In an industry marked by fierce competition and thin profit margins, a $1 billion consumer products manufacturer faced substantial operational hurdles stemming from decentralized operations and acquisitions. This case study explores their path to cost reduction and improved margins through centralized procurement and vendor consolidation, highlighting 8020 Consulting’s innovative solutions and transformative outcomes.
Background
A consumer products manufacturer with $1 billion in revenue faced operational challenges due to its geographically and organizationally distributed operations. The company had acquired several smaller companies in the same industry, resulting in independent manufacturing and supply chain organizations. This led to difficulties in passing price increases to customers and shrinking profit margins. The main challenges included:
- Raw material costs increase due to rising prices in base commodities.
- Inability to effectively pass price increases on to customers, resulting in shrinking margins.
- Geographically and organizationally distributed operations with independent manufacturing and supply chain organizations.
- Lack of centralized contract negotiations and vendor selection.
- Inconsistent vendor identification numbers and part numbers across different sites.
- Lack of a consistent numbering structure for categorizing raw materials.
- Absence of a procurement module within the ERP system.
8020 Consulting’s Solution
To address these challenges, we followed a structured approach:
- Assessment and Planning: The procurement team collaborated with a finance resource to evaluate available tools, desired timeline, support from manufacturing sites, and the readiness for change. Based on the limitations and requirements, it was decided that an offline database would be the most suitable solution. This database would analyze historical information and support future reporting.
- Data Consolidation and Categorization: The finance resource gathered historical spending data from manufacturing sites and consolidated it into the offline database. Hierarchies and category groups were created for vendors and raw materials, enabling multiple levels of reporting and consolidation. Close coordination with the procurement department ensured materials and vendors were appropriately categorized based on reporting goals.
- Evaluation and Negotiation: With access to purchasing history by vendor and material type, the procurement team evaluated vendors based on pricing, volume capacity, geography, payment terms, and historical quality. Vendors were classified as primary, secondary, or eliminated from selection. Armed with historical and projected purchasing information, negotiations were conducted, resulting in significant cost savings through improved pricing, payment terms, and vendor consolidation.
- Tracking and Projection: Finance tracked product and vendor spending in the database to ensure savings and spending expectations were met. The database was regularly updated with new raw materials and vendors. Additionally, finance projected the financial impact of changing commodity prices based on historical purchasing patterns and expected production demand.
Outcome
The implemented solution yielded several positive outcomes for the consumer products manufacturer:
- Cost Reduction: Optimization of raw material procurement led to significant cost reductions.
- Improved Margins: Vendor consolidation and data-driven negotiations improved profit margins and cash flow.
- Enhanced Quality and Service: Vendor evaluations helped ensure product quality and on-time delivery performance.
- Centralized Procurement: The company transitioned from individual site negotiations to a centralized procurement approach, leveraging buying power on behalf of all manufacturing sites.
- Strategic Decision-making: The database and tracking system provided valuable insights for decision-making, enabling proactive responses to changing commodity prices and facilitating target sales growth.
By effectively addressing the identified challenges and implementing a comprehensive solution, the consumer products manufacturer achieved substantial cost savings, improved financial performance, and established a more efficient and centralized procurement process across its geographically dispersed operations.
