Business Fitness for ManufacturingEffective cost management strategies

for healthy profits in 2011

About ExpenseReduction Analysts

Expense Reduction Analysts About Expense Reduction Analysts2

Expense Reduction Analysts works inpartnership with its clients, offering theexpertise and resource to:

• Forensically examine and benchmark more than a hundred areas of business expenditure, in order to present opportunities for significant savings;

• Review and re-engineer procurement functions,in order to ensure optimum buying process;

Expense Reduction Analysts is a leader in cost, purchase andsupplier management and focuses on reducing operatingcosts, whilst maintaining or enhancing service levels, for private, not-for-profit and public sector organisations.

• Facilitate high value supplier relationshipmanagement programmes, in order to createmutually beneficial working partnerships.

Expense Reduction Analysts has over 150consultants across the UK and Ireland, withexpertise in all sectors of commerce, industry and not-for-profit organisations and more than 100 categories of business expenditure.

Introduction from Robert Allison Expense Reduction Analysts 3

Welcome to the third in our series ofBusiness Fitness Guides for 2011, focusingon effective cost management strategies inthe Manufacturing sector.

Every Manufacturing organisation has many,many areas of expenditure, and, in a guide likethis, we can only touch upon a few. We havechosen to delve into the important cost areasof Waste, Logistics, Packaging and Work Wear,which, together with the wide-rangingintroduction from Ian Morrison and twocontrasting case studies at the end, give you anidea of what savings are possible.

Furthermore, we hope that these examplesgive you the confidence that, if this level ofcost reduction could be extrapolated over asignificant percentage of your outgoings, yourbottom line would indeed look very healthy!

This booklet has been written by consultantswho specialise in finding savings in these areas

Introduction from Robert Allison, Managing Director, Expense Reduction Analysts

in the Manufacturing sector, their knowledgegleaned from, and their expertise honed by,many years of delivering significant costreduction for their clients.

I hope that you find their insights valuable – and may I wish you a successful year in 2011.

Manufacturing savings in 2011

Expense Reduction Analysts Manufacturing in 20114

Increasing costs, particularly of rawmaterials and transport, will threaten thecompetitiveness of UK manufacturers in2011, if they are not effectively addressed.

We are seeing increased enquiries aroundmanaging rising raw material input costs. It is critical that manufacturers forensicallyexamine the supplier marketplace. The world is not a large place any longer. Increasingly,manufacturers are going offshore for their raw materials despite the associated transport costs.

Ian Morrison outlines some of the cost reductionchallenges facing UK manufacturing

Manufacturing in 2011 Expense Reduction Analysts 5

However, a full risk assessment is critical ifyour organisation decides to go offshore.Thorough research of global suppliers, gettingunder the skin of their businesses andcapabilities, and understanding lead-timeimplications, is a must. And, once selected, it is essential to ensure the supplier isintegrated into your own business.

Obviously, road transport costs will continue to be a major consideration as prices at thepump continue to rise. Manufacturers will also need be aware of new levies on shippingcompanies, which will be introduced over the coming years to encourage a moreenvironmentally responsible shipping industry. Furthermore, shipping companies are going to run their engines at two-thirds of their normal speeds, as they look to clean up their environmental act.

This move will help them scrub out theirexhaust systems, which have been adverselyaffected by the dirty petroleum that ships runon. Whilst it will have a positive impact on theenvironment by reducing carbon emissions,ships will take longer to make their deliveries,which will in turn impact on lead times.

There is no doubt that UK manufacturing isenjoying an upturn, but to continue tocompete on a world stage, the sector will needto think smart when it comes to driving upefficiencies and driving down costs. Only by sodoing can UK manufacturers outsmart theirglobal counterparts and prosper in the future.

A selection of the categories ofexpenditure most relevant to yourbusiness now

Waste

Expense Reduction Analysts Waste6

Landfill tax is increasing by £8 per tonneevery year. It is currently at £56 per tonneand will rise to £80 per tonne by 2014.

As tax and disposal costs increase it becomesmore important to recycle different wastematerials. Technology and the markets aredeveloping rapidly to meet this demand.

