Understanding Transactional Costs

by Scott Walton, Harbour Results, Inc.

Do you know what your direct costs really are? Well, of course you do. As a sound business manager, you work to control these costs every day. Now…do you know what your indirect and transactional costs are? Maybe you do, but not nearly as well as you understand your direct costs.

Take a look at the following list and ask yourself if you have data to answer these types of questions:

  • How much does it cost to issue a purchase order?
  • How much does it cost to maintain a tool or piece of equipment?
    • Have your preventive maintenance tasks increased or decreased?
  • How much does it cost to conduct secondary inspection?
    • Have your secondary inspection costs increased or decreased?
  • How much does it cost to enter a sales order?
  • How much does it cost to hire a new employee?
  • How much does it cost to launch a new program?
  • How much does it cost to push a design change through your engineering department?
  • How much does it cost to quote a new opportunity?
    • How many iterations of the same quote do you do?
    • What is your hit rate percentage?

If you have difficulty finding supporting data to answer these types of questions, then it’s time to take a hard look at your transactional costs. It is true that transactional waste is more difficult to identify than physical waste. Transactional waste is harder to see and manifests itself differently in every organization. However, once identified, transactional waste can be eliminated utilizing the same continuous improvement tools you have applied to your business during this economic downturn.

Begin with the following steps and see where the journey takes you:

  1. Conduct a Process Quantity Analysis (PQ) within your support functions. You are looking for a data-based understanding of what your support resources spend their time doing and the costs associated with those tasks. For those areas with limited data availability, ask each employee to keep a task inventory of what they do on an hour-by-hour basis for a minimum of two weeks.
  2. Conduct a Process Flow Analysis (PF), looking at the most time consuming roles, responsibilities or functional processes, such as an engineering change or customer quotation process. Look for redundancy, bottlenecks and balanced workloads during this exercise.
  3. Document all key findings from the first two steps and analyze this information, looking for those activities that would be considered waste under traditional lean thinking.
  4. Compare and contrast existing roles and responsibilities against current business demands. Do they still fit the business changes that have occurred over the last several years? Consider realignment of responsibility to share like or similar transactional processes and modify process flows accordingly.

Raising your organization’s awareness to indirect and transactional waste will build additional flexibility within your organization. That flexibility will prepare you to react to the next market demand shift and ensure your resources are aligned with current business practices. Never stop challenging your resources to think differently. There is always a best practice out there somewhere – find it and drive your business to continual productivity improvement.