Direct Material Cost Reduction for U.S Diversified Manufacturer

Engagement Date: Q2, 2010

Highlights

• 51% Cost Reduction achieved within 90 days of first engagement. 
• Migration to new vendor yielded $485,000 in annual hard savings with improvements in quality.  
• Client inventory reduced by 10 days.
• Working capital increased by $33,000.

Case Overview

A U.S based manufacturer of specialty lighting products needed ideas for direct material cost reduction in order to improve the commercial viability of a product line.  A high volume component part was being produced using inefficient processing methods.  The incumbent vendor was unable to adapt to the more efficient technology offered by an alternate supplier identified by Leverage Advisors, so the business was transitioned to a new source.

Product Line Details:

Volume per year: 64,000 pieces
Product line revenue: $5,100,000
Pre-engagement profit margin: 19% | Profit margin improvement: 9.5%
Pre-engagement component cost: $14.99 | Cost reduction per unit: $7.59

Problem

Our client experienced profit erosion on a mature product line.  Lower business volumes and volatile commodity prices increased fixed costs while making it difficult to budget variable costs for the product line.  Due to these difficulties and life cycle issues, the client was considering discontinuing the product line.

Methodology

Leverage Advisors performed a value stream-specific spend analysis [on direct material] to determine where the highest percentage of costs were incurred.  High impact items were reviewed in detail using several methods to determine viability for cost reduction: reverse cost estimating, appropriateness of manufacturing process, supplier efficiency, commodity analysis, and market tests. The problem became apparent during early attempts to reverse cost estimate the first item researched, a large stainless steel metal insert.  Using industry known labor/fixed costs and historical commodity prices to build up the cost, it was immediately evident that the current purchase price was not competitive. Through further analysis and a supplier survey, it was discovered that the current supplier was using a technology suited for lower volume manufacturing.  This process was labor intensive and required very long cycle times, resulting in high costs.  The solution was to use a different manufacturing process.  The current vendor did not have the proper equipment required for the new process.  While negotiating the 3-year contract with the new vendor, a hard tool was built at no cost that compressed project timing by three weeks and avoided a capital expense for the client (or supplier???).

Impact

Our client’s in-house supply management resources were constrained by daily challenges that did not permit a deep review of direct material costs.  Through our effort, the client saw an incremental rise in profit margin of 9.5% or $485,000 per year and is continuing production of this product for the foreseeable future.  In addition, PPM levels decreased a significant percentage, which decreased the client’s assembly cycle time, and payment terms with the new source were extended by 15 days and inventory fell by 10 days creating a favorable impact on working capital of $33,000.

About Leverage Advisors

Leverage Advisors is a specialized consulting company that is focused on direct material cost reductions for manufacturing clients.  Through a Lean manufacturing and 6 Sigma inspired method the firm will improve your current supply chain’s cost structure or will manage the migration to a more competitively priced supplier.

We pride ourselves on creating value for our clients within the first 90 days of the engagement.  Our pricing model is value based, in which the only dollars you spend on our services will be from dollars Leverage Advisors has delivered to your bottom line.  The firm is available for select engagements with manufacturing clients and private equity groups with a manufacturing based portfolio.