The revival of the global economy has resultedin strong demand and new highs in pricing ofmany secondary (recycled) commodities. Forexample, the value of waste cardboardincreased by 50% during 2010, and hascontinued to strengthen so far in 2011. Othergrades of paper, scrap metals and plastics arefollowing a similar upward trend.

Processes for segregating waste are key. Allpackaging should be recycled. Raw materialsand waste products may have viable markets:different demands are developing all the time,so that even the market for hard-to-recyclematerials should be kept under review. Only asmall proportion of residual waste should endup at expensive landfills.

Presentation is the key to obtaining themaximum rebate for waste materials. Theoptimum format should be used to suit thetype of material, the quantity and the location,in relation to the end market or sorting point.This will determine the equipmentrequirements, e.g., compactors, balers andcontainer types, etc..

Pete Bramhall says that cost management is all aboutminimisation, segregation, presentation and negotiation

Waste Expense Reduction Analysts 7

Waste buyers pass on the decreases in the value of your waste more readily thanthe increases

Ensuring that the maximum value is achievedover time requires close contact with marketsand suppliers. Buyers are much quicker to passon market decreases to waste producers thanthey are to share the full effect of increases.

Finally, here are three simple points that maysave you a significant amount of money. It may sound obvious but, faced with risingraw material and waste disposal costs, it isclearly more important than ever to minimisethe amount of waste that you generate in thefirst place.

Secondly, study your contracts. Most wastecontractors operate a 12-month, rollingcontract, whereby, unless notice is served three months prior to the contract anniversary,you will be locked in for another 12 months.Negotiate your contract terms and be mindfulof your contract anniversary date.

Thirdly, check your invoices. Many errors andovercharges go unnoticed, so it is important to check your waste invoices continually.

A selection of the categories ofexpenditure most relevant to yourbusiness now

Logistics

Expense Reduction Analysts Logistics8

Kevin O’Neill details the supplier attributes to lookfor in this complex area

Logistics plays a pivotal role inmanufacturing. Whether it is in thesourcing of raw materials, timelymanagement of the positioning of sub-assemblies, distribution to customers or theeffective management of the productservicing after sale, any inefficiency in the

logistics of the supply chain can have a bigimpact. Now add the impact of risingcommodity prices, in particular fuel, and theimpact of ever changing external influenceson supply routes, and you have a complexand challenging mix.

Logistics Expense Reduction Analysts 9

To manage this complexity, every manufacturerwill be outsourcing components of the supplychain to specialists. Deciding which activities tooutsource can take considerable effort in termsof careful analysis that can involve everyfunction in the organisation. However, whereveran organisation stands in this process, there aresteps that can be taken to deliver a significantimpact on the cost base whilst maintaining orimproving existing service levels.

Your suppliers should be exhibiting signs ofenhanced efficiency, innovation and service

Looking internally, escalating fuel costs arehaving a dramatic impact on fleetmanagement. Right now is when to look at thisarea to ensure that you are buying at the bestprice possible. The same can be said of otherfleet consumables like tyres.

With outsourced services like Inbound andOutbound Freight and parcel distribution,revisiting service requirements and pricing ona regular basis with your suppliers can bringsubstantial benefits in not only cost but alsoservice. Competition in the market to deliverthese services is strong, and service providersare striving to maximise their efficiency,develop innovative solutions and improvecustomer services. So, if you are not seeingevidence of these ambitions in your ownsuppliers, then perhaps it is time to take acloser look at what is out in the market!

A selection of the categories ofexpenditure most relevant to yourbusiness now

Packaging

Expense Reduction Analysts Packaging10

Richard Anson has cost reduction strategies all wrapped up

Packaging is used throughout themanufacturing sector, utilising a mix ofsubstrates, including corrugated board,timber and plastics. These can be in bothstandard and bespoke formats.

During the past eighteen months, the cost ofthese materials has been increasing at anunprecedented rate and regularity.

Here is a snapshot of tips that may help toachieve efficiencies:

Review the range – often the differences insizing and thickness of materials supplied areminimal and ripe for consolidation. This couldmean greater manufacturing efficiencies forsuppliers and therefore cost savings for you.

