Background and Challenge

The client, a leading high-tech global engineering business, faced significant external pressure to reduce cost, while seeking internally to drive transformation throughout the organization. Although the business maintained a first-class engineering design and manufacturing capability, it was suffering from project delays and rising costs. L.E.K. Consulting was engaged to identify critical overhead and operational cost reduction opportunities that could be rapidly put into action to meet customer expectations.

A key challenge was to disentangle a large and complex cost base, spanning central functions, and program delivery elements on a diverse and aging site. Organizational complexity had evolved over a number of years, compounded by a proliferation of initiatives that lacked effective coordination. The fundamental challenge was to develop a bespoke approach to the analysis of functional efficiency in an organization with few direct peers.

Approach and Recommendations

Recognizing that different parts of the business would require different approaches, we tailored the analysis according to two high-level organizational categories:

• Back-office support functions
• Operational enabling and delivery functions

For each of the support functions, we carried out detailed benchmarking of the number of FTEs and the organizational cost against a carefully chosen industrial comparator set. Working closely with the client, we allocated employee time to a set of discrete and comparable activities within each function. Comparison against industry best practices highlighted significant, potential cost savings should the client move to a top-quartile position. Collaborative working ensured that important context for existing processes was captured and incorporated into targeted recommendations for cost reduction initiatives.

We adopted a proprietary, systematic approach to the assessment of functional efficiency for the operational enabling and delivery functions, such as project management and engineering design. Looking first at internal indicators of efficiency, we analyzed organizational structure, including spans of control and reporting lines, together with historical growth and cross-business unit comparisons. Skills, demographics and shift patterns were considered for their effect on efficiency, and a detailed investigation of performance management systems and data led to the identification of clear areas for improvement.

We then benchmarked selected elements of the enabling and delivery functions according to leading indicators of efficiency and best practice among similarly complex and capital-intensive industries. These included the levels of rework experienced, the ratio of project management to delivery staff and the relative level of investment in manufacturing process improvement.

Results

Following our review, the client was left with a clear and detailed understanding of the cost base, a quantified year-on-year cost saving potential within the support functions, and a roadmap for improving efficiency within the operational enabling and delivery functions. we brought to bear deep industry expertise; analytical capabilities; and a flexible, collaborative approach that helped to steer the client through a period of close scrutiny from a wide range of important stakeholders.

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.

Results

• 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.

Background and Challenge

The client, a $1.5 billion business, was experiencing a rising cost base due to increased finance and administration costs and headcount. Furthermore, there was an inefficient delivery of the services.

The client sought L.E.K.’s guidance to undertake an efficiency review of this cost base and to recommend improvement opportunities.

Approach and Recommendations

• Conducted an activity efficiency review of the client’s cost base and recommended an improvement program consisting of multiple initiatives across the finance and administration functions
• Proposed an organization restructure
• Reviewed the business’s portfolio and the support services operating model

Results

• We evaluated the client’s organizational structure and determined that division by geography was a better structure than a division by business
• An optimal business portfolio development that delivers attractive returns was proposed, with quick wins’ exit of more than 30 loss-making and strategically non-aligned local operations
• We identified, through close work with the client, savings across a dispersed resource base as well as opportunities for improvement of fleet and labor and restructure of support services for greater efficiency
• Overall, we helped the client realize a significant potential savings of  approximately 15% of the addressable cost base, excluding one-off working capital savings

Background and Challenge

A large, approximately $5.0 billion SOE engaged L.E.K. to undertake a diagnostic of its indirect cost base and to develop a transformation program to drive efficiency.

Approach and Recommendations

The overall objective of our engagement was to develop robust evidence of substantiated cost-out potential, and to translate this into a large suite of implementation-ready initiatives.

We leveraged its cost reduction experience, using a range of bespoke opportunity identification tools and methods, to rapidly identify and size functional and cross-functional cost reduction opportunities.

An in-depth understanding of functional challenges and cross-functional workflows meant we could effectively identify the root cause of cost escalation and the design solutions addressing the underlying issue (often in functions other than the one where cost was recorded).

A key dimension to the project was the hands-on coaching of management and initiative owners — both in analyzing the cost base and operations to find opportunities, and in change planning and execution.

Results

• Our review identified cost reduction opportunities totaling over 20% for most functions, which means a  total approximately 20% of the addressable cost base was identified, underpinned by a robust evidence base
• We also provided the client with a comprehensive, prioritized and coordinated implementation plan to realize the savings
• Management and initiative owners were coached to drive execution

Background and Challenge

An approximately $2 billion electricity and gas transmission and distribution company sought to reach its cost full potential, and engaged L.E.K. to guide the organization through this process.

Approach and Recommendations

Our role was to set the saving targets, develop a plan to realize the savings, and coach key stakeholders so that the business itself could execute and deliver the savings.

We helped the business identify numerous performance improvement opportunities:

• A top-down assessment of the business identified a substantial stretch target
• More than 250 discrete, high-quality, executable initiatives were developed, assigned to over 80 owners, and captured in ChangeMaker, our intuitive program management tool
• Coaches embedded throughout the business ensured that each division achieved its target savings pipeline and had the capability to deliver the savings

Results

• We developed an end-to-end cost-out program from target setting to delivery
• Our review identified substantial savings well beyond the business’s expectations, and all initiatives are in-flight (with some already delivered)
• Our coaches drove capability uplift through all layers of the business
• The governance structure was implemented in four weeks
• More than 150 users were trained on ChangeMaker, our intuitive program management tool, to deliver the savings, with quick wins prioritized

Background and Challenge

The client was a leading European provider of tax-free and currency services for retailers.

