Impact of Operating Effort on Annual Expenditure

Quantification of the reduction in annual expenditure due to a 10% reduction in operating effort

Background

Our client, in response to Defence's 5% sustainment expenditure cuts, has targeted savings of $6.25m in FY 08/09. GRA has been engaged to help our client deliver $6.25m savings.

One initiative that GRA has investigating is whether the potential under achievement of the target Rate Of Effort (ROE) might lead to the opportunity for reduced expenditure this FY.

Challenge

GRA estimated the size of expenditure reduction if our client planned its replenishments based on the fact that the target utilisation rate would be under achieved by 10%.

• current total purchase recommendations of $32.96M for the next 12 months

Approach

GRA performed a Baseline Cost Analysis before considering a 10% reduction in operating effort:

• establishment of a simulation environment and capture of the baseline projected purchase plan (AS-IS)
• adjustment of forecast down by 10%
• run our optimization engine and capture of the simulated projected purchase plan
• comparison of the simulated and the baseline projected purchase plans and impact on each department

Outcome

The new total purchase recommendations represent $31.58m, with a total potential saving of $1,38m. 10% forecast reduction on the 12 months generates 4.2% reduction of the purchase order plan for the next 12 months.

Moreover, each major inventory segment was impacted at a different degree, from 1.7% purchase order reduction to 11.6% purchase order reduction.