Review specifications – in many cases,specifications have been drawn up years agoand are blindly adhered to. Improvements inmanufacturing processes now mean thatperceived lower or alternate specifications can perform just as well, but at a morecompetitive rate.

Know the true costs of your packaging –how much does it really cost you to wrap apallet with Stretch Film? With respect, the

chances are you do not know. Often the costof the film is irrelevant, if you are applyingtoo much material. Advances in Stretch Wrapand film technology generally have seenusages reduced by as much as 50%.

Know your supplier’s capability – are youusing the right supplier? Large volumeproducers will not be competitive if yourequire them to provide a “hands on service”.Also, as a consequence, do you suffer fromboth space and working capital implications?A switch to a supplier who has the logisticalcapability to supply in smaller quantities mayreduce these “hidden” costs and may not beless competitive.

PPE and Work Wear Expense Reduction Analysts 11

PPE and Work Wear

Steve Parrott points the way to overall cost reduction

1. Role-specific work wearBuyers are confronted with the option of eitherbuying garments outright and then laundering,or renting and laundering, which could beeither a combined or separate price. There isno simple rule as to which is the right solution.Generally, rent and launder deals offer moreflexibility and have cash flow advantages. Akey factor in the relative merits of a combinedrental and launder over separate pricing is thelevel of utilisation of the garments: this in turnwill be driven by the number of garments perperson and the wash frequency.

If a significant proportion of garments aregoing to sit in a locker at the bottom of a pilethat the wearer never gets round to using, thisraises questions over the fleet size. If the washfrequency is below the anticipated level then,self evidently, a combined wash and laundercontract will result in a service being paid forbut not used. Although suppliers can, andshould, provide utilisation reports, youranalysis of them can be time consuming andcomplex. Comparisons of offers from differentsuppliers, or even differently structured offersfrom the same supplier, have to be viewed verycritically, particularly because such contractsare typically of three years’ duration and costlymistakes take a long time to recover.

2. PPEPersonal Protective Equipment (PPE) usuallyrefers to disposable garments or products such as earplugs, overshoes, hats, etc.. These are generally commodity items.However, specification can be all important.Constraints can be placed by legislation (forinstance the specifications for Network Railand London Underground Hi-Vis jackets aredifferent, and not interchangeable.)

Internal H&S policies may play a part, or downstream customers, such as large retailers, may specify elements of traceabilityor composition for PPE worn or used inproduction areas on their behalf. Cost saving israrely a simple case of identifying like-for-likeproducts in catalogues at better prices. Even if written requirements and approvals can be satisfied, extensive trialing may berequired to ensure compatibility.

Expense Reduction Analysts Mono Pumps12

“We have always believed that we are able to achieve the best results for ourselves andregarded Expense Reduction Analysts’ claims with some scepticism. But the results speakfor themselves and I wholeheartedly recommend Expense Reduction Analysts to anyorganisation that wishes to reduce its costs and urge them to put aside the scepticismthat held us back” – Steve Valentine, Group Financial Director, NOV Mono

Two contrasting examples of costreduction best practice in action in Manufacturing

Mono Pumps

Category Annual Annual SavingSpend (£) Saving (£) (%)

Stationary £57,500 £25,000 42%Landlines £18,300 £2,700 14%Courier £112,900 £24,300 21%Scrap Metal*

Previous £242,600 £68,700 28%(revenue) (benefit)

Revised £267,042 £136,192 51%(revenue) (benefit)

Totals £431,300 £127,000 28%

(*Project recently extended by three years)

Steve Valentine describes the start of therelationship: “I first met Adam Wheatley ofExpense Reduction Analysts late in 2003. Eventhough Adam overcame my scepticism whenwe met, I still harboured doubts, particularlyabout the effort required from us, but hispersistence eventually paid off and welaunched our first projects – Stationery andLandlines – in October 2004.”

Mono Pumps Expense Reduction Analysts 13

Mono Pumps were very impressed by theresults achieved on those initial projects, inparticular for Stationery, where a 43% savingwas delivered by changing supplier. Thechange went very smoothly and they are stillusing the stationery supplier introduced byExpense Reduction Analysts. Furthermore,Steve Valentine soon realised that the internalenergy required to support the cost reductionprojects was not significant.

