# Presentation: 274045

## An Approach to Sustainable Cost Reduction

**Jeff Smith,**
**Pacific Northwest National Laboratory (PNNL)**
- Operated by Battelle for the U.S. Department of Energy

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## Purpose of Presentation

- To share key success factors and lessons learned that led to sustainable overhead cost reductions of $40 million (almost 20 percent)

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## Outline

- Background
- For each phase in improvement process:
- Objectives
- Approach
- Results/Benefits
- Critical Success Factors
- Summary
- Questions

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## Pacific Northwest National Laboratory 

**DOE National Laboratory System**

**Los Alamos**

**Oak Ridge**

**Argonne**

**PNNL**

**Battelle**

**Department **
**of Energy**
**(DOE)**
**Headquarters**

**DOE Richland **
**Field Office**

**Manages Lab**
**per DOE Contract**

**Oversees Lab**
**Operations**

**Provides Policy**
**and Direction**

**Provides**
**Funding**

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## PNNL - Basic and Applied Science

- Environmental science and technology

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## Background

**The U. S. Department of Energy (DOE) national laboratories** are among the world's premiere scientific and technical institutions
**PNNL** is part of the (DOE) national laboratory system
**Battelle **(under contract) operates PNNL delivering science & technology products to DOE and others
**DOE Richland field office** supports PNNL with day-to-day management support and oversight
**DOE headquarters** supports PNNL with programmatic direction, funding, and policies

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## Tremendous Pressure to Reduce Cost

- Battelle Corporate improvement initiative
- Dramatic cuts in DOE R&D budgets
- DOE task force finding “national laboratories need to cut costs, especially in administrative areas”

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## PNNL Response 

**PNNL Response **

- Launch a major improvement initiative
- Key Goal: To become the **most productive** provider of science and technology

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## Four-Phase Improvement Process

- 1.	Understand costs
- 2.	Develop breakthrough ideas
- 3.	Implement ideas
- 4.	Transition to continuous improvement

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## Objectives of Phase 1

- Identify improvement opportunities
- Estimate potential savings
- Establish aggressive, results-oriented targets

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## Approach: Analyze 3 Key Cost Factors

**Approach: Analyze 3 Key Cost Factors**

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## Cost by Driver 

**Cost by Driver **

- Bargaining Unit Work Rule

- Contractual Obligations

- Industry Stds/ Best Practices

- Ext. Regulatory Agencies

- Discretionary

- DOE Orders and Rules

- Internal Policy

- Community

- $1M

- $130M

- $158M

- $53M

- $115M

- $95M

- < $1M

- $32M

- Total $585M
-          FY94

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## Cost by Process 

**Cost by Process **

- Project Performance

- Facilities

- Operations & Compliance

- Finance

- Capability Development

- Business Development

- Technology Commercialization

- Communications

- Planning & Investment

- Information Mgmt

- Total $585M
-           FY94

- $101M

- $69M

- $39M

- $32M

- $30M

- $15M

- $15M

- $12M

- $4M

- $268M

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## Benefits of Process / Value Analysis

- Showed total cost of activities/end products
- Reduced organizational barriers and finger-pointing
- Helped set cost reduction targets
- Helped pinpoint key improvement areas
- Made us aware of importance of understanding _***processes***_

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## Insight Gained From Cost Driver Analysis

- We had more control than first thought!
- Major opportunity to affect cost without having to change external drivers
- We lacked true process-orientation in our support operations

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## Benefits of Establishing Lab-Level Results-Oriented Targets

- Measures
- Reduce average rate charged for R&D work
- Increase total research to support labor ratio
- Benefits
- Easy to understand
- Measured impact of initiative (as opposed to improvement activity)
- Appealed to customers and technical staff

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## Critical Success Factors

- Used “fact-based” approach to make decisions
- Established results-oriented goals
- Partnered with key client - DOE Richland Field Office
- Focused on _***processes***_

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## Four-Phase Improvement Process

- 1.	Understand costs
- 2.	Develop breakthrough ideas
- 3.	Implement ideas
- 4.	Transition to continuous improvement

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## Objectives of Phase 2

- Develop breakthrough ideas to reduce waste and inefficiency

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## Approach: Establish “Breakthrough” Teams

- Focused on “high-opportunity” support processes
- Used cross-cutting teams
- 6 to 12 members per team including
- Performers and customers of processes
- Managers and front-line workers
- 50 to 100 percent time commitment
- 6 to 8 week effort

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## Results

- 12 teams generated 130 ideas that could potentially save PNNL over $55 million annually

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## Critical Success Factors

- Supported by senior management sponsors
- Involved client
- Created high expectations
- Used facilitated, structured, team-based, approach
- Maintained aggressive, focused schedule
- Emphasized redesign of _***processes***_

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## Four-Phase Improvement Process

- 1.	Understand costs
- 2.	Develop breakthrough ideas
- 3.	Implement ideas
- 4.	Transition to continuous improvement

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## Objectives of Phase 3

- Successfully implement ideas developed by breakthrough teams

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## Approach: Create Implementation “Projects”

- Grouped 130 ideas into 40 projects
- Set aside $2 million to support implementation
- Identified a senior manager to sponsor each project
- Assigned senior staff member to lead each project
- Applied sound project management principles
- Managers planned, tracked, and reported on project until completion

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## Results: $40 Million Cost Reduction

