Situation

A specialty chemicals manufacturer based in North America struggled to respond to a significant drop in volumes in Q4 2008. All business units experienced volume drops of at least 20, and several saw declines of more than 40 percent. The CEO knew that a significant reduction in functional costs was required immediately to augment a focused effort that he launched in Q3 to conserve cash and minimize working capital. The company faced some difficult decisions, but knew that inaction was not an option. The client decided to request assistance to complete an analysis of the company’s cost structure to identify areas where the company could reduce costs in the short run without jeopardizing their ability to grow and prosper when the economy returned to more normal conditions.

Findings

The client initially defined the scope as including only people costs in the G&A functions. An initial analysis revealed that the company had an equal portion of its cost structure in the Sales, Marketing and R&D functions, and that all of the functions collectively spent as much with third-party suppliers as they spent on people. The broadened assessment reviewed the organizational structure, levels, spans of control, organizational fragmentation and structural cost drivers. The assessment identified specific improvement areas and developed a business case that quantified the improvement potential at $60 million based on the existing organization and our experience helping clients address similar challenges.

Actions

A working team of functional managers met three days each week for eight weeks to analyze the existing cost structure and organization and to develop recommendations for streamlining the cost structure. The team found significant differences in functional costs and resources across business units and locations. An Executive Steering Team assembled to review the strategic cost analysis results and develop a vision for the new organization. The team produced a clear and concise vision and from this, developed the design principles that would guide the design of the new organization and cost structure. The working team and functional leaders developed a new organizational structure, roles and responsibilities. The end result was the creation of a focused and lean organizational structure with clear accountabilities and reporting lines, and implementation of a series of measures to more effectively manage and control costs and spending.

Results

While it took a few months to get through all of the transition issues, the company was well on its way to a step-change performance improvement. By the end of Q1 2009, the company was operating at a sustainable run rate well below the original cost base. The additional margin dollars generated from the strategic cost management implementation are being used to ensure that the company meets its earnings targets. And most importantly, the cost reductions were achieved without impacting the people and resources that will be required to fuel future growth and profitability when the global economy returns to more normal conditions.