A major colour television, audio systems, home and kitchen appliance company looking at significant improvement in profitability in a tough revenue growth situation.
The management of this company was faced with a serious profitability situation
- Revenues had declined at CAGR 5% over the past 3 years
- Group profits had been wiped out
- Historically, more than 60% of revenues and 80% of profits had been contributed by one SBU; this SBU was facing a 30%+ drop in profits
- International competition had stepped up significantly in key product categories with an impending loss in other SBUs as well
- Overall, the company needed to cut costs drastically in an effort to stay afloat
The consumer durable industry typically grows in line with the slow and steady growth in per capita income. Rarely does one see significant growths in product revenues outstripping economic growth. Product penetrations increase as the consumer income levels grow. In this scenario, it is extremely critical to balance the durable product portfolio and manage internal operations with high level of efficiency; without which products can pile up in warehouses, the selling expenses can increase disproportionately and productivity can be average across the organization. Cedar’s client was faced with a similar situation. The client was keen to address sales, customer service and all key support functions to identify cost inefficiencies and prune the cost base strategically.
Cedar looked at cost reduction from a strategic standpoint. Costs in an organization are impacted from four perspectives
Cedar conducted a current state assessment of processes/activities across the sales, customer service and key support functions. More than 50 processes were catalogued and prioritized out of which 35 were found to be defective with significant improvement opportunities. 70% of the processes were in the area of sales, marketing, brands, branch operations; 20% in the customer service area and the balance across corporate planning, administrative, MIS. Cedar conducted more than 60 interviews at corporate, regional and branch offices, including dealer/distributor points nationally.
Major areas of cost inefficiencies identified were
- Order generation process leading to stock returns and high warehouse inventory levels
- POP material utilization inadequately tracked leading to wastage of material
- Scheme payout not controlled as % of sales leading to 3-4% higher monies disbursed in trade margins with no volume gains; with dealer churn at 40%
- Sales FTE loading 40% of competitive levels
- More than 400 product demonstrators on company payroll; duplicated across multiple product categories
- Poor buffer stock management leading to inventory pile up – 9% of sales value locked in stocks
- No single responsibility at branches for dealing with defective stocks – 10% space blocked at warehouses and 17% of saleabale value in defective stocks
- 20 % excess warehouse space with high rentals
- Forecasting variations from -40% to +30% leading to very inefficient supply chain management
- Advertising spends ineffective – SOV significantly less than competition for higher SOE
- Customer service commission payouts inadequately structured
- Cedar developed cost reduction recommendations, defined new MIS formats and identified excess resources to be released.
- Recommendations were then categorized based on cost reduction impact, area of cost reduction and timeframe for implementation.
- A detailed implementation schedule was drawn up to assist the client in managing the implementation of the recommendations.
- Thus at the end of overall effort, the client was able to reduce 23% of the addressable cost base across the organization and generate relevant cashflow for operating activities in a rapid 45 day exercise.