Secrets to Slashing Operating Costs by 15-30%
Executing a World-Class Manufacturing and Distribution Strategy
A common consequence of the growth-by-acquisition strategy many companies deployed in the 1990s and 2000s is a fixed cost structure that is an afterthought of past actions. Individual production and distribution facilities that made sense as part of stand-alone businesses now drain the parent company’s profits. Our experience has shown that many management teams are missing the opportunity for a unified strategy that can slash operating costs by 15-30%.
In a merger, the acquiring company often finds that the efficiencies of scale embedded in the M&A business case are hard to achieve. The individual business units have their own supply networks and customer networks that prove costly to rationalize. The more the parent business managers know the details of the individual business units, the less they are able to achieve fundamental breakthroughs. As a result, management often works on minor improvements within each business unit and neglects the opportunity to act decisively to align the entire company on a single, integrated production and distribution platform.
A Case for the Experts
A thorough rationalization of the global manufacturing and distribution strategy is one key element of The KGI System™. We regularly come across supply chain networks that are far from ideal.
One notable client was a Fortune 1000 medical device manufacturer that grew to 32 sites across North America as it made strategic acquisitions. Each site handled a different product set and managed their own shipping operations, including a full complement of management and support staff. The company’s executive management was struggling with consolidation and was stymied by unique, local advantages that they identified in all but 6 locations. Management consolidated the 6 locations, but stopped there.
KGI developed a plan to consolidate the remaining 26 sites down to 8 strategic locations in the US and Canada. The key to the plan was selecting the right level of information upon which to make decisions. The company had been looking at the pennies that the acquired locations were producing rather than the dollars that could be gained by creating an integrated network.
For example, the total landed cost of aluminum tubing increased by 2% for one product line, but the overall cost of tubing decreased by 4% for the company as a whole. Another example of considering the integrated network resulted in increased shipping costs to and from the Seattle and Miami locations but total shipping costs for the company declined by $2.5M.
It’s Not Just the Rent
The total scale of a well-executed manufacturing and distribution re-alignment is upwards of 25% improvement in COGS, excluding direct materials.
The most sizable component of these opportunities is either in reductions in direct labor and/or reductions in freight costs. With fewer sites the complexity of planning operations is greatly simplified as is the need for accounting, human resources and IT support.
Another client situation, a small-cap electronics equipment supplier with production and distribution facilities that were concentrated in areas distant from customer ship-to locations, provides a good example. The results of this project, shown in the above chart, demonstrate the possibilities of optimizing a company’s manufacturing and distribution footprint. The project team combined limited manufacturing outsourcing with lean manufacturing process improvements, changes to what products could be manufactured where and changes to the company’s distribution network to dramatically reduce freight costs. The overall result was a 28% drop in COGS, excluding direct materials costs.
A Few Secrets
The KGI System™ employs simplified linear programming techniques to confirm significant changes to the number, size and cost of manufacturing and distribution facilities and what products should be manufactured where. Most traditional approaches used by non-experts – including network optimization software – aren’t able to converge on a perfect solution for the issues being modeled in a reasonable amount of time.
Many years ago we learned that these were problems that were easy to solve in hindsight. That is, if you knew the answers, then the solution to the equation readily made sense after-the-fact. The problem is that as the number of modeled details increases, the time required to solve the problem of where to locate a manufacturing plant or distribution center increases exponentially – which makes it incredibly difficult to calculate an optimal solution.
Instead, our approach is to take reasonable estimates of a few key variables, lock them in, and then drive to a result that materially improves the client’s market responsiveness and cost structure. For our real world approach, an excellent solution today is far better than a theoretical solution that never comes to fruition or that fails in implementation.
Our experience is that companies don’t holistically think through the problem of where and why to locate their plants and warehouses. The notion of determining an optimal operating strategy and then executing a facility consolidation plan in direct support of that strategy is a forgotten concept.
With that said, here are a few of our secrets:
- Break something. Lock-in a couple of the unknown variables and do it in a way that forces executive management to reconsider how things have been done in the past. The historical reasons for the current structure limit the possibilities. Our experience is that breaking something gives management the new, objective perspective that enable the kind of breakthrough thinking that drives the 15-30% operating cost reductions we typically help companies achieve.
- Mitigate the risk that you really broke something. In a successful consolidation, we are taking actions that affect management positions, real estate holdings, local deals, schedules, transportation, financing, suppliers and customer experiences. Something will go wrong – so a core component of our approach is having an immediately executable mitigation plan in place.
- Do not seek perfection. Just make it better. We usually learn something new about the business or find that circumstances change, such as the acquisition of another company or a divestiture. This new information requires modifications to the original plan, so it is best to move forward quickly and adjust the plan as you learn. You can’t sit on your hands because you know your knowledge is incomplete.
- Limit the factors chosen for optimization. The solution time for calculations to prove optimization varies exponentially with the number of factors considered. Simplify the decision-modeling exercise.
- Optimize through a total perspective. Consider the entire company. For example, even though transportation costs may be nominally higher because of the elimination of a location, the real estate and labor savings from not having the plant or warehouse exceed that cost increase over a reasonable planning horizon.
- Recognize limits in your model. Transportation models of the US are often indecisive. For example, placing sites in the Seattle, Salt Lake City or Miami regions is a challenge for network optimization software packages due to geographic structure and population density. Having the experience to understand and modify these faulty considerations for success in the real world is critical to the overall goals of an integrated manufacturing and distribution strategy.
- Minimize local customization. Standardize each necessary site as much as possible. This helps with management, scheduling, buying, maintenance, and many other factors. Unique facilities each require their own operating plan and drive unnecessary costs.
- Involve the experts. Nobody knows your business like you do. That is why your senior, experienced personnel need to be involved in the decision-making process. However, balancing the internal view of future possibilities with sound consulting advice on the larger universe of re-alignment possibilities is critical to achieve breakthrough results. Expert, objective advice is critical to the success of the endeavor. We’ve come across far more companies that have tried and failed to improve the execution of their manufacturing and distribution strategy than those that have succeeded, so it is important to choose a partner that can help leverage your expertise in delivering exceptional results.
It is this kind of thinking in manufacturing strategy, distribution strategy and facilities consolidation projects across high-tech, medical devices, industrial products and processed food and dairy industries that has enabled the team at KGI to help companies achieve extraordinary results.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.