With challenging market conditions driving down revenue and profits our client needed to find a way of boosting their bottom line and delivering a better return to private equity investors.
Third party spend accounts for our client's biggest expenditure (after salaries and overheads), reducing this was a logical opportunity to lift profitability. Efficio was engaged to undertake a comprehensive procurement transformation program. The goal was simple – to deliver significant savings which would translate to the client's bottom line. The savings so far have exceeded all objectives.
The program has also succeeded in creating a new global supply chain organization, ensuring the savings are sustainable and building a platform to deliver ongoing improvements.
Our client, headquartered in America, is a global manufacturer of highly engineered machine parts for a variety of industries. Despite being a recognized leader in their field, our client’s financial position and sales revenue had been eroded by historically low market prices.
To bridge the gap, our client sought to dramatically reduce third party spend expenditures. Efficio had previously worked with this company's private equity owners on successful large-scale cost reduction initiatives in other operating companies – and based on their track record we were engaged to lead the program.
The task was complicated by the fact that the client’s three key subsidiaries had historically operated quite independently of each other, from a procurement perspective. As a result, there was a fragmented supplier base and little consistency across business units. The procurement approach was predominantly transactional. There was little focus on developing strategic long-term relationships with suppliers and limited cooperation between purchasing, engineering and quality functions. To address these issues and ensure the savings were achievable and sustainable, part of Efficio’s remit was to transform the Procurement function, establish a global supply chain management organization and upskill the procurement staff.
Efficio began by conducting a six-week opportunity assessment across all business units. This identified targeted savings of $30 million across 17 direct material categories and $265 million in spend. Two successive sourcing waves were designed, with $15 million targeted savings in each wave.
Direct materials, comprising the largest spend categories were the primary focus. These are more complex to source, because they directly impact the specification, production and performance of the client's end products. As a result, close co-operation between procurement, engineering, quality functions was critical to the success of the program – but the fragmented nature of the existing procurement approach meant this would require a whole new way of working. Efficio addressed this by setting up multi-site teams, which brought together different parts of the business. These teams were responsible for jointly reviewing product specifications, aligning them across business units, and choosing suppliers that offered the best strategic value. Over 10,000 technical drawings were validated and categorised, which meant suppliers could quote only on those parts that suited their production capability.
To ensure sustainable change, Efficio also designed and implemented a new global supply chain organization. This included selecting the best people within the organization and upskilling them through a comprehensive training program.
Efficio impressed with the way they very quickly developed excellent working relationships and gained a deep understanding of our business. They brought new ideas, challenged existing ways of doing things and identified significant opportunities - not only to reduce costs but also to operate in much more collaborative and strategic ways. Most of all, they ensured those opportunities were realised. They’ve played an important role in helping us achieve our business goals in a challenging environment.
To date, the program has succeeded in achieving - and exceeding - our client's objectives. Wave 1 has delivered $20 million of signed-off savings, $5 million above target, with Wave 2 now under way. Importantly, the savings have translated to the bottom line, with P&L savings on target.
The program has also delivered many ongoing benefits. The process of bringing Procurement staff from each business unit together has created an integrated procurement approach across the company with a much more strategic, long-term focus. It also succeeded in bringing Procurement together with key stakeholders in the business, working together in a collaborative way to find solutions rather than working in silos. This process has allowed local issues to be understood and addressed in the context of wider business needs, and helped build credibility for Procurement within the business. Along with the establishment of a global supply chain organization, it has created a platform for ongoing, sustainable improvements into the future – and provided a timely boost to our client's bottom line in a challenging environment.