Specialty Chemical Manufacturer
We engaged at a $1.1 Billion specialty chemical manufacturer that was a leading supplier of additives to the petroleum industry. The company had been suffering from declining gross margins, and was burdened by an increasingly complex product portfolio. As a result of our work, the company dramatically simplified its operations, removed $100 million in annual expenses, and improved operating profits by 50%.
Service Model Alignment
We performed a pareto analysis of the company’s customer base to discover that 80% of its sales were coming from just 3.4% of its accounts (the ‘A’ customers), while 84% of its accounts contributed just 4% of sales (the ‘C’ customers).
Sales people were motivated to add new ‘C’ customers due to their high nominal gross margins, their incremental sales volume and the promise that the ‘C’s would grow into ‘A’s in the future. However, Accunomics’ multi-year trend analysis revealed that only 3% of ‘C’ customers ever became ‘A’ customers. Further, our fully loaded profitability model proved that although gross margins were stronger, the cost of servicing ‘C’ customers deteriorated their operating margins to -5% of sales.
Our consultants worked with the company’s management team to migrate the majority of the ‘C’ customer base away from the direct sales force to local or regional distributors. This solution provided improved, localized service for the customers, and dramatically reduced the cost of the company’s sales and administration services.
Product Portfolio Optimization
A similar pareto analysis was performed for the company’s 1,000+ product SKUs. The analysis revealed that 26% of the products contributed 80% of the revenue, while 46% contributed just 4%. Unfortunately, just as was the case with customers, only 6% of ‘C’ products ever grew to become ‘A’ products. The ‘C’ products offered high gross margins – 45% on average – but still drove negative operating margins of nearly -20% of sales.
Our consultants conducted an in-depth study of the customer’s product development operations to understand the root causes of the product proliferation. We found the company to be very customer-focused, even if it meant creating a custom product formulation for a small ‘C’ customer. As a result, the company was consuming 12-15% of its sales on product formulations and related testing activities. Worst, 30% of the new low volume products were being developed specifically for low volume ‘C’ customers, thus driving operating losses on both dimensions.
We worked with the company to dramatically simplify its product line, and bring down the high cost of custom formulations. First, we developed a detailed substitution matrix to allow for more standard formulations to be sold in lieu of custom product variants. With this change, the company was able to become more market focused, rather than just customer focused. Second, we transformed the company’s highly serial formulation and test process in to a parallel process that leveraged new high throughput testing technologies. These tactics reduced over $17 million in development related operating expenses, and greatly improved the time to market for new formulations.
Supply Network Optimization
Their product proliferation issues had lead to inefficient plant operations and a manufacturing utilization rate of just 62%. Further, the wide array of component chemicals for the custom formulations lead to inefficient sourcing practices and high inventory levels.
Our consultants performed a complete supply network optimization project to take advantage of the company’s new streamlined product line-up. Basic materials for standard products were bid out using a reverse auction. Inbound and outbound transportation was optimized, including improving the utilization rate of rail cars. Finally, new inventory management practices were adopted that wrung excess materials out of the system.
As a result of our work, capital employed in manufacturing and distribution was reduced by over 30%, and nearly $45 million in expenses were eliminated from the company’s sourcing and manufacturing operations.