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By Matt Stanczak, Consultant A predicament common to all businesses is how to leverage assets to maximize outputs. This situation exemplifies the most basic tenet of economics - how to create maximum value from limited resources. Whether these assets are raw materials, human capital, or liquid capital, the allocation of these resources to business operations boils down to similar principles of economics and mathematics. These principles can be utilized in resource allocation business models to optimize the usage of assets for optimal outputs. In these difficult business times, the same principles can be used to analyze scenarios for answering the ever-present question of business managers in times of recession: "Where can I cut costs with minimal effects on core business processes?" Often, the answer to this question is a broad brush solution - 5% reduction across all business units or mandatory layoffs. Without documented business information to rationalize these measures, your business may or may not be better off from these "off the shelf" solutions. Implemented properly, resource allocation models can analyze the effects of cuts in any asset base, be it cutting materials purchases from vendors, reorganizing human capital, restructuring shipping networks, or re-allocating financial resources. The first step in analyzing a reorganization of assets is defining how each asset contributes to your business process - how many labor hours are needed to produce a product, what amount of materials are used per product, how much does it cost to ship a product. This can be a long, painstaking process, but it is critical to defining efficiency in your operations. Once you know how each asset contributes to your business process, you can build a model describing the relationships between your assets and deliverables. With this model in place, your cost-cutting analysis can begin! The first and most obvious analysis is to determine whether you are under-utilizing any of your assets. If any assets are not fully contributing to the business process, they are prime candidates for cost cutting. After determining any assets that are not being utilized, managers can use the business model to describe various scenarios for cutting costs in other areas. Using the asset/product relationship defined above, managers can analyze how the core business process will be affected by a reallocation or reduction of assets in any particular unit. For example, if your business is currently using four delivery trucks to ship products, how will your business process be affected by decommissioning one truck? How much less product will be produced if your business no longer operates a third shift? Are the cost savings worth the reduction in revenue? Building a model to describe the relationship between assets and outputs will generate important management information to bolster your cost cutting decisions. If the relationship between assets and outputs is defined explicitly, the above analysis will yield invaluable results in analyzing the effects of cutting costs. In any event, your business model will give you a better perspective on where to cut costs rather than implementing broad brush solutions.Matt Stanczak specializes in business modeling and operations research at THE HILL GROUP. If you would like further information about business modeling, contact Matt at 412-343-9393 or mstanczak@hillgroupinc.com. These materials have been prepared for educational and information purposes only. They are not consulting advice or opinions on any specific matters. Transmission of the information is not intended to create, and receipt does not constitute, a consultant-client relationship between The Hill Group, Inc. and any recipient of this material. Readers should not act upon this information without seeking professional advice. 
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