Background and challenges
A manufacturer of high-pressure vessels and storage tanks was struggling to keep up with monthly demand and deliveries. Despite increasing volumes, the manufacturer faced rising unit costs and supplier delays resulting in production disruptions.
The client and its investors engaged L.E.K. Consulting to evaluate opportunities to optimize costs and ramp up production capacity to meet increasing market demand.
Approach
To achieve these objectives, our team undertook a comprehensive analysis across manufacturing operations, engineering and procurement to uncover opportunities for cost optimization and capacity expansion:
Cost optimization
L.E.K. deployed its Rapid Opportunity Diagnostic to develop procurement initiatives to reduce cost and risk exposure.
A spend cube, category profiles and supplier matrices were rapidly developed to model the current direct materials ecosystem and generate insights into supplier concentrations, pricing, historic supplier performance and supply risks.
Category sourcing strategies were evaluated and incremental opportunities were developed, including:
- Insourcing vs. outsourcing assessment: Evaluated critical sourcing categories resulting in cost-benefit quantification, strategic de-risking of the supply chain and support for volume growth
- Value engineering: Recommended product redesign to eliminate over-engineered components, significantly reducing sourcing costs
- Alternate manufacturing processes: Suggested alternate viable manufacturing processes for sourced metallic components, which had better pricing driven by production scale efficiencies without sacrificing quality
- Incumbent negotiations: Identified opportunities with existing suppliers based on cost models and pricing insights
- Contract evaluations: Determined opportunities for renegotiations, such as payment terms, to enable cash conservation
A strategic roadmap was developed to prioritize and time phase 15+ projects across four categories that allowed the company to allocate its resources pragmatically and hold them accountable on value and timing.
Operational efficiency and throughput expansion
To address production capacity constraints, our team created a process map and identified bottleneck process steps at current and future volume projections. We evaluated different options to increase production to required levels by:
- Eliminating production bottlenecks: Identified and eliminated bottlenecks in the production process through process redesign and capex investments
- Optimizing facility layout: Optimized the facility layout to reduce transportation waste within the plant and improve direct labor efficiency
Results
Our team of experts identified and quantified 15+ opportunities across four procurement categories, resulting in $20M+ in annualized cost savings and a 30% reduction in per-unit costs. Additionally, the team planned five projects with the client to streamline production bottlenecks, ramp up throughput and optimize the shop-floor layout.
A strategic in-sourcing project was developed that would stabilize the supply chain for a critical component facing supplier reliability concerns. A business case was developed to evaluate the returns on the significant in-sourcing capex investment — a payback period under 2 years which exceeded finance’s requirements.
L.E.K. worked closely with management to develop the roadmap and resources required to implement this ambitious program. Opportunities were sequenced based on impact, risk and overall timing into a 2-year roadmap. The management team engaged L.E.K. to assist with the program management of the in-sourcing project.
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