CASE STUDY: Supply Chain Management
A 25 million-dollar consumer products company felt like they were paying too much for a key product. They hired a KEYSTONESG professional to lower their product costs. What he found was that they had been overpaying a middleman for years. By sourcing more direct they immediately reduced their costs by 32% and added over $900,000 to annual gross margin.
CPC, Inc. was enjoying strong margin sales in their key product line. Through strong negotiating and utilizing suppliers in North and Central America they had driven down their core consumer product costs considerably, however, they knew they were still working through a middle man and realized there were more profits to be made. They also realized that product costs were likely to rise as key raw material costs were on the increase. They didn't believe the market would accept a price increase so they had to do something dramatic to protect their margin. They decided to attempt a more direct sourcing relationship.
CPC, Inc. realized that they lacked the in-house knowledge necessary to safely source product directly from Asia. They knew their current product was being manufactured in China and sold to them through several layers of middlemen. What they didn't know was how to go about eliminating the layers and how many of the layers should be eliminated. They realized that going too far to eliminate supply chain layers could expose them to unnecessary costs and risks such as cost of money. They assigned a KEYSTONESG professional to lead them through the maze.
The KEYSTONESG professional started by performing a full investigation of the industry suppliers and supply chains. Through networking with key supply chain leaders he was able to negotiate an incredible savings for CPC, Inc. The problem, however, was that CPC, Inc. was enjoying extremely favorable terms with their domestic suppliers while the Chinese factory required payment by secured Letter of Credit at time of shipment. To source direct would have required a significant acceleration in cash outflow. The problem that CPC, Inc. faced was a classic dilemma: could they afford the savings? They decided that they just could not afford such a significant acceleration in cash outflow.
The KEYSTONESG professional was right on board. He began immediately to develop a better solution. He went back to his network of supply chain leaders and negotiated a cooperative deal with a key importer. By adding CPC's volume the importer would be able to secure a majority production stake in a key Asian production factory. Through acquiring CPC's business the importer would be able to dramatically reduce his own cost structure. This allowed the importer to pass on a significant cost reduction to CPC while maintaining the favorable payment terms they were used to getting with their domestic supplier.
CPC, Inc. with the KEYSTONESG professional's help reduced their product costs by nearly 32% and added over 13 points of margin to their key product line. By creating a win-win opportunity with a key supplier they eliminated the complexities of importing direct and managed to avoid a drain on cash. The solution produced significant results for both CPC and the supplier leading to new business opportunities in the future. To protect nearly $900,000 per year in newly acquired annual savings CPC, Inc. chose to retain an Asian based KEYSTONESG professional to routinely inspect factory operations in China.
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