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An 80/20 Profit Enhancement Case Study:
Profitability through Restructuring & Simplification
A $750M–$1B group of specialty chemical companies, consisting of name brand divisions, was built in the late 1980s. The group has grown steadily since then, primarily through acquisition.
Each of these divisions differed in the products they offered and the customers and markets they served, but they all shared a very common characteristic — very high material margins and, upon acquisition, almost equally high SGA/overhead. The cost of R&D, regulatory compliance, application engineering, facilities, and usually, high selling expense all contributed mightily to this.
The common prescription for every unit in the group has been 80/20, and the model case was Division A. Upon acquisition, this division was a break-even operation, despite 80%-plus material margins. Lead times averaged five weeks, on-time deliveries to customer request were in the 60% range, and despite having an average of three months of inventory on hand, the company always seemed to be out of stock on key products. First-pass yield was low, the scrap rate was high, and virtually everything was a “rush” order. There were hundreds of different products, making catalogs expensive, confusing, and rapidly out of date. Each product needed an MSDS, a material acceptance spec, a certification of purity…and so did each raw material going into it. Put simply, it was a mess.
Strategex experts Joe Hahn and Rich Dodge led the efforts to simplify the business. The most important step taken was product line simplification, which eventually reduced the product line from dozens of products per application to a single product per application. Product line simplification combined with quadrant analysis allowed Mr. Hahn to design and build a state-of-the-art Quad 1 production facility.
This facility now operates at a very high level. Any order placed for any product before noon ships that day, despite operating with less than one month of inventory on hand and one-third the labor and overhead of the past. No competitor in the industry comes close to this world-class level of QDC, hence this business has been able to “shape demand” for its Quad 1 products and grow at CAGRs double the industry average. Virtually every major customer in the industry is, today, a customer.
Another key action was outsourcing aerosol production. Aerosols, a key high-material-margin product for the company, are very challenging to produce. Regulations covering propellants and manufacturing safety are stringent and ever-changing. Every change demands a change in production which takes a long time to optimize. Staff long believed that only they could produce their aerosols, but this was far from the truth. Once we convinced the division’s people that their core competency was formulation, not the filling of aerosol, they were able to outsource the filling, which improved quality, lead time, and total cost, and reduced the investment in the process. It was a challenging move, but no other change shifted the culture more successfully.
The business today is twice the size it was ten years ago, with half the products, half the customer roster, half the facility space, half the inventory, and half the people. Not surprisingly, operating margins are 30% plus.
The model of acquisition, PLS, quadrant segmentation, facility redesign, outsourcing, and demand-shaped target selling has been repeated throughout the group and the result is that the group, as a whole, operates at Division A levels — heady results indeed.