Situation

A specialty chemicals manufacturer based in Germany struggled to generate sufficient margins to fund growth and innovation plans. Sales and product managers fought over access to product and applications development resources. Executives hoped they would make it through each quarter without some crisis that would jeopardize the company’s financial situation. Results included missed production targets, inaccurate forecasts and high SG&A costs. Managers of functional areas blamed each other when the company missed revenue and margin targets. And in the highly competitive automotive segment, key customers were experiencing slack demand and stepping up pressures for price reductions and extra technical support. Something had to give.

Findings

The client decided to conduct an SG&A cost structure assessment to identify improvement opportunities. The assessment reviewed the 800-person organizational structure, levels, spans of control, organizational fragmentation, and structural cost drivers. The assessment confirmed that misalignment and a lack of clarity around structures, people and responsibilities was lowering productivity in SG&A functions. The assessment identified specific improvement areas and developed a business case that quantified the improvement potential based on the existing organization and our experience helping clients address similar challenges. There was a $17 million benefit from reducing costs.

Actions

A team of client executives assembled to review the SG&A assessment results and develop a vision for the new organization. The team produced a clear and concise vision and from this, developed the organizational design principles that would guide the design of the new organization. A design team developed a new organizational structure, roles and responsibilities. Mechanisms were put in place to ensure that scarce technical resources focused on top priority, high-margin customers and products. Most revenue cycle and customer service activities were moved to shared service centers. Against a target from the Assessment of reducing SG&A function headcount by 19 percent, the design team developed a focused and lean organizational structure with clear accountabilities and reporting lines and exceeded the target. Each position had clearly defined responsibilities and specific performance metrics for which they were accountable.

Results

While it took several months to get through all of the transition issues, the organization was well on its way to a step-change performance improvement. Within one year from the start of the Assessment, the company was operating at a sustainable run rate $20 million below the original cost base. The margin dollars generated from SG&A restructuring were used for two primary purposes: ensuring that the company met its earnings commitments, and increasing the people and resources committed to a series of growth and innovation initiatives.