Manufacturing cost transformation

Situation

Our client, which primarily serves coal power generators, faced a unique set of market challenges driven by fossil fuel price and regulatory uncertainty:

  • Customers shifted focus to short-term decisions driven by fuel market uncertainty
  • Customers were reluctant to make large long-term investments in new facilities and equipment
  • Traditionally stable customers became more price sensitive as coal-fired generation began losing its advantaged market price position

The practical implications for our client were threefold:

  • Increased order volatility as customers pushed inventory risk onto suppliers
  • Reduced number of large project orders, traditionally used to set baseload plant utilization
  • Pricing pressure and increased willingness of customers to try alternative, non-OEM, suppliers

Given these market-driven issues, our client explored two independent paths to achieve cost reductions and increase variabilization:

  • Reorganize differentiated activities around workload drivers and variabilize staffing as needed
  • Outsource noncore operations to shift variability to external lower-cost players

Situation

How we helped

A framework of three options was developed for manufacturing cost savings: facility resizing and consolidation, rationalizing the make or buy decision, and pursuing production in low-cost countries.

  • Strategic pros and cons were developed for each option
  • A business case was put forth for each
  • Ultimately, two were identified as aligned with current corporate strategy and capabilities, and detailed design was performed for each

Labor was determined to make up a majority of addressable costs, and specific cost reduction levers were tested for impact and feasibility.

How we helped

Results

Results

Labor was determined to be a key addressable cost

  • Labor constituted 74 percent of total manufacturing costs
  • Of this cost, 76 percent represented hourly labor and 24 percent represented salaried

Key levers were identified for each of three categories:

Direct labor

  • Order patterns and lead times were analyzed to understand demand volatility
  • Scheduling methods were redesigned to smooth production volatility and reduce direct labor inefficiency
  • Staffing levels were adjusted to meet the troughs of demand and policies were adjusted to meet peak needs via overtime
  • Selected employees were cross-trained to increase utilization and reduce overtime

Indirect labor

  • Staffing based on number of direct FTEs required to be managed
  • Workload drivers were analyzed to better understand their role in impacting staffing levels and to facilitate reductions in redundancies

Salaried labor

  • Workload drivers specifically associated with salaried FTEs were analyzed
  • Selected roles were combined where staff were underutilized
  • A role-by-role buildup of salaried labor requirements was developed

Results