Traditional manufacturing companies are operating in an environment of dramatic change. New technologies, increased regulation, and competition from new markets are revolutionizing the boundaries and framework long in place.
Manufacturers now need new, proven ways to react quickly and ensure that capital—people, time and money—are readily available, so they can make the huge investments required to grow, as well as stay profitable in the short term.
In the past, cost-cutting measures were the usual course of action, such as reducing overhead and workforce, restructuring, reengineering as well as closing factories. However, you can only do that for so long. Eventually those options become exhausted; they no longer generate enough savings. Instead, the focus needs to shift to doing more with what you have, from product development to operational strategy.
Here are three strategies traditional companies can follow to free up cash-flow to support new capital investments:
Product Redesign of Current Portfolio
Companies are moving upstream—evaluating existing products at the creation and management stage. Are our products designed in such a way that they are competitive? How can we deliver either better performance or cost, or both, to the customer?
Value engineering is the main strategy here. Redesigning existing products can offer ways to reduce material and sourcing costs, as well as streamline, standardize and modulate product offerings.
An example would be a major pump supplier to the oil and gas industry. The company had production and engineering centers all around the world but had not made a conscious effort to redesign their products to reduce costs.
A portfolio analysis of the company’s 300-plus products enabled us to define approximately 15 product families that were good candidates for redesign. Teams from the US, Germany, UK, India, and China then collaborated to learn and apply the value engineering process to a pilot product. Suppliers were invited to participate as well. Together, they reduced product costs by more than 20%. That success energized the team and prompted management to redesign 13 more product groups, significantly reducing costs across 80% of their future-critical product offerings.
That is not to say product redesign initiatives are always readily embraced. There can be resistance to a multi-functional approach, since engineering departments have traditionally led cost-reduction exercises on existing products. But to successfully satisfy market needs while ensuring accountability, a product redesign really must involve sales, purchasing, production, aftermarket, suppliers, and engineering — and include people from different countries.
Collaborative Sourcing
Companies are also developing new ways to source their products. Namely, rather than just handing over specs, they are collaborating with suppliers on product design. A good example is casted parts. An active collaboration with suppliers from best-cost countries showed our client that adding material for smoother angles reduced scrap and rework significantly, thus reducing the overall cost of the part.
Designing for technological change may need an especially high level of involvement from suppliers, as the company may not have the internal capabilities of the required technology. Consider the automotive industry. Due to aggressive emissions regulations in Europe, automakers are investing in electric and driverless technologies, resulting in R&D budgets that are tripling and quadrupling.
The main question is: How can I accomplish this function for my product and work with technology leaders to find a best-cost solution? Having a good process that involves the right people is critical to overcoming these challenges and moving beyond traditional cost reduction initiatives.
Footprint Improvement
Companies that have grown through acquisitions often find that consolidation creates significant footprint overlaps of markets, product offerings, manufacturing capabilities, production sites, and more.
While acquisitions often add complexity to the business, the offering and the organization, they are also a great opportunity to rethink how products are produced and distributed, how material is sourced, how the organization is structured, and the culture that is developed.
Improving the footprint means looking at the whole supply chain—from distribution, production and purchasing to delivery to the end customer.
A private equity firm needed to develop a new European footprint for a water equipment manufacturer with manufacturing in six countries. Each factory had been independent and developed its own products for its national markets. After consolidating the companies into one, the board saw the overlap of products across locations and the duplication of production processes across plants.
Gathering engineering teams from all locations resulted in an effort to design “the best of” all existing products into a new common European one—15 product groups. Consolidating the engineering capabilities across the locations and developing “competence centers” for each product family unleashed tremendous synergies that generated a 50% increase in EBITDA. Those savings were used to develop new product types that fit better as “low-end” applications, in the face of Asian competitors entering the markets with lower-priced products.
It’s a lesson for all traditional companies. In the context of so much change, it’s time to do things differently. There are ways to remain profitable, but they require a change of mindset and thorough processes. By applying their great technical knowledge and years of experience, traditional companies can optimize their product offerings, sourcing and footprint to enable them to comply with regulatory changes, stay ahead of the competition, and capitalize on technological breakthroughs.