”I was blown away… …a 28% increase overall that I had done”

Such success resulted in the remit beingwidened further into Scrap – a key concern forMono Pumps. Barrie Walker, Supply

Manufacturing Team Leader at Mono Pumps,explains: “I am very proactive with regard toour Waste and Scrap needs and in fact hadalready delivered considerable benefits forMono Pumps in these areas. Having doneeverything that I could, I decided to let theExpense Reduction Analysts team see whetherthey could yield additional benefits for Scrap.

“Diane Lane and Bob Carter impressed mefrom the start with their efforts to understandour requirements. Then I was blown away bywhat they achieved with a further 28%increase in revenue over and above all that Ihad already done. This was achieved with theincumbent supplier, so delivering the benefitsinvolved little effort from me.

”I have already committed to a furtherthree year term”

“I have recommended Expense ReductionAnalysts to all of my peers and superiors inproduction and beyond, and a variety of newprojects should be launched soon. I havemyself asked them to now look at our Wastecosts. Furthermore, I am so pleased with theservice they provide on Scrap that even thoughwe are only ten months in, I have alreadycommitted to a further three-year term, so asto retain access to Diane and Bob’s services.”

Expense Reduction Analysts Plastikote14

"We are very pleased with the savings that John and Fergus have uncovered, but we areeven more delighted with the way in which these results have been delivered – with noloss of service and with a seamless transition between suppliers. For our business, thesebenefits have been vital” – Joanne Garner, Site & Finance Manager, Plastikote

Category % saving

Inbound sea freight 18.3%Outbound UK pallets 26.7%Outbound European pallets 39.6%

Average saving 28.2%

John Waine of Expense Reduction Analystsdescribes his original meeting with JoanneGarner, Site and Finance Manager at Plastikote: “We discussed the business’sprocurement and Joanne naturally wanted toensure that Plastikote was purchasing servicesas keenly as possible, especially in the criticalarea of logistics.

Two contrasting examples of costreduction best practice in action in Manufacturing

Plastikote

Plastikote Expense Reduction Analysts 15

consumer marketing. We were able to find amuch more local distribution company thanthe incumbent to fulfil their needs. Thecompany had the infrastructure to handle both the smaller deliveries, and the critical,time-sensitive, larger deliveries into the majormultiples. This organisation interacted withPlastikote very professionally from the outset,creating confidence in their abilities. And theirperformance ever since has certainly justifiedthat trust.”

The third project looked at Plastikote’s pan-European distribution, in particular toGermany and Switzerland. Different challengesemerged here. Fergus Smith explains:“Germany is a critical growth area for Plastikote and their major customer thereoperates to a very stringent order cycle. This results in short delivery times from the UK to a very exacting two-hour deliverywindow to their customer’s distributioncentres across Germany.

“In delivering to Switzerland, as a non-EUcountry, the difficulty centres on dealing with the necessary import and exportdocumentation. Again, we researched themarket and recommended a supplier who was expert in fulfiling demand in the face of these obstacles.”

“Plastikote in the UK acts as a distribution hub,receiving product from the US, repackaging itand sending it on to retailers in this countryand throughout Europe. In this regard, I wasfortunate to be able to call upon the expertservices of Expense Reduction Analysts’Logistics Specialist, Fergus Smith.”

Fergus Smith takes up the story: “We startedby analysing all of their distribution activities.Although there were some areas where theywere obviously achieving good value, weidentified three key areas that were worthinvestigating. A phased approach was agreed,starting with their inbound sea freight.

“Plastikote told me that they sat down withtheir freight supplier every six months toensure that they were getting the best possibledeal. They were therefore justifiably scepticalthat we could find any further savings, so theywere delighted with the 18.3% that weeventually achieved for them.

Having product on their retailers’ shelves isimperative

“We quickly moved on to their outbound UKpallet requirement. In Plastikote’s business,having their product on their retailers’ shelvesis imperative; indeed, it is a vital part of their

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