Cost optimization through effective sourcing and product evaluation

Client had developed a market competitive chemical additive for Operations. Raw materials were sourced and a 3rd party blender would blend the materials to produce the finished chemical additive.

Overall profitability of the finished chemical additive dropped below acceptable margins because of incremental price increases from raw material and finished goods blender.

The context

The profit of the client's chemical additive dropped below acceptable margins because 30% of the chemical additive component was single sourced.

We conducted an analysis of the supply chain and found our client faced two major obstacles:

1. Raw material assessment:

   • Key raw material that made up 30% of the final chemical additive composition, can only be sourced from a limited number of suppliers.

2. Supplier assessment:

   • Finished goods blender had high overhead costs for the blending operation causing fundamentally higher prices.

Our client needed us to optimize their supply chain to reduce the overall reliance on this key raw material, or to reduce the cost of the blending operation to stay competitive.

The challenge

Our client needed us to optimize their supply chain to reduce the overall reliance on this key raw material, or to reduce the cost of the blending operation to stay competitive:

1. Key Raw Materials

   • Raw material suppliers knew their market position and demand for their material.

   • They leveraged their position to incrementally increase the cost of the material (Upwards 10% each quarter).

2. Supplier Assessment

   • Discovered that toll blending was not their core competency resulting in higher overhead costs.

   • Manufacturer did not have strong strategic partnership with client.

The solution

After careful assessment of client's current supply chain processes. We recommended 2 major changes.

1. Raw Material Assessment:

   • Replace their main raw material component with a chemical more easily and readily available.

   • This would increase our clients leverage and options when looking for potential suppliers.

2. Supplier Assessment:

   • The second was to find a supplier who had toll blending as a core competency using a proprietary Sourcing Methodology.

The first solution reduced raw material cost by up to 30% for the client and the second solution reduced the cost of finished goods blending by 20%.

Result

After implementation of recommendations client managed to reduce total cost of finished good chemical additive by 26%.

• Mitigated sole source risk by sourcing for another supplier with blending as their core competence.

• Finding an alternative to the primary raw material led to long term cost savings

• Led the phased approach to rebalance the volume distribution of the suppliers to obtained desired cost reduction.

  
  

All actions sustained with inflation in line with market inflation, allowing the increased margin to be maintained over 18 month period