Overview
This UK manufacturer of short shelf life products, had benchmarked its sites against each other – and found a problem:
-
It largest site was by far the least cost effective:
- 30% more expensive per unit, according to internal accounts
- Losing some £2m p.a. – and responsible for compromising Group profitability
- The site was also by far the most complex in the Group
Two hypotheses arose:
- Either the complexity at the site was genuinely driving up the costs – and a complexity reduction programme was required;
- Or the internal accounting systems were being misled by the the complexity – and costs were not being allocated properly
Sequoia were asked to undertake a detailed – activity based cost analysis – to work out which hypothesis had the most validity.
![Flow chart](/Resources/CaseStudies/CostOfComplexity/ChilledFoodManufacturerGraphicV2.png)
Approach
Sequoia built bottom up activity based cost models – such that we were able to:
- Compute production costs SKU by SKU from intake to despatch – both for the target and comparison factories
- Conduct "what if" tests to establish the potential value of portfolio reduction, either of specific SKUs, product categories or production processes
- Identify a road map of specific changes to the operation that would deliver cost alignment with more efficient facilities
![Cost breakdown](/Resources/CaseStudies/CostOfComplexity/ChilledFoodManufacturerGraphic2V2.png)
Results
The primary result was to clearly demonstrate that the complexity of the site was not the primary driver of its extra operating costs:
- A culture of "agility", resulting from its role as a balancing site for excess materials supply, had institutionalised excess fixed and indirect costs
- This agility also came at the cost of utilisation – which further exacerbated the fixed cost problem.
Actions were taken which reduced the conversion costs by 36%.