Transformational Cost Reduction for Building Materials Giant
After years of growth, a leading roof tile supplier faced declining profit margins due to a combination of increasing pricing pressures and rising manufacturing costs. Past cost cutting initiatives failed to keep pace with new industry realities.
For this reason, the client required an intensive approach to help achieve the “Next Level” of improvement – using dedicated resources and utilizing a structured program which focused on the cost levers of the business. Almost half of their operations were put through the process over a four-month period. Objectives for the waves included:
- Reduction in the range of 5% compressible costs
- Identification of “quick win” ideas transferable to the other plants
- Detailed understanding of key cost drivers and their sensitivities
- Process skill development delivered to internal resources
The bottom line: the company needed to cut costs faster and more permanently without jeopardizing quality, with the goal of using savings to fund growth opportunities in new markets and through acquisitions.
Working collaboratively with the plant and regional managers, we deployed our performance improvement toolkit to develop a multi-prong strategy for transforming the manufacturer into a cost leader.
We want to ensure that the teams were focused on the ideas that had the maximum value for the business. Therefore, as a prioritization step, ideas were sorted out that could deliver the most value in the shortest relative timeframe. For example, the ideas were grouped in a matrix as shown below:
The team used this type of analysis, and other cuts at the data (segmented variable costs, value chain benchmarking) to identify those “leverage” areas where the team should focus its effort to deliver the greatest value.
The value improvement process consisted of three distinct phases in order to drive home the expected results. Exhibit 1 shows the activities in each:
Exhibit 1: Value Improvement Process
We recommended that the group president and the executive team implement a comprehensive cost transformation plan to achieve its goals of improved financial performance and funding growth opportunities with cost savings.
The plan called for deploying five major initiatives:
- Reformulate the product mixes to provide greater short and long term strengths and at more efficient costs
- Optimize labor schedules to reduce OT costs by 60%
- Smooth the utility loads and eliminate peak usage penalties
- Continue testing on reducing strength additives by virtue of more efficient mixing
- Eliminate high cost scrap grinding process
With Next Level’s help, the sweeping transformation plan is quickly re-positioning the company as a building products cost leader. It is achieving quick wins and sustained savings while better meeting evolving customer needs.
Exhibit 2: Example of one site’s monthly savings curve.
- Savings of $1.6 million year on year—and resources freed up for re-investment in growth through acquisitions and emerging markets
- Implemented work plans and mobilized team for improved productivity
- Established program management office
Through analytical problem solving, a company reduces its exposure to costs of quality
By analyzing four dimensions of a costly quality problem, a manufacturer reduces its cycle time to resolution and discovers key operational benefits in the process.
An over-abundance of information with no time to spare in the middle of the busy season- a common issue in this time of technology and speed. The costs of product rectification were on the rise for a second year and the company’s leading brand was at risk in a key market.
By funneling extensive sources of knowledge and experience into a best-practice problem solving model, the assembled team members were able to quickly narrow down the possible causes while systematically eliminating previously plausible “pet theories” that had led to stalemate. Soon they had discovered process problems that contributed to a million dollar issue. This example shows the power of process when faced with time constraints in a data-rich environment.
Redesigning the Supply Chain to Improve Profitability
With the help of linear optimization, an international supplier maximizes profit margins while seeding future growth opportunities.
The North American division was becoming progressively more capacity constrained due to bottlenecks in its distribution network, while product demand in key regional markets was growing in disproportion to the regional plant’s ability to supply. It was a key priority for the CEO to address in order to increase profitability.
However, due to the complexity of the distribution network and trade-offs between economic drivers, it was not a simple “back-of-the-envelope” exercise to quantify the opportunity and the costs of these constraints, nor was it simple to assess the impact of future greenfield markets on overall profitability.
The Next Level team used a framework to help client executives assess the objectives for the model that would identify potential opportunities for growth without neglecting current performance. The project’s objectives were therefore twofold:
- Identify and value strategic network opportunities
- Provide visibility on future month-by month system constraints (ex: material shortages, rail car availability, silo capacity)
The results of this analysis indicated specifically where to save 5% in landed costs and the opportunity costs of critical bottlenecks worth $5 million more. Just as importantly, we also helped to clarify which markets to expand into to accommodate future planned capacity upgrades.
