Dairy products group
Taking a holistic view of the supply chain delivered much higher cost savings – while enhancing agility in a volatile market.
The situation
Like most commodity driven businesses, this group was dealing with two significant challenges. First, the low price of milk created razor-thin margins that demanded significant efficiencies from ongoing operations. And second, it faces volatility not just in the core commodity, but also in other areas – most notably transport – where a fluctuating transportation costs were a constant threat.
Instinctively, it had kicked off more than 40 cost reduction initiatives in order to manage the first problem. The in-house procurement team had already secured a USD $225,000 (£150,000) saving simply be renegotiating with its fleet provider. Though welcome, this saving felt piecemeal – a short-term win that did little to address the group’s wider problem.
The solution
Proxima’s team took a step back. Some of the projects weren’t going to work, even in the short term. But there were plenty of projects underway that were clearly sensible and sustainable, and it was important to support the procurement team on those clearer initiatives.
Fleet and logistics fell under that category. But rather than simply renegotiate existing contracts, the team took a broader look at the entire logistics supply chain. We broke the individual components apart – asking how each connected to the rest of the supply chain, and contributed to the group’s broader objectives. This enabled us to undertake a partial redesign of the overall logistics approach – giving the group greater flexibility and aligning it with some of the broader strategic aims – and benchmark the individual contracts against the broader market.
The result
The in-house procurement team had been rightly proud of their USD $ (£150,000) saving renegotiation. But taking a broader look at a range of components within the logistics set-up reduced this group’s costs by USD $900,000 (£600,000) in the first phase alone.
The financial re-engineering was even more compelling from a financial perspective. Rebasing the contracts with a “total lifetime cost” approach allowed the finance function to release USD $3.7m (£2.5m) from the balance sheet in the first year.
In just three months Proxima’s approach delivered a USD $4.5m (£3m) boost to the bottom line. But it was the shift in operational mind-set that most impressed the executive team. Changing the way departments across the business looked at third party relationships and how they fed into overall strategy was perhaps the biggest win in their eyes.