A Business Consultancy Solution in Cost Reduction by 97.75%
This particular incident started off when the top management of a Company started facing the ire of its auditors! According to the auditors, the running costs of the plant were very high compared to what was projected in the Project Reports. We were called in to troubleshoot the situation since our business consultancy in Kochi had a history of being experts in this specific industry; with cost reduction being our forte! Incidentally, let me highlight that the subject factory was located in the Middle East in a very radical country!
As is our trademarked procedure in business consultancy, we started off with a meeting with the Management but rather than move into the Plant Operations angle, we decided to have a go with the Auditors to find out what inputs they could give us on the subject. Although they could not provide technical inputs, they were quite confident that there was something in the production scenario that was giving them headaches.
Since this plant had a process layout, we decided to start with Raw Material Handling, Batch & Furnace, Production, Inspection, Labelling, and finally, Packing – in the process sequence.
The Cost reduction
Raw Material Procurement was one area where we could immediately make inroads by shifting from Yellow Soda Ash to Indian Dense Soda Ash in Jumbo Bags bringing in huge savings and thereby gaining the confidence of the Management.
When we came to Production, since this Plant was built on a European collaboration, most of the consumables were also being sourced from the same country, and among these were Mold Oil, Swabbing Brushes, Shear Blades, and Shear Cutting Fluid.
We shifted to US Based Mold Oil and to Swabbing Brushes as well as Shear Blades from Germany – not just for cost reduction but improved plant efficiency too; but the star of our story here was the Shear Cutting Fluid!
As highlighted earlier, this Shear Cutting Fluid (a proprietary mix) came in 200 liter barrels from the European Country; and the barrels came by sea with a lead time of anything from ninety days to a hundred and twenty days.
Coming to financials, the cost of each barrel was approximately 96,000 Indian Rupees, (Actuals would keep varying since these purchases were based on a volatile International Currency rate)! Couple this with the fact that this plant was one that operated 24 X 7; 365 days a year and that one barrel would last for just three days!
This meant that, the monthly operational cost for Shear Cutting Fluid alone would be 9,60,000 Rupees considering a month of thirty days! Further, the Inventory cost of the item would be 38,40,000 Rupees considering a lead time of four months!
To add insult to injury, the material was developing some sort of bacterial reaction with the treated water of the plant resulting in frequent clogging of shear spray nozzles which meant zero or improper shear spray and thereby causing extensive damage to expensive shear blades and disrupting production! To tell the truth, the losses due to the poor performance of this product were manifold!
Now, this certainly called for some innovative cost reduction from our end! There were some very important additional reasons for such a line of thought!
This was a Middle East Country where religious sentiments ran high! It was clearly mentioned on the barrels that this product contained biodegradable animal fat but the more important fact was that this “so-called” animal fat was rumoured to be that of an animal abhorred – nay prohibited – by many Middle east Countries. We started working out the economies of importing similar products from other countries; especially products without the animal fat tag but then again, the lead times and pricing combinations never seemed to work out!
This was one clear instance where our Indian roots stood us in really good stead! Indians, with special mention of the folks from Kerala, are very well known for their ability to innovate and provide financially viable solutions, and here too, our experience with the same industry in Kerala and other states of India in fact, helped us zero in on the perfect solution! A solution that would justify our tag as a business consultancy that delivers!
The Perfect Solution
Incidentally, this Middle East country was one of the biggest Petroleum Producing nations in the world which meant that this plant was, luckily, situated in an Industrial Area approximately three kilometres from one of the refineries of the Nation!
The next step involved finding out details of the range of products of this refinery – to be specific, whether the refinery was producing any product, known generally, in layman terms, as “Cutting Oil”.
For those who wish to get some technical info on this subject, “Cutting Oil” is a refinery by-product and is generally used to cool down and lubricate machining processes such as lathe operations, milling machine operations, gear cutting, and the like! This product, when mixed with water, turns into a milk-like solution that facilitates easier metal cutting operations or any operation involving friction for that matter!
We first, took the local purchaser with us to lathe working workshops in our vicinity, showed him the product, got him to talk with the workshop guys regarding the availability of the same and, to make a long story short, found out that the local refinery was indeed producing Cutting Oil as a by-product! Words will fail to describe our euphoria on this discovery but then our next worry was to find out the availability and pricing norms of this product.
As luck would have it, this particular company that we were working for was part of the kingdom’s efforts for building a self-sufficient nation and had all the blessings of the ruling family which meant that Governmental processes were much easier for this company rather than a private firm!
By this time, the entire Top Management was in a frenzy due to multiple reasons – we were trying to get rid of a product that was seemingly banned in the country, was imported, and this was being replaced by a product developed and supplied within the nation!
The refinery on realizing that we would be a bulk consumer was more than happy to offer free delivery within three hours, and at a discounted rate of 10,800 Rupees a barrel!
The initial shipment arrived and we shifted gear – from Economics to Technicalities – we started experimenting with ratios and finally after a week of trials, we worked out a sustainable formula – in truth, we kept tweaking the same for close to three months before arriving at the final set-up!
But then the results were immensely gratifying!
One two hundred litre barrel of local cutting oil would last for fifteen days which meant the consumable would cost just 21,600 Rupees for a month as against 9,60,000 Rupees previously! That was a direct saving of 9,38,400 Rupees every month! Or, in other words, a monthly cost reduction of 97.75% on just one item! This is what we call cost reduction!
The Inventory would be limited to just three barrels at a cost of 32,400 Rupees as against the previous Inventory cost of 38,40,000 Rupees!
Plus, most importantly, we were eliminating a product that may have been hurting religious sentiments of the nation AND, most importantly, we were adding towards indigenization!
There were further savings in labelling and packing too but this was the one innovation that put us in the star category and turned the tables for the Company. In reality, over a period of time, the Company made a hostile takeover of another ailing plant and three years later built a massive plant double the combined size of these two plants!
At this point, we thank the Management for having placed their trust in us and thank God Almighty for having given us the strength to sign off in style and keep the Indian Flag flying!
If you need similar support in cost reduction or business consultancy services, get in touch!