more on your plate than you can handle? So what’s new? Maybe, just maybe, you need a little help with company cost savings. Remember that old adage about two heads being better than one. Well how about all heads being better than one? This month, we share with you a true cost-saving story from outside the petroleum industry, but with a valuable concept which can be easily implemented at your company.

At the beginning of 1996, Kryptonite Corporation, a 75-employee manufacturer of bicycle locks in Massachusetts, decided the company needed to save money. Accordingly, they put this value statement out to their employees, “Come up with ideas for saving money, and we’ll split some of the savings with you.”

Per the rules of the original game, the employees were eligible for a bonus once total company savings hit $300,000. The bonus percentages grew as the savings increased. That year, in 1996, Kryptonite saved close to $900,000, moving the company out of the red into the black. The cost-savings plan was called the “Krypto Challenge.”

In 1997, the company launched the concept of open-book management, providing employees with business literacy training and sharing information about profitability for the first time. The Krypto Challenge continued, only this time the rewards were pegged to profit goals, not just pure cost-reduction. Here’s how it worked:

Generating ideas – Part of each monthly meeting is devoted to talking about new ideas. The employees break into cross-functional groups. Both new ideas and old ideas that need refinement are discussed. There is usually no less than 30 minutes devoted to ideas.

Gathering data and support – To submit an idea, the projected savings, capital requirement, and return on investment must accompany the idea. Before an idea is submitted, the employee must informally research the idea using as many other ad-hoc people as he or she needs to see the idea through. Sometimes seemingly unfeasible ideas will work due to a team simply making it happen.

Putting it down on paper – Once the ad-hoc team commits to an idea, they write it down paper. For instance, if we make this design change, we’ll save 30 cents per piece. We typically sell 20,000 pieces per year, therefore this would be a $6,000 savings. The employee must calculate the expected annual savings to give everyone an idea of the potential impact.

Implementing and tracking an idea – Many of the ideas are implemented quickly, which means within a few weeks or perhaps months. Once the idea is implemented, it receives a tracking number. The team leader, who is usually the project’s champion, is responsible for charting the results of the initiative and giving the finance manager a report each month. The finance manager then verifies the work and records the dollar savings.

The total dollar savings for all projects are announced each month at the monthly meetings and posted on a scoreboard, along with the company’s pre-tax profit. Supporting calculations are always available so employees can see how the savings were calculated.

Rewards and recognition – In the first monthly meeting after the cost savings are realized, all the members of the ad-hoc team are formally recognized. Company leaders talk about the most recent contribution to savings, and more importantly to the bottom line. The finance director may say something like “Challenge # 00125 saved us $300 this month.” Then the project leader will give a one-minute synopsis of how it’s tracking and what they hope to save in the coming months. The team also gets a certificate for a free lunch and a scratch lottery ticket for each team member as a thank you. It’s the same reward for each team and member, regardless of the idea’s dollar impact.

The challenge scoreboard – The savings is tracked as it comes in, both on paper and on a big scoreboard in the lunchroom. The scoreboard shows the total idea implementation from month to month. It’s split into two categories. One is for new ideas initially implemented in the last 12 months. The other is for what the company calls Annuities, or ideas implemented more than 12 months ago that are still generating savings. The total savings, the savings goals, and the results to date are all posted.

Celebration – In 1997, the Challenge was linked to the overall success of the company. At the beginning of the year, they talked through their profit-before-tax goals. If the company was profitable, a sliding percentage of the cost savings went into the bonus pool. The percentage increased as the pre-tax-profit percentage increased.

By the end of 1997, the maximum percent had been reached and every one of the 75 employees received a bonus check of $1,100 plus their own personal box of business cards. After all, each of those employees was truly a business person! The finance manager and two owners dressed up like cheerleaders to deliver the checks adding even more to the merriment.

All told, the company implemented 75 money-saving initiatives during 1997 from a new way of taping in the assembly department at a $300 savings to new manufacturing specs for the steel rods from which locks are made at a $35,000 savings. One group of savings came from renegotiating several service and supply contracts, most of which saved the company at least $195 per month. The copier contract, for example, called for a flat fee based on 50,000 copies. When the team discovered that the total was more like 25,000 copies, they asked for, and got, a lower rate.

Another team investigated phone usage and found that the company had several unused phone lines that had never been cancelled. The office manager came up with savings on the office-cleaning contract. When the employees would come to the finance director to ask how to negotiate, the director would say “Just ask,” and you know what, they did!

So now a few morals to the story to think about for your petroleum business. First, the team approach was more successful than the individual approach. This company found that by everyone pitching in ideas, and those savings going into a pool to be shared equally, they fostered an enormous amount of teamwork.

Second, the monetary reward was tied to overall company success. In order to pull this off, the company had to open its books to the employees, and more importantly teach them basic business principles. It’s not enough to just say “Here’s the P&L and balance sheet.” You must teach business basics so they understand what they are looking at.

If you want more employee-generated cost-savings at your company, you won’t do it by keeping them in the dark. The time and money invested into educating your people on business will come back to you many times over. For more information on open book management, we recommend you contact The Great Game of Business Inc. at 800-386-2752, or visit their website at www.greatgame.com. And of course, there is no better petroleum financial education than Meridian’s Focus on Finance this November!

PetroAnswers A Cost Savings Story