Tuesday, February 19, 2013

A Cost-Saving Case Study

Scenario


In previous years, Smartchester City College has received income from the Mordenvia Bank, which has its head office in Smartchester and sends many of its employees to the college for management training.

Three years ago, the college opened a new training facility (known as the Mordenvia Building) with a generous grant from the bank. 

The Mordenvia Bank has now informed the college that it is moving its head office to the Bahamas, and that employees will in future receive all their management training online. The college is invited to submit a proposal for the provision of this training, but it is clear that the bank expects this to be significantly cheaper than traditional training.

Taking into account other projects and grants from the bank, the college expects to lose around 5% of its annual income, and must reduce its costs by an equivalent amount.

However, there were some special costs associated with satisfying the bank's training requirements. The bank trainees followed a customized training programme, and did not share lectures with other students.

The loss of training business from the bank may therefore create an opportunity to rationalize training provision and remove inefficiencies.

The college must therefore consider the following cost-saving measures.

  • Reducing the number of lectures, or reducing the number of hours.
  • Reducing the amount of time lecturers are allocated for non-teaching work (including developing new courses).
  • Closing the Mordenvia Building, or converting it to other uses
  • Reducing or eliminating the financial support given to impoverished students.

Some of these measures may involve short-term costs (such as redundancy payments) or may negatively impact future income. Some of these measures may be reversible, others irreversible.



Questions


  • How would you evaluate the different options? 
  • What extra information would you need?



Further Analysis


Cost Identification/Classification
  • Where are the costs?
  • What things (and what kinds of things) are the costs associated with?
  • How do costs vary?

Cost Algebra
  • How do we add, subtract, multiply and divide costs?
  • Understanding interactions and indirect costs

Cost Optics
  • Which lens do we use to view costs? E.g. accounting versus architecture.

Cost Control
  • Where does the responsibility for costs lie?
  • What are the control loops? What dynamic system behaviour do they produce – e.g. damping, oscillation, hunting?

Cost Motivation
  • Where is the motivation for cost control? Where will any cost savings be distributed?
  • What theory of incentives is espoused / in use? How does this affect cost outcomes?

Cost Outcomes
  • Are cost savings reversible?
  • Do we expect cost savings to be permanent or temporary? (In other words, will the costs revert to previous levels?)
  • What other consequences?

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