Background and Challenge
The client is a leading manufacturer of plastic horticultural containers. The client has grown in recent years, resulting in a product portfolio that consisted of more than 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 over-supply and varied weather seasons all contributed to underperformance. The client sought to implement a cost reduction plan to ensure that it earned its cost of capital by reducing manufacturing overhead and indirect plant costs through simplifying its product line and rationalizing its SKUs.
Approach and Recommendations
L.E.K. Consulting developed a costing methodology to allocate plant overhead in an effort to accurately reflect the “true” cost of each SKU the client produced. Subsequently, we performed a detailed analysis of the client’s SKUs, product molds and plants to create a performance fact base. We leveraged the fact base to determine a list of initial opportunities for the client to consider for SKU rationalization and product portfolio improvements. We estimated the financial benefits and costs of specific recommendations for the client including headcount, inventory and capacity implications.
We identified specific actions that could allow the client to achieve more than two times the targeted profitability improvement.
Significant production capacity was freed up and excess inventory was released.