_**Baseline**_

_**Savings**_

- $77M

- $10M

- $9M

- $13M

- $10M

- $2M

- $9M

- $10M

- $16M

- $14M

**---------**

**$170M**

**80**

**$15.3M**

**$3.2M**

**$2.0M**

**$1.6M**

**$3.6M**

**$0.4M**

**$4.7M**

**$1.3M**

**$1.8M**

**$6.1M**

**---------**

**$40M**

**Results: $40 Million Cost Reduction**

_**Process**_

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## Reduce Cost of Hanford Site Services

_**Utility Prices**_**	**_**Old Rate**_**	**_**New Rate**_
**Steam ($/1000 lb)****	****40****	****20**
**Electrical (cents/kWh)****	****6.5****	****4.0**
**Sanitary/water/sewer****	****10****	****3**
**($/1000 gal)****	****	**

_**Baseline**_

**$77M**

**$15.3M**

**Reduce Cost of Hanford Site Services**

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## Improve Facility and Space-Planning

_**Old Way**_**	**_**New Way**_
**Over 200 different pieces ****	****20 standard pieces**
**of office furniture****	****of office furniture**

_**Baseline**_

**$10M**

**$3.2M**

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## Implement “Managed” Hardware and Software Programs

_**Baseline**_

**$10M**

**$3.6M**

_**Old Way**_**	**_**New Way**_
**Several hundred different ****	****8  standard****   **
**desktop computer ****	****desktop computer**
**configurations****	****configurations**

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## Improve Facility Engineering Process

_**Baseline**_

**$9M**

**$2M**

_**Old Way**_**	**_**New Way**_
**16 documents ****	****One “living” facility**** **
**required throughout****	****project plan from**
**facility project life cycle****	****“cradle to grave”****	**
**	**

**Improve Facility Engineering Process**

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## Improve Facility Maintenance

_**Baseline**_

**$13M**

**$1.6M**

_**Old Way**_**	**_**New Way**_
**Most maintenance based  ****	****Risk-based maintenance**
**on standards  for “high-****	****using engineered standards**
**risk,” critical facilities****	****and manufacturer specs**

**Improve Facility Maintenance**

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## Improve Property Management, Excess and Utilization

_**Baseline**_

**$2M**

**$0.4M**

_**Old Way**_**	**_**New Way**_
**“****Wall-to-wall” inventory ****	****Statistical sampling, reward **
**of property****	****for good audit**

**Improve Property Management, ****Excess and Utilization**

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## Improve Procurement Process

_**Baseline**_

**$9.0M**

**$4.7M**

_**Old Way**_**	**_**New Way**_
**Individuals negotiating****	****Volume discounted**
**independently with a ****	****“master agreements”**
**variety of vendors****	**

**Improve Procurement Process**

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## Improve Training

_**Baseline**_

**$10M**

**$1.3M**

_**Old Way**_**	**_**New Way**_
**Classroom training****	****Challenge exams and**
**	****	****computer-based training**
**	**

**Improve Training**

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## Improve Communication

**$16M**

**$1.8M**

_**Old Way**_**	**_**New Way**_
**30 “hardcopy” ****	****6 “hardcopy”**** ****	**
**newsletters****	****newsletters****	**

**Improve Communication**

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## Critical Success Factors

- Maintained senior management support
- Provided adequate resources
- “Projectized” implementation
- Prioritized implementation
- Involved client
- Institutionalized redesigned _***processes***_

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## Four-Phase Improvement Process

- 1.	Understand costs
- 2.	Develop breakthrough ideas
- 3.	Implement ideas
- 4.	Transition to continuous improvement

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## Objectives of Phase 4

- Build upon accomplishments in the first three phases and move toward a less dramatic but steady rate of continuous improvement

**Target 2**

**Target 1**

**Phase 4: **
**Continuous Improvement**

**Previous Path**

**Phase 3**

**  ****Phases 1 and 2**

**Initiative**

**Performance**

**FY93   FY94   FY95   FY96   FY97   FY98   FY99  **

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## Approach: Institutionalize Continuous Improvement 

- Redesign key systems to support and reinforce continuous improvement
- Planning
- Measurement and assessment
- Standards development and deployment
- Performance management
_***Organized around processes!***_

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## Mgmt Systems Support Core Processes

- Expert Delivery

- Relationship Mgmt

**C**
**U**
**S**
**T**
**O**
**M**
**E**
**R**
**S**

**Glenn R. Hoenes:**
- Driving Management Systems to describe process for delivery of products & services

**Mgmt Systems Support Core Processes**

- Core
- Processes

- Management Systems

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## Total Overheads at Pacific Northwest National Laboratory

- “No Action” Trend Line

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## Critical Success Factor

- Shift culture and organization
- From one centered around **functions**
- To one centered around **processes**

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## Summary

- Strong senior management support
- Buy-in and active partnering with key client
- Early understanding of costs
- Well-defined, results-oriented measures/goals
- Focused, cross-cutting “breakthrough” teams
- Facilitated structured methodology
- “Projectized” implementation
- Focus on work _***processes***_

- Basic principles that led to success

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## Final Thought

- The good news - It can be done
- The bad news - It sounds easier than it was
- Contact:
- Christopher Larmey, 509-375-3713,
- 	chris.larmey@pnl.gov
- Jeff Smith, 509 375-2970
-     jeff.smith@pnl.gov

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