Confection Crisis

by Mark Buckheim, Senior Consultant

Our client, a national marketer of consumer confections, had a situation related to its manufacturing operation that was negatively impacting company's overall financial performance.

Due to an earlier strategic decision to narrow its product line, coupled with a loss of market share, the company's 800-plus employee manufacturing facility was operating well below capacity. As a result, fixed manufacturing costs were under absorbed, generating annual, negative variances averaging over $10 million. The situation was further complicated by 40 years of restrictive labor agreements with an entrenched and inflexible local of a national union.

The company asked for help and we responded with a three-phase approach to the situation. Our plan resulted in closing the plant, outsourcing the manufacturing activities and setting up a new product distribution network.

In Phase One, or the Assessment part of the program, we performed a detailed analysis of the current plant operation. We then developed a set of pro forma operating financials for the plant by comparing current staffing levels, line efficiencies and the impact of union work rules with industry best practices. Assuming that the required flexibility could be negotiated with the union, and local management could effectively instill and sustain needed cultural changes, we projected annual cost reductions of between $5.5 and $6.6 million.

Phase Two called for the development of alternatives. Using our client's knowledge of the industry, we made discreet inquiries concerning the outsourcing of all manufacturing. We quickly learned there was ample open capacity available and there were no major technical challenges related to packaging differences, formulations and other activities.

We then built a distribution model using the alternative suppliers' locations as product source points matched with the client's actual customer base. The cost projections developed with this model were then combined with preliminary product cost quotes from four potential suppliers. This data set was then used to create four pro forma financial projections. Although at this point, probable error was in the 20% plus or minus range, it was obvious that the potential annual savings were a multiple of the opportunity identified in Phase One. The most promising of these four scenarios was selected and we were asked to proceed.

Phase Three was the actual implementation of the selected plan. We worked closely with representatives of the client's management team in all key phases of the plant closing, the transition to outsourcing the product, and the establishment of the new distribution network. Included was the negotiation of supply agreements with two manufacturers and development of a detailed implementation plan to assure maintenance of customer service during the transition form in-house to external product supply.

Additionally, we designed an operations organization appropriate to the revised role of manufacturing and developed a communications plan to inform employees, customers, suppliers, and the local community of the decision. We also served as advisers during the process of bargaining the decision and effect of the plant closing with the union local.

A distribution network also was designed to mesh with the outsource locations to provide an optimal balance between cost and customer service. This included a third party warehouse to serve as a central distribution point in the new network.

The highlights of this effort included transition to outsourcing with no customer service or product quality problems and financial benefits of $6.6 million (after non-recurring costs) during the first year and $15.1 million in the second year.

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