Summary
Rho Consulting was engaged to help a leading Home appliance manufacturer to help them with better control over raw materials primarily in Procurement, Storage, and Issue for Production. The client was decently doing well in terms of Sales improvement but the Profit % was low. Improper handling of raw materials was eating into the client’s profits. Setting the Right processes and control measures helped the client get out of the profitability issue.
Client Situation
Besides improper accounting practices, the primary issue was that the client did not have any proper records of raw material ordering or aging leading to a lot of wastage and theft. It was even found that material bought 4-5 years ago was left unused on the factory floor even as new raw material was being bought. Bank borrowings were also increasing leading to increased Finance costs. The cash flow due to bank borrowings masked the issue of increasing costs and decreasing profitability.
There was also a huge discrepancy between the production count and the packing material. One example that shows a lack of coordination between the production and purchase teams was packing material for certain phased-out products that were ordered long after the product was phased out leading to unnecessary financial costs and loss of storage space.
The credit cycle for debtors was also very long leading to significant working capital stress that was also a pain point for the company.
There were also no set processes to manage scrap. The scrap was disposed of without looking at opportunities to sell elsewhere at a better price. These constraints denied them the opportunity of using schemes and other deals offered by competitors.
Rho’s Approach
Rho’s professionals conducted a health check to identify the gap areas. The costing technique was used to compare actual material costs with accepted costs showing abnormal variance in material usage. A detailed plan was made to reduce the raw material cost near to an acceptable level.
The primary aim was to set up processes around Material a) Procurement b) Storage c) Issuance to Manufacture d) Minimum Order Quantity e) Reorder quantity.
Rho’s Process Excellence Team created an Automated tool to help streamline the raw material ordering and storage processes, reducing the time and effort required to manage inventory.
The tool also helped optimize inventory levels, minimizing the costs associated with excess inventory or stock-outs and automatically generating orders when inventory levels reach a certain threshold, reducing the time required for manual re-ordering.
Rho leveraged market intelligence and introduced new suppliers into procurement taking into consideration cost-effectiveness and reliability thereby reducing dependency on one supplier. An efficient quality check was also put in place which was lacking prior to intervention.
A control tower and a visual dashboard were created to help cross-functional teams view real-time status and collaborate with each other. This helped the Purchase department view production plans and order packing material accordingly.
Rho’s team helped the management negotiate for a shorter credit cycle by offering small discounts and renegotiating contracts.
To prevent the underutilization of transport vehicles, the team created a mix of self-owned transportation and outsourced transportation.
Results
The intervention in the procurement front alone gave the client 6% cost savings through efficient usage of raw materials, regularization of order time, and better scrappage management. The standardization of raw materials management along with extra savings motivated and enabled the client to start new plants and new products.
The credit cycle for debtors was re negotiated to an average of 90 days from 6 months leading to significant easing on working capital needs.
A suitable accounting procedure was also implemented so that the management could derive MIS (Management Information System) to run the business with informed decisions. An SOP (standard operating procedure) was also implemented in the respective departments.
Rationalization of logistics and transportation led to reduced underutilisation of vehicles and staff leading to 5% cost savings.
