Case Study 2003/4/5 - Supply Chain Cost Reduction
Reducing Global Supply Chain Costs by 47% ($13m) Annually - (2003-5).
New VC owners of a $160m global software vendor identified run-rate cost of goods sold (COGS) at 17% of revenue as being far too high to be sustainable, and out of line with competitors. Stuart Lester was given global responsibility to broaden savings already achieved in Europe and drive further improvements to achieve results <9% of revenue.
In late 2003 an objective was set to reduce a software vendor’s cost of goods sold from over 17% towards an ultimate target of 7% of revenue. Stuart Lester was given responsibility for the manufacturing division to achieve this. Over the next two years every aspect of the global supply chain was addressed and brought under control, from partner contract pricing to royalty payment systems, resulting in COGS falling to below 10% in spite of absorption of significant extra costs into the division from marketing, finance, support and e-store.
This level of achievement required the focus and motivation of all the division’s staff to relentlessly drive towards the objective, with monthly reports to the Board charting progress and projections.
The following are some highlights of how such a major reduction in cost was achieved:
· Reviewed all purchases and adjusted to lean buying principles.
· Reworked all lifecycle planning processes and associated purchasing policies.
· Combined and standardised similar product categories to maximise efficiencies and bulk purchasing power, particularly around multi-language product packaging, and standardising components, formats, colours and materials between different product ranges.
· Renegotiated freight partners and contracts for all global regions.
· Worked with manufacturing partner to review all suppliers and change or renegotiate pricing.
· Set up new manufacturing and distribution partnerships in Far East to serve that region locally.
· Sourced volume product from Far East suppliers where made possible by time to market.
· Renegotiated pricing structure of contracts with global manufacturing partner.
· Achieved massive reductions in scrap by tight purchasing and management.
· Reduced cost per unit by purchasing long where future demand could be reliably predicted.
· Required marketing to justify products with high content and low margin through business cases which (with senior board focus) rarely flew.
· Drove new product release processes to complete earlier and with far higher focus on right-first-time to dramatically reduce high urgent product and delivery costs at launches.
· Reduced cross-border freight costs by holding controlled strategic local stocks.
· Transitioned separate e-store fulfilment partner into mainstream partner business.
· Drove paper box content to on-line resources where practical, shortened and simplified manuals drawing much positive press publicity, and used blank and white to replace colour where acceptable.
· Consolidated CD content through creative engineering redesigns.
· Constant detailed inventory reviews giving early warning of any excess building in plenty of time to take action.
· Dramatic improvement in global sales forecasting and requirement to justify demand levels.
· Converted to electronic licence distribution and activation wherever possible.
· Implemented scrap-in-field procedures and policies to prevent high channel reverse-logistics costs.
· Creative storage solutions for slow moving product and early scrapping of excess.
· Negotiated packaging and manual production in Taiwan at mainland China pricing.
· Produced in Taiwan for Japanese market with final assembly only within Japan.
· Innovation in product design including introduction of DVD packaging to replace some boxes.
· Identified duplications and other errors in finance royalty payment calculations and drove recovery of overpayments.
· Relocated European production from Netherlands to Czech Republic having negotiated parity deal on freight charges.
· Brought high value hardware bundle programmes under control.
This case study shows how high attention to detail combined with galvanisation and motivation of a global team and partners towards achievement of a common objective can bring about a massive improvement to the profitability of a company by comprehensively overhauling manufacturing and supply chain processes.
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Last Updated (Thursday, 13 January 2011 18:00)