Background and Challenge
An approximately $200 million business produces and sells horticultural containers, including flower pots, trays, flats and other products, to greenhouse, nursery and retail markets.
The company had grown in recent years, in part from several acquisitions, and as a result, its product portfolio consisted of over 20,000 SKUs produced in two plants. Despite historical efforts to reduce costs, the client had not been able to earn its cost of capital.
Retail distribution pressures, industry oversupply and varied weather seasons all contributed to underperformance, exacerbated by the fact that the sales team never said no to a client. Similarly, the operations team never said no to the sales team.
Further, high SKU counts, short production runs and production equipment capacity limits drove the need to hire significant numbers of temporary workers to meet seasonal demands, which led to higher costs.
The client sought to implement a cost reduction plan to ensure it earned its cost of capital by simplifying its product line and rationalizing SKUs, thus reducing manufacturing overhead and indirect plant costs.
With our support, the client targeted a cost reduction that would yield an annual EBIT margin improvement of at least two percentage points.
Approach and Recommendations
- Developed a costing methodology to allocate plant overhead in an effort to accurately reflect the true cost of each SKU the client produced.
- Developed a cash- and activity-based overhead costing methodology that ensured an accurate view of profitability by SKU, which was the driving focus of the project.
- Performed a detailed analysis of the client’s SKUs, product molds and plants to create a performance database.
- Leveraged the database to recommend a series of actions designed to improve profitability, and outlined the financial implications of these actions for customers, products and manufacturing operations.
- Analyzed the operational implications of the recommended actions to highlight freed-up manufacturing capacity and opportunities for inventory reduction, adjusting to seasonal demands.
- With assistance from the client’s commercial team, we created a list of specific recommendations for each unprofitable SKU to either be eliminated, substituted for a profitable SKU, re-priced, improved through optimized ordering/production, or left as is.
- We. estimated the financial benefits and costs of specific recommendations for the client, including headcount, inventory and capacity implications.
- To ensure a smooth transition, we developed an implementation plan to capture the opportunities and outlined potential risk-mitigating actions to take.