About when we saved a company ~20% of subcontracting costs

How it began

Beta Limited is a 15 year old well established manufacturing company with a top-line of approximately USD 3Mn based out of India. Prequate was brought in to help Beta manage further growth by analyzing and changing old systems and introducing future thinking.

Beta was in a mature stage and wanted to move to a people independent setup. They relied on experience and rule of thumb for determining the key controllable factors in their industry – pricing and costing mechanism.

Image credits: http://dilbert.com/strip/2010-05-05

Getting to work

Beta started a continuous engagement model that allowed Prequate to develop the management reporting frameworks within the CFO Office offering. Over the course of the next 12 months, Prequate became an integral part of the business with specific charge of the management reporting for Beta. In the course of such delivery, Prequate Team began the process of overhauling the finance function and noticed that:

1. Costing of all products were on an ad-hoc basis for specific projects only

2. Pricing mechanisms were based on rule of thumb and increments factoring the BOM costs only

3. True profitability for each LOB and product line was never evaluated as products were launched

Costing and pricing function are primary to any business, more so for a manufacturing company where sustenance becomes questionable if not adequately assessed and monitored. Each unit may become potential onerous to the company.  A new sceintific approach was necessary.

The approach

The main questions to be addressed behind any cost or pricing mechanism need to be addressed:

1. Does the system capture all costs?

2. Are there costs factored? Say, the cost of the standard delivery and collection terms and associated credit costs or customization efforts and related manpower costs?

3. Is there information flow for studying profitability on SKU basis or is it a work back?

4. Is costing information dynamic? When was the last time it was updated?

⇒  A new costing philosophy which was linked to pricing was needed.

Action Time

1

Detailed operations study: Understand the setup and functioning of all systems including the composition of every product and its manufacturing line

2

Review of SOWs & Job orders: Study the term, conditions and pricing system and the competitive position of the company in each SKU with dependencies between product lines

3

Process Study: Study each process in isolation and then as a whole as a part of the organization to analyze gaps in understanding and cost capture

4

Analyze wastages: Understand the products and the wastages associated at each step to set up standard measurements

5

Understand consumption: Understand the consumption patterns of different products and their respective reorder and fulfilment levels

6

Build Standards: Build out standard worksheets with manufacturing workflows tied in which will form the new norm for cost capture and reporting and get buy-ins

Improvements made

1. Dynamic BOMs were incorporated into the system to generate real time feedback across product lines

2. Renegotiations with sub contractors since their pricing was constant and not pegged to the size and nature of work

3. Study of individual processes and production lines led to recognition of numerous hidden costs

4. Building of a dedicated purchase team to reduce wastage and monitor levels with defined goals to reduce purchase costs

5. Developed a method for recognition and accounting of abnormal wastage which was not even identified before

6. Introduction of reporting at a manufacturing line level on efficiency and wastages was introduced

Impact

1. Win 1 | 15%-20% reduction in subcontracting in Year 1

2. Win 2 | 12% reduction in wastages due to continous monitoring

3. Win 3 | Economies of scale due to consolidate buying from ‘Purchasing Team’
   

4. Win 4 | Higher accountability + Better cost determination of time costs due to improved reporting and accountability

5. Win 5 | Finance thinking from all departments within the organization

What happens when Finance thinks business

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.