The manufacturing, distribution and facilities management functions of a company are often in the crosshairs of cost reduction efforts. This is due to the significant fixed and variable costs of production, distribution and facilities maintenance. Direct material, labor, freight and maintenance of property, plant and equipment are areas in which companies typically aim to reduce costs.
Companies involved in a restructuring may find that they have too many facilities or facilities in the wrong locations. The number of facilities a company manages should be in proportion to long-term demand forecasts. Excess capacity impacts profitability because a high fixed to variable cost ratio hurts per-unit profit margins. Suboptimal facility location (relative to customers or suppliers) can lead to increased or unnecessary freight costs and production delays.
Reducing the facility footprint is sound strategy when demand is in rapid decline or a restructuring is required due to market forces. However, a poorly planned and executed facility consolidation effort may not only fail to deliver cost savings, but can also lead to organizational instability, loss of strategic advantage and can threaten the overall viability of the business.
Businesses looking to consolidate manufacturing, distribution or retail capacity are well-served to contact KGI to discuss how we can work together to avoid the pitfalls of poorly-planned or executed consolidation activities.