Case studies
Simplification in the food ingredient industry
As a result of many acquisitions across Europe, a leading food ingredient manufacturer suffered from a wide variety of products and business models, which prevented the company from capturing synergies and leveraging scale in procurement, manufacturing, and R&D. The company had business units (BUs) in most West European countries, each with its own, almost autonomous, organizations, including sales and marketing, production, logistics, and R&D.
Portfolios and business models differed significantly from one country to the other. In some countries the majority of sales were generated from finished consumer products for retail clients. In other countries semi-finished products or even raw materials dominated sales to food manufacturers.
Most BUs were subscale and unable to survive the evolving pressure from rising costs and commoditized pricing. The company needed to quickly capture leverage and scale across borders.
Challenge
The project team faced three main challenges:
- Overcoming huge differences between the countries
Because there were significant market differences across Europe, at least for the coming years, the team had to carefully identify the synergies, without jeopardizing the local business.
- Convincing local management that they needed to change
Some of the countries were still quite profitable and, therefore, reluctant to change their portfolio or business model for the sake of the other countries.
- Achieving results within a limited budget and timeframe
The new CEO was under pressure from the shareholders to quickly demonstrate success, plus the size of the company did not allow for a huge budget. The team had to determine the right level of analyses, build a pragmatic approach, and stick to deadlines.
Approach
The approach was based around 10-week pilots in four countries. The pilots were staggered, starting every three weeks to capture and integrate learnings. The pilots focused on optimizing the portfolio and identifying options for fixed-cost reductions.
The first step was to determine product clusters, based on technology and market/channel characteristics. The focus was not at the SKU level, since true profitability of a single SKU is very difficult to determine, mainly due to arbitrary allocation of fixed costs even when detailed activity-based techniques are used. On average the team identified between 25 and 30 clusters per country.
The next step was to identify financially-underperforming product clusters and determine how much of the fixed costs could be taken out of the system, if the cluster was removed. When the reduction of fixed cost was higher than the loss of contribution margin, and the cluster was not of strategic importance, it was targeted for rationalization.
Results
Initial rationalization of all marginal SKUs and underperforming clusters from the local portfolios resulted in an overall reduction of approximately 20%, directly taking out US$10 million of fixed cost.
On top of this, the project paved the way for a major manufacturing footprint consolidation, which resulted in over US$25 million in savings. It also streamlined R&D centers linked to focused factories, enabling an improved process and shorter time to market.
|