With life cycle cost analysis, building materials manufacturer ramps up for growth
By determining the optimal age in which to turn over aged fleet, a supply company positions itself for a market upswing while lowering transport costs by 8%
The U.S. markets were exhibiting demand resurgences and two of the company’s divisions were in the midst of managing the challenges that come with such an upswing. The company had previously frozen all capital spending on new transport vehicles and were thus concerned that neither fleet would be able to adequately respond to the expected volume increases in upcoming years. Ramifications included loss of third party revenue, higher maintenance costs, and increased fuel costs, as well as more fees paid to third party haulers. Added to the capacity issue was a drop in driver retention.
One of the most debated issues among fleet managers is when to sell a unit to maximize returns and minimize lifecycle costs. To perform a thoughtful analysis of this issue, it was important to consider all direct costs, including depreciation and maintenance, as well as indirect costs, including perk value, corporate image, downtime, and feature upgrades. A project team was set up to address this issue and charged to develop a framework that would determine the optimum amount and age of trucks given the various business constraints. The team had three objectives:
- Determine the optimum age at which to turn over truck vehicles.
- Identify location priority and levels in which the fleet should be turned over.
- Recommend the best purchasing options going forward for identified replacement opportunities.
U.S. manufacturer leverages profit opportunities
By leveraging a systematic process for identifying opportunities, a market leader delivers 7% to the bottom line in materials, operations, logistics and sales while establishing a tool for future synergy analysis.
A building materials business had made substantial, year-on-year improvements to its operation but found it increasingly difficult to maintain this high rate of improvement. The divisional president was concerned that the organization was missing opportunities to maximize profits and keep pace with competitors. He believed the solution was to launch bold new initiatives that would return the company at its former trajectory. For this reason they elected to use a new approach to help achieve the “Next Level” of improvement – using dedicated resources and utilizing a structured program focusing on all areas of the business.
The company had a strong balance sheet with substantial cash holdings and thus had the flexibility to fund multiple opportunities- both short and long term. The CEO asked the teams to develop a portfolio of initiatives and to create a timeline savings curve that would raise the company’s growth rate to the next level.
The cross functional team used a three-phased approach of customized program design, idea development and implementation to help client’s managers execute on the various opportunities. The rules of the game consisted of:
- A program target of about 7% of compressible costs in on-going benefits (not once off)
- A structured approach that utilized full time employees dedicated 100% to the project or 8 weeks
- A holistic view of entire business with cost and revenue opportunities eligible; costs could not be pushed into another department
- A rigorous review process with management before ideas could be approved for implementation
- Being implementable within 2 years
- Capital efficiency –i.e. payback less than 2 years
The facilitated team first looked at opportunities within the company’s existing operating model and in adjacent areas, such as transport strategy. By analyzing the cost bases and expected trajectories of sales in certain markets, the team identified 29 opportunities that showed the greatest potential.
Next, the team narrowed the list of the most viable opportunities and prioritized attractiveness by three filters- degree of difficulty (i.e. customer behavior change required), time to implement and payback. Next, key economic drivers were identified and potential problems flushed out.
For each idea, the client team drafted an idea story, including the approach to capturing the opportunity and financial driver trees to ensure the bottom line would be impacted. A series of internal “syndications” helped top executives assess the feasibility from all areas of the business and understand how the competitors’ reactions could affect full idea capture.
The three week analysis across 5 facets of the business identified above average potential in the areas of logistics operations and materials procurement as well as “quick strike” opportunities in pricing disciplines and product formulations. The steering committee then designated specific teams to further develop the ideas, complete with potential risks across 3 dimensions, and to project plan the implementation.
After digesting the results of the diagnostic, the client rolled out the program in a series of five waves. Overall, the effort helped the company boost the bottom line by 7%. The process used to evaluate the current business was also used by the client to evaluate the potential savings in targeted acquisition operations.