The private equity owner was preparing the business for an eventual exit and needed a new strategy to accelerate growth.

Once the new strategy was developed, a structured and comprehensive activation program was required to implement the recommendations.

Approach and Recommendations

Initially, L.E.K. conducted a comprehensive strategic review covering over 10 work streams — these ranged from customer segmentation to pricing, organizational review and operations improvement.

Subsequently, we put in place a fast-paced and structured value activation program to support management in implementing the changes required:

• Led detailed design of initiatives
• Coached and supported management team to implement and deliver initiatives
• Enabled project governance and acted as thought partner to the senior team and board

Results

• The new strategy was fully approved by the board and the management team
• Critical initiatives were fully implemented over the course of eight months
• Private equity owner successfully exited the business, and in three years of ownership, EBITDA more than doubled and exit valuation was 3.4x higher than the consideration paid at entry

Background and Challenge

An agricultural storage system manufacturer in Brazil hired L.E.K. to identify cost reduction opportunities to maintain profitability in the new market scenario.

Approach and Recommendations

First, a high-level cost analysis of each of the client’s areas was conducted and used as a guide for interviews with employees, to assess possible cost reduction opportunities.

The cost reduction opportunities identified during interviews were separated into two categories:

• Short-term initiatives, involving adjustments in the company structure to address the new market scenario
• Medium-/long-term process improvements, involving changes in sales, production and installation processes

We estimated the cost reduction of each initiative, and concluded by creating/revising existing implementation plans.

Results

We helped the client identify short-term and long-term cost reduction opportunities of R$20-30 million and approximately R$80 million, respectively.

Background and Challenge

L.E.K. Consulting's client, a leading independent film studio, had recently changed ownership and was looking to conduct a wholesale review to optimize performance.

Historically, the business was profitable; however, opportunities remained to refine commercial, operational and sales practices to create further value for its owners.

Approach and Recommendations

• Developed a value-based model of the studio’s operations, to understand the key drivers of performance and to quantify the impact of any proposed initiatives
• Collaborated with senior and functional management to develop an agreed-upon list of priority initiatives with the potential to drive additional value in the business
• Developed solutions to complex issues, including pricing strategy and the allocation of accommodation types across the site to minimize structural barriers to utilization
• Developed an implementation path forward that defined work streams and teams to capture the performance improvement opportunities
• Supported work stream teams with solution refinement and implementation, embedding relevant capabilities and tools to ensure change program success

Results

• Provided the studio owners with a comprehensive understanding of the drivers of value in their business, and a set of solutions with which to move them
• Optimized high-level and functional organization structures to help deliver on key initiatives, particularly within sales, to align resources with target customer segments
• Developed actionable path forward with key activities, deliverables and timelines that could be leveraged to quickly deliver results

The estimated impact of the opportunities identified included an overall improvement of over £13M in EBITDA (representing over 40% uplift)

Background and Challenge

L.E.K. Consulting's client, a leading industrial and mining explosives company with more than $1 billion in global revenue, asked us to analyze its SKU performance and develop recommendations to improve product profitability.

Over time, the company had seen a proliferation of its SKUs, causing unnecessary production costs and decreased profitability per SKU.

Approach and Recommendations

Database and opportunity sizing:

• Estimated profitability by product, including validation of cost methodology
• Identified underperforming SKUs (adjusting for indirect costs, capital cost)
• Estimated opportunity size and need for further analysis

Product portfolio rationalization:

• Determined which products need revised pricing, elimination, redesign or cost reduction
• Collaborated with commercial team to understand potential customer and product pull through impacts

Results

• We identified more than $1 million in immediately actionable profitability improvements for  approximately 1-2% gross margin improvements
• We also found potential for several million dollars in near-term profitability increases that required SKU re-pricing, elimination or small organizational changes
• We demonstrated that SKU rationalization would have a small impact on the existing customer base
• We also found that the top 25% of customers accounted for  approximately 90% of total gross margin in their respective channels, leading to better customer prioritization
• Finally, we defined a number of implementation initiatives so the client could continue to investigate new opportunities and execute on recommended changes

Background and Challenge

L.E.K. Consulting's client had recently acquired an archery and bow hunting company and was looking to integrate the target with other companies in its portfolio.

Approach and Recommendations

• Designed new integration plan by functional group:
• Operations group, to ensure a smooth transition in manufacturing
• Commercial group, to drive new sales and product development
• Back-office functions, including HR, finance and legal, and IT, to best support the new organization
• Identified and outlined key cross-functional efforts, including a new ERP system and facility closures
• Created a detailed “first 30 days” plan to avoid early pitfalls in the transition process
• Conducted a synergy review of both cost and revenue synergies

Results

• The client had a better understanding of how different functional groups played a role in the integration timeline as well as interdependencies between the groups
• The client was well-prepared for the most disorganized part of the integration process, the first 30 days, with an integration management office
• Synergies and one-time costs and benefits of the integration were clearly outlined for the client to track