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Beverage Manufacturer improves Cash Flows by optimizing Operations

We helped a dairy and beverage manufacturer identify massive opportunities to free up cash.

Sectors : Manufacturing Retail
Services :

Beverage Manufacturer improves Cash Flows by optimizing Operations 1
Goals

Goals

The management of a major manufacturer of dairy, beverages, and juices kept finding itself in constant need for short-term financing, knowing that sales were thriving.
Top management was asking shareholders to make a much-needed USD 5 Million capital injection to finance the construction of a purpose-built new factory. However, the shareholders were unwilling to advance the funds because they saw little or no need for it. We were recruited to make a business case to quantify the expected return on investment.

Situation

Situation

The current factory layout and space usage was preventing the company from having an efficient production planning and supply chain management. Raw materials and finished goods were being stored too far off the production facilities and the factories were incurring higher transportation, storage, and handling overheads as a result.

The problems were compounded by additional needs to invest in equipment and machinery to handle those tasks. In addition, unnecessary transportation and handling tasks lead to damaged raw materials and finished goods and raised risks of contamination and quality control.

Analysis

Analysis

Production management was draining parts of the cash flow and increasing the company’s needs for short-term financing. For instance, it has been demonstrated that ice cream production would start 5 months ahead of sales (knowing that sales started late in June): therefore, raw materials were purchased very early straining the company’s finances very early and demanding more storage space and equipment (freezers). Production of other products was following the same cycle.

Actions

Actions

We identified in details the inadequacies that were putting the factory at serious disadvantages:

  • The main activities needed to produce all of the products (dairy, ice cream and juice) were 67 whereas they should be below 53. It was proven that they could be reduced by 25% at least (14 less than the current 67).
  • The unnecessary need for additional unskilled labor to transport raw materials and finished products between floors and buildings. The increase in paid manpower was 35%.
  • The current factory layout was preventing the timely accomplishment of tasks and imposed longer production lead times. The increase in time needed to finish a job went up by 19%.
  • Additional energy costs were increased by an average 25-30% (gas for forklifts and trucks).
  • The current layout of the factory required a larger investment in transportation equipment and machinery (forklifts, trucks, trans-palettes etc.).
  • The ineffective usage of available floor space (for production, warehouse, and freezers, etc.) imposed an additional need for capital investment in fixed assets, which was totally unnecessary if the premises were purpose-built. For instance, the ice cream production cycle extended to 4 different buildings and many floors. The same principle was applicable to dairy and juice products (to a lesser extent)
  • Higher maintenance expenses of transportation equipment.
  • Difficulties to keep control over the volumes of quality of raw materials inventories and finished products. Exacerbated with the recurrent movements between warehouses, goods get damaged and lost. The layout of the factories posed serious complications to properly manage the warehouses.
  • Higher risks of theft, product degradation and food contamination. Storage conditions were compromised especially where hygiene conditions are required.
  • The poor management of the production cycle, and the resulting inefficiencies, was directly raising the factory’s manufacturing and general costs. In other terms, if the factory produces more of a specific product that has a higher inefficiency ratio (for example, the inefficiency ratio for the 33c. glass bottles is higher than those of higher products), then the overall costs of inefficiencies are higher by 17%.
  • If the factory had a better layout, the savings on manufacturing overheads can easily be reduced by 40% in addition to substantial improvements to the production management and quality control chains.
  • Using data analytics, our team demonstrated that a higher operational efficiency in using labor, capital and materials resulted in yearly savings of USD 1 Million. With this, shareholders would get their investment reimbursed in a period of 5